John Phipps: The Varying Price of Fluid Milk at the Grocery Store

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Ryan Setter has a question about retail milk prices.

“I was wondering how different brands of milk can vary so much in price in the stores.  Recently a ‘Big Box Store’ opened up about a half hour away from where I live.  They sell milk in their grocery section from the local dairy as well as their store brand milk, however it is double the price of their brand. I was wondering if their milk may be subsidized from profits on other items in the store as a way to attract business.  If so, it does not seem fair for the other local milk providers as they would have no way to compete.”

Good question, Ryan, send me an address. Retail pricing of any product is a mystery to consumers because there could be several things going on. In this case, it is important to remember milk is a famous loss-leader product – a staple that people have to buy often that retailers frequently sell below their cost just to attract customers to the store. This is also one reason why the dairy section is usually at the back corner of the store as well.

The higher price on locally sourced milk could be because the store has discovered consumers will pay for that feature. Regardless, you can be sure that very serious analysis has been done by the retailer’s marketing and sales teams before setting the price. This is because supermarkets operate on a remarkably thin margin – about 1 to 3 percent. The industry is highly competitive, and all stores carry virtually the same products, so it is hard for even behemoths like Costco or Kroger to price substantially higher. The retail food industry makes its profits on volume, as consumers spend $1.7T on food each year, about half eaten at home. Retail milk prices can become disconnected from fluid milk prices on the farm. Store milk prices are at a 16-year low. In general, farm prices are depressed by oversupply more than excessive profiteering by retailers, and that decline is driven by a seemingly relentless drop in milk consumption. We have been drinking steadily less milk for years. If it weren’t for the enormous number pizzas Americans eat, consuming about 1/3 of total cheese consumption, milk prices would be even lower. Increased exports would help, but while the value of exports have grown slowly, the volume has dropped sharply due to trade frictions.

This is a lot of data for your simple question, but the rule of thumb in our house is buy milk when and where it’s cheap, because it’s a moving target.


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