Got Moo-La?
Los Angeles Grocers Continue to Gouge Consumers on Milk

by
Elisa Odabashian, Policy Analyst, West Coast Regional Office
June 1997

Residents of the Los Angeles area continue to find a wide range of prices at which they can purchase a gallon of milk, with the major supermarket chains charging much higher prices than most smaller, neighborhood markets. In May, Consumers Union, nonprofit publisher of Consumer Reports magazine, surveyed milk prices in 77 food stores in Los Angeles and Orange counties. Consumers Union's previous L.A. area milk survey, published in October of 1996, found that gouging by grocers, particularly large supermarket chains, was a primary cause of surging milk prices. This latest survey supports those earlier findings of gouging by grocers on milk and, further, highlights the gap between the price farmers receive and the price consumers pay for milk. We define "gouging" as taking advantage of consumers' needs by exacting a price that is excessively high and non-competitive. Grocers hike the price of milk in order to make the highest possible profit on one of the most necessary foods for the healthy growth of children.

Consumers Union's newest milk price survey shows, as did last October's survey, a vast range of prices at which Los Angeles area consumers can purchase a gallon of milk (even the same brand of milk), from $2.19 per gallon on the low end to $3.99 per gallon on the high end--a difference of 82%.

Large supermarket chain stores are charging the highest prices--as much as $1.80 more per gallon than the local Mom-and-Pop grocer. Supermarket whole milk prices in the Los Angeles survey average $3.63 per gallon. Smaller market whole milk prices in the Los Angeles survey average $2.97 per gallon. On average, consumers can purchase a gallon of whole milk for $ .66 less (22% less) per gallon at a smaller or discount Los Angeles market than at a supermarket grocery chain. Supermarket whole milk prices in the Orange County survey average $3.41per gallon (6% less than Los Angeles supermarket prices). Smaller market whole milk prices in the Orange County survey average $2.90 per gallon (2% less than Los Angeles smaller market prices). On average, consumers can purchase a gallon of whole milk for $ .51 less (18% less) per gallon at a smaller Orange County market than at a supermarket chain.

On February 1, 1997, the farm price of milk dropped dramatically, by 20%, or $ .30 per gallon. This decrease in the price farmers are paid for producing milk has remained throughout the months of February, March, April, and May. Most of the major Los Angeles area supermarkets passed a fraction of these savings on to consumers, by decreasing retail prices by 6 - 10 % per gallon. Despite these decreases, this survey found examples, throughout the Los Angeles and Orange County areas, of small, neighborhood stores selling milk for between $1.00 - $1.80 per gallon less than the supermarkets are charging.

There is also a wide range of prices consumers pay for the exact same brand of milk. In the Los Angeles and West Los Angeles areas, the range of prices for Altadena brand milk is $2.69-3.99 per gallon, a difference of $1.30 or 48%. In the San Fernando Valley, the range of prices for Chase Bros. brand milk is $2.29-3.99 per gallon, a difference of $ 1.70 or 74%. In the South Bay area, the range of prices for Ross Swiss brand milk is $2.79-3.79 per gallon, a difference of $1.00 or 36%.

The farm price for milk is regulated in California. Dairy farmers cannot be paid less for their milk than a minimum set by the California Department of Food and Agriculture (CDFA). Retail milk prices are not regulated in California, but grocers are prohibited from selling milk for less than their actual costs. With no cap on retail prices, grocers are free to charge as much as they want for milk as long as they do not sell it for less than their actual costs.

