July 21, 1998	Contact: Elisa Odabashian, Policy Analyst 415-431-6747 Consumers Union West Coast Regional Office

THE LAND OF MILK AND MONEY:
LOS ANGELES AREA RETAILERS CHARGE TOO MUCH FOR MILK

On May 26-29, 1998, Consumers Union, nonprofit publisher of Consumer Reports, surveyed milk prices in 73 food stores in four Los Angeles areas--the San Fernando Valley, Central and West LA, the South Bay, and Orange County. Gouging by grocers, particularly large supermarket chains, continues to be the primary cause of high milk prices in the Los Angeles area.

The three main findings of this report are: 1) Supermarkets in the Los Angeles area and Orange County generally charge among the highest prices for milk in the region. By contrast, many neighborhood Mom-and-Pop markets charge considerably less for milk--anywhere from $1.05 to $1.99 less per gallon. Milk prices in Los Angeles neighborhood stores average as much as $1.36 per gallon less than supermarket chains--a 57% difference per gallon. 2) In general, the major supermarkets chains, Ralphs, Hughes, Vons, and Lucky, are matching or nearly matching one another in high milk prices throughout the Los Angeles area and Orange County. 3) For the last several years there has been a widening gap between the price farmers receive for their milk and the price consumers pay at the checkout stand. As of May 1998, most Los Angeles area supermarket whole milk prices were $.12-$.16 per gallon higher than they were in May 1997, when Consumers Union conducted its last survey of the region. Farm prices during the same period rose only $.07. Supermarkets frequently increase their milk prices when the farm price goes up by a margin greater than the actual increase, and fail to pass on the full decrease when the farm price goes down. The cumulative effect is a growing disparity between how much farmers and retailers make on milk.

Supermarket retailers reap high profits on milk, a product that is important for the healthy growth and nutrition of children, particularly children living in poverty. Grocers know that, in economic terms, milk is an "inelastic" food item. That is, even with higher prices, and regardless of season of the year or changing fads, consumers continue to buy milk. There is no good, reasonably-priced, nutritional alternative to milk. When food budgets are tight, consumers are more likely to scrimp on other items rather than limit their milk purchases. Knowing this, supermarket retailers locate the dairy sections on the back walls or corners of their stores, compelling consumers in search of milk to walk down aisles lined with other products in the hope of inspiring people to buy items not on their grocery lists.

Consumers can pay considerably more for a single gallon of whole milk at a Los Angeles area supermarket than at a smaller, independent market--up to $1.15 or 44% more in the San Fernando Valley, up to $1.25 or 50% more in Central and West LA, up to $1.05 or 39% more in the South Bay, and up to $1.99 or 114% more in Orange County. This discrepancy, a phenomenon which exists even in low-income neighborhoods, makes no economic sense. The smaller stores pay higher wholesale costs per gallon for moving a smaller volume of milk. Furthermore, many of the big chain supermarkets are also milk processors, so they have eliminated the profit of the middle man. In short, the big chain supermarket retailers pay less to get the milk onto their shelves than small market grocers do, and yet the supermarkets charge consumers the highest prices for milk.

A good example of a large chain charging considerably more for a gallon of milk than a smaller market in the same neighborhood is Ralphs, located on Lincoln in Marina del Rey. Ralphs charges $3.74 for a gallon of whole milk, while the independent market, Alan S. Market located on Washington Blvd. in Marina del Rey charges $2.99 per gallon, a difference of $.75 per gallon. Another example is Lucky on Pacific Coast Highway in Manhattan Beach, which charges $3.71 for a gallon of whole milk, while Trader Joe’s on Manhattan Beach Blvd. in Manhattan Beach charges $2.99 per gallon, a difference of $.72 per gallon. The most glaring example of a supermarket charging more than a small store in the same neighborhood is in Orange County. Lucky on La Palma in Buena Park charges $3.71 for a gallon of whole milk, while El Ranchito Market on Knott Avenue in Buena Park charges $1.75 per gallon, a difference of $1.96 (or 112%).

As in past studies by Consumers Union, this survey continues to show a uniformity of milk prices between the major Los Angeles area supermarkets, all of which have among the highest milk prices of the stores surveyed. In the San Fernando Valley, Ralphs charges $3.74 for a gallon of whole milk, while Vons, Lucky, and Hughes (owned by Ralphs) charge $3.71 per gallon. In Central and West LA, Ralphs and Hughes charge $3.74 for a gallon of whole milk; Vons and Lucky charge $3.71 per gallon. In both the South Bay area and in Orange County, Ralphs charges $3.74 for a gallon of whole milk; Lucky and Vons charge $3.71 per gallon.

Consumers Union has long maintained that there is insufficient competition between the big chain retailers on the price of milk. While California’s supermarket industry is highly competitive, using extensive advertising, marketing and price-cutting techniques in order to gain a market share, supermarkets almost never advertise milk, and make no attempts to undercut one another on the price of milk. The uniformity of high milk prices at the supermarkets, in the larger context of milk being sold for considerably less at smaller markets, coupled with the lack of evidence of marketing techniques used on most other products, suggests that there is much the supermarkets could be doing to compete for milk sales and to bring retail prices down.

Because of the cumulative effect of years of continual increases by milk retailers whenever the farm price goes up even a penny, and limited decreases in the retail price when the farm price drops, there is an ever-widening spread between the retail price and the farm price.

In May 1998, most Los Angeles supermarkets charged consumers between $.12 and $.16 more for a single gallon of whole milk than they did a year ago, as evidenced by Consumers Union’s Los Angeles milk price survey of May 1997. The farm price during the same one year period, from May 1997 to May 1998, increased only $.07 per gallon. The farm price for Southern California in May 1998 was $1.33 per gallon. With most retail supermarket prices in the Los Angeles area averaging $3.72 per gallon of whole milk, the difference between the average supermarket price and the farm price was $2.39 per gallon. This difference of $2.39 represents a 180% margin between the farm price and the price consumers pay for a gallon of milk.

On June 1, 1998, the farm price in Southern California dropped $.12, from $1.33 per gallon to $1.21 per gallon. On July 6, 1998, in an effort to determine if the gap between the farm price and the retail price of milk was further widened during this period, Consumers Union returned to 11 of the supermarkets visited in May to see if there were any changes in milk prices as a result of the farm price decrease. The July 6 survey shows that Ralphs supermarkets lowered their prices for a gallon of whole milk to reflect the entire farm price decrease. A gallon of whole milk at Ralphs dropped from $3.74 to $3.62, a decrease of $.12. Consumers Union commends Ralphs for passing on the whole of the farm price savings to Los Angeles area consumers; however, it should be noted that, in late May, Ralphs milk prices were the highest supermarket prices in the survey, and this $.12 decrease in the July survey brings Ralphs in line with prices at Vons and Lucky. By contrast, Vons and Lucky supermarkets passed on to consumers only 75% of their savings from the farm price decrease, lowering their price for a gallon of whole milk from $3.71 to $3.62, a decrease of $.09. The gap between the farm price and the retail price of milk is widened by Vons and Lucky failing to pass the entirety of the farm price savings onto consumers.

The lowest prices for a gallon of whole milk were found at small, independent markets: in the San Fernando Valley the lowest price surveyed was $2.59 at Dale’s Jr. Market in Studio City; the lowest price found in the Central and West LA area was $2.49 at El Gallo de Oro Market in Compton and Zafar Market in West LA; the lowest price found in the South Bay area was $2.69 at Mr. B’s Market in Lawndale; and the lowest price found in Orange County was $1.75 at El Ranchito Market in Buena Park. In general, considerable savings on milk prices can be found at specialty, discount chains and co-operative stores, such as Trader Joes at $2.99 per gallon of whole milk, Food 4 Less (owned by Ralphs) at $2.76-$3.11 per gallon, Smart & Final at $3.22 per gallon, and Valu+ at $2.99-$3.18 per gallon.