Our October 1996 survey reported that regulation of farm prices by the state was the reason many grocers gave for charging consumers exorbitant prices for milk. A number of stores displayed conspicuous signs explaining the increases in retail milk prices as beyond retailers' control due to regulation of milk prices by the CDFA. It is inaccurate to blame dairy farmers for the retail price of milk. According to a recent article in the Wall Street Journal, "what particularly irks dairy farmers is that they spent $70 million last year on their "Got Milk?" advertising campaign designed to shore up U.S. consumption. Farmers feel that retailers are reaping most of the benefits."ⁱ

On October 29, 1996, the Department of Food and Agriculture issued the following warning to grocers, distributors and processors:

• A number of retail stores, milk distributors and dairy processors are advising concerned consumers that California Department of Food and Agriculture (CDFA) is responsible for the current level of retail milk prices through its establishment of minimum farm prices for milk. Based on the information provided to them, many consumers are misled into believing that the current retail price levels are solely the result of CDFA's farm price adjustments. We have advised a number of such consumers that CDFA does not regulate wholesale or retail milk prices....
  
  Interested consumers who contact CDFA are given historical data relating to the farm price for milk, the retail milk price levels, and the growing spread between the farm and retail milk prices...Upon receipt of such factual information, most consumers react angrily that they have been seriously misled...To help address this problem, we have directed the Dairy Marketing enforcement staff to take more active steps to prevent the distribution of misleading information on retail milk prices.ⁱⁱ

California farmers were further frustrated when, on February 1, 1997, the regulated farm price for a gallon of milk dropped by 20% or $ .30 per gallon. The farm price has remained static for the past four months. The retail price of milk to consumers at many Los Angeles area supermarkets has dropped 6-10% or $ .22-.40 per gallon since last October. We commend Los Angeles area supermarkets for passing along at least part of their farm price savings to consumers. However, further reductions in the retail price of milk are necessary in order to begin to shrink the wide gap between the farm price and retail price of milk.

The spread between the farm price and the retail price of milk has been caused, historically, by grocers using the slightest increase in the farm price as justification to increase retail prices exponentially. Since January of 1995, there have been three decreases in the farm price. However, only recently have grocers lowered their milk prices in response to a drop in the farm price. The U.S. Department of Agriculture noted in a 1994 report on the farm-to-retail milk price spread:

• Farm-to-retail milk price spreads increased significantly as farm prices decreased while retail prices either stayed the same or else went down more slowly...These data indicate that the greatest portion of the farm-to-retail price spread increase occurred at the retailer level. Processor profits also increased but not enough to account for the increased price spread...Retailers have tended to react quickly to increases in farm milk prices by raising their own prices, although as the farm price declines, retail price adjustments tend to lag behind, not immediately passing on the lower farm price to consumers.ⁱⁱⁱ

The cumulative effect of years of continual increases and few decreases in the retail price of milk by grocers is a wide gap between the amount farmers receive for their milk and the amount consumers pay at the checkout stand. Consumers end up paying more for milk than they should, particularly at supermarkets.

The current farm price for Southern California is $1.26 per gallon. Retail supermarket prices in the Los Angeles area range from $3.55-3.99 per gallon of whole milk. This difference of $2.29-2.73 per gallon, representing a 182%-217% margin between the farm price and the price consumers pay, suggests that Los Angeles supermarkets (most of which process and distribute their own milk) are reaping high profits on milk. Farmers cannot be fairly blamed for the high cost of milk to consumers.

As of June 1, 1997, the Southern California farm price will drop again--this time to $1.16 per gallon, a decrease of 9% or $ .10 per gallon. The $1.16 per gallon Southern California farm price will remain in effect through July and possibly longer if what looks like a bumper corn crop this year holds down the cost of feeding dairy cows. According to the May 16, 1997 issue of Nutrition Week,

• Assuming normal weather, the U.S. Department of Agriculture said this week that American farmers are likely to harvest near record grain crops this fall...The prospect of a big harvest brought an immense sigh of relief everywhere...The impact of a 40 percent drop in corn production in 1995 is still being felt by U.S. consumers. As a result of poor 1995 crops, grocery prices in 1996 rose nearly 5 percent, nearly double the increase of consumer prices overall...In 1996, reserves [of corn] fell to 400 million bushels, a condition which led to shortages of feed for livestock and poultry and consequently, higher food prices.^iv

Consumers Union maintains that Los Angeles area retail milk prices are higher than they should be and that the difference between the price farmers are paid for a gallon of milk and the price consumers pay is far too great. We call on all California grocers to reduce retail milk prices to reflect the June 1 drop in the farm price, and to begin to remedy the farm price-to-retail price disparity.