On July 6, we visited one supermarket which we had not surveyed in late May-- the Lucky store in Orange. This store offered extremely low prices for milk, well below all the other chains, including other Lucky stores. Both whole and 2% Lady Lee brand milk sold for $2.73 per gallon, and non-fat Lady Lee brand milk sold for $2.59. These prices are lower than all the major chains and are even lower than many small neighborhood markets. Besides the Lucky in Orange, the supermarket with the lowest milk prices in the survey was Albertsons in Reseda, which, at $3.25 per gallon as of the end of May, undercut Ralphs, Hughes, Vons and most Lucky stores by between $.46 and $.49.

Most of the major supermarkets are milk processors as well as retailers. They offer, in addition to higher-priced, name brands (Lady Lee, Ralphs and Vons’ Jerseymaid), lesser-known brand alternatives (Farm Fresh, Imperial and Westwood) for less. At the end of May, Ralphs sold one gallon of Imperial whole milk for $3.71 (as compared to Ralphs brand, which sold for $3.74 per gallon) and two gallons of Imperial brand whole milk for $4.62; Lucky sold one gallon of Farm Fresh milk for $3.69 (as compared to Lady Lee brand, which sold for $3.71 per gallon) and two gallons of Farm Fresh whole milk for $4.53; and Vons sold one gallon of Westwood whole milk for $3.69 per gallon (as compared to its Jerseymaid brand, which sold for $3.71 per gallon). The Vons supermarkets surveyed did not appear to offer two-gallons-for-less.

All brands of milk must meet minimum standards set by the California Department of Food and Agriculture. Since the quality of the milk in all the various brands is the same, consumers should take advantage of the lower-priced, lesser-known brands, particularly the two-for-less specials offered by Lucky and Ralphs. However, only consumers with easy transportation from the grocery store and with families large enough to consume two gallons of milk before the expiration date can realistically take advantage of the two-gallons-for-less offer.

Over thirty years ago, California enacted a law which prohibits retailers from selling milk for below cost. Retailers often use the sales-below-cost prohibition as an excuse for their high milk prices. This survey shows that supermarkets could lower milk prices considerably without selling below cost, since many smaller stores are currently selling milk for considerably less than the supermarkets without selling below cost. However, the sales-below-cost law is an added deterrent to retail competition on milk. If California grocers were allowed to use milk as a "special" low-priced inducement to shoppers (as retailers are allowed to do in numerous other states on milk, and as California retailers are currently allowed to do on most other kinds of products), Consumers Union believes consumers would begin to see increased competition for milk sales and lower milk prices in California.

Large retail chains charge much less for milk in other states where there are no laws prohibiting selling milk for below cost. In Washington State, where the farm price is very similar to the farm price in California, retailers can sell milk as a loss leader. An October 1997 coupon clipped out of the Seattle Post Intelligencer offered Lucerne brand 2%, 1%, and nonfat milk for $.98 per gallon in all Western Washington Safeway stores from 10/1/97 to 10/28/97. By comparison, a few weeks later, in November 1997, Safeway stores in the San Francisco Bay Area were selling Lucerne brand 2% milk for $3.75 per gallon and Lucerne brand nonfat milk for $3.53 per gallon. This example of California consumers paying $2.77 more than Washington consumers paid for the exact same brand of milk at the same supermarket chain, underscores the impact of the sales-below-cost prohibition on milk, a force that impedes competition and drives up the cost of milk to consumers.

A recent Associated Press article about pricing discrepancies on milk highlights the kind of price wars in other cities that do not exist in the California milk market due, in part, to the sales-below-cost prohibition in California:

Economists and industry officials say the variation in markups is often a matter of market forces at work. For example, Cincinnati was enjoying a price war between two big grocery chains. Average milk prices were cut in half, from $2.62 to $1.32, between January and June.

Supermarkets often offer steep discounts on high-demand products to entice customers away from competing stores. In some cities the "loss leader" is milk. In other cities, milk prices are kept relatively high. "Some of this really boils down to the pricing strategy of the retailer," said Andrew Novakovic, an agricultural economist at Cornell University. "Fluid milk is viewed as a high-profile item that many stores feel they need to price right."1

Consumers Union strongly supports a change in the law that retailers claim hinders them from offering milk as a "special."

Many of poorest consumers in the Los Angeles area purchase the highest-priced milk at supermarkets because they can be assured that both food stamps and Women, Infant, and Children (WIC) milk coupons will be accepted there. All the major Los Angeles area supermarkets accept food stamps and WIC milk coupons. Many of the smaller markets in this survey also accept food stamps, but most of the smaller markets (where milk can be purchased for considerably less) do not accept WIC milk coupons. Trader Joe’s and Smart & Final, for example, offer some of the lowest prices in the Los Angeles area for a gallon of milk, but neither store accepts WIC milk coupons. Tax dollars for food stamps and WIC coupons are being spent on the highest-priced milk, enriching the biggest retailers. When food dollars are wasted on excessive milk prices, poor children get less food to eat.

Consumers Union’s Milk Price Survey does not claim to be a comprehensive compendium of milk prices in a particular region. The methodology is to comparison-shop on a random basis, as a typical consumer might do. The purpose of the research is not to provide a complete listing of the lowest and highest milk price retailers, but rather to see if there exists a dramatic range of milk prices about which economic conclusions can be drawn, and to provide guidance to milk buyers.

This survey was conducted anonymously by Consumers Union staff members, without notice to store owners or managers. The data was gathered by walking into each of 73 Los Angeles area stores and purchasing one gallon of each available brand of whole, 2%, and non-fat milk (the receipts of which have been retained). No payments were made to or solicited by Consumers Union from any person or entity connected with the survey.

• Consumers should not think that they are getting the best buy on milk at supermarkets. In general, before buying a gallon of milk at a supermarket chain, consumers should check the milk prices at smaller neighborhood markets (not quick-stop, convenience, or liquor stores), or check the milk prices at discount, co-op, or specialty stores like Trader Joe’s, Food 4 Less, Smart & Final, and Valu+. In the Los Angeles area and Orange County, consumers can find numerous Mom-and-Pop grocery stores that sell a single gallon of whole milk for less than $3.00. Not all of these small stores accept foods stamps, however, and very few of them accept WIC milk coupons. As of July 6, 1998, most of the Los Angeles area supermarket chains are selling whole milk for $3.62 per gallon.
  
• Consumers should know that there is only the slightest difference in the quality of most brands of milk, even those sold for considerably less. All brands of milk must meet minimum standards set by the California Department of Food and Agriculture.
  
• Albertsons supermarkets sell a gallon of whole milk for approximately $.40-$.50 less than do the other major chains. On July 6, the Lucky store in Orange offered extremely low prices for milk, $.89 per gallon less than at the other supermarkets, including other Lucky stores.
  
• Consumers should let their California legislators know that milk prices are too high in California, particularly at the major supermarkets, and that the law that prohibits selling milk for below cost should be repealed.
  
• Consumers should let supermarket managers know that there is no good excuse for their milk prices being considerably higher than prices at many smaller markets, and that taking advantage of people’s need for this essential product is unfair and harmful to consumers.
  
• Consumers can voice their concern and frustration about the high price of milk in Los Angeles and Orange County by writing or calling:

Peter Larkin, President
California Grocers Assn.
906 G Street, #700
Sacramento, CA 95814
(916) 448-3545

David Ikari, Chief
Milk Stabilization Branch
California Dept. of Food and Agriculture
1220 N Street
Sacramento, CA 95814
(916) 654-1456