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 list of the lowest and highest milk price leaders, 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 done anonymously, without notice to store owners or managers. The data was gathered by walking into each of 77 stores and making a notation of the advertised price of milk. The survey compares retail prices for single and multiple gallons and single half-gallons of whole, low-fat, and non-fat milk.

Grocers know that milk is an "inelastic" food item. That is, regardless of socioeconomic factors, season of the year or changing fads, consumers always 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. Many consumers are unaware of the price they pay for milk, and their busy lifestyles preclude them from shopping around for the best price. Knowing this, supermarket retailers locate the dairy sections on the back walls of their stores, compelling consumers in search of milk to walk down aisles lined with high-profit, highly-packaged products in the hope of inspiring people to buy items not on their grocery lists. Retailers consider milk a lure because it is so essential to families.

Consumers can pay considerably more for a single gallon of milk at a Los Angeles area supermarket than at a smaller neighborhood market--up to $1.30 or 48% more in the L.A. and West L.A. areas, up to $1.66 or 72% more in the San Fernando Valley, up to $1.00 or 39% more in the South Bay area, and up to $1.40 or 64% more in Orange County. This is so despite the fact that the smaller stores pay higher wholesale costs per gallon for moving a smaller volume of milk, and despite the fact that almost all of the major supermarket chains process their own milk, eliminating the profit of the independent processor and driving supermarket costs down.

Consumers Union's Los Angeles Area Milk Price Survey found that consumers pay the highest prices for milk at supermarket chains, and this remains true even in low-income areas. An example of large chains charging more for a gallon of milk than a smaller market in the same neighborhood is Vons and Ralphs on Compton Blvd. in the low-income city of Compton. Vons and Ralphs both charge $3.59 for a gallon of whole milk. A few blocks away on Compton Blvd., Jae's Market sells a gallon of whole milk for $2.99. This $ .60 difference for a gallon of milk is typical of milk price diversity between supermarket chains and small, neighborhood stores, particularly in low-income areas where the market can bear only so much gouging and where reasonable milk prices can be readily found.

Of the Los Angeles area supermarkets surveyed, the highest prices (an average of $3.73 per gallon) were found at Hughes and Lucky stores. Vons and Ralphs prices were the second highest (matching each other at $3.59 per gallon). Albertson's and Stater Brothers, both in Orange County, came in the with the lowest supermarket prices (matching each other at $2.99 per gallon).

Considerable savings on milk prices, as compared to the supermarket chains, can be found at specialty and discount stores, such as Trader Joe's, Smart & Final, and Food 4 Less. Trader Joe's (which sells whole milk for $2.79 per gallon) has six stores in L.A. and West L.A., three stores in the South Bay area, six stores in the San Fernando Valley, and four stores in Orange County. Smart & Final (which sells whole milk for $2.99 per gallon, two gallons for $4.32) has approximately 75 stores in the L.A., West L.A. and South Bay areas, approximately 15 stores in the San Fernando Valley, and another 15 stores in Orange County. Food 4 Less (which sells whole milk for $2.63 per gallon, two gallons for $4.35) is owned by the Ralphs supermarket chain and has numerous stores throughout the Los Angeles area.

California's supermarket industry is highly competitive, using extensive advertising, marketing and price-cutting. However, supermarket chains in the Los Angeles area do not appear to be competing heavily for milk sales with one another through advertising and marketing in order to win a market share. In general, Los Angeles area supermarkets do not advertise milk or otherwise attempt to undercut each other on milk prices. In fact, there was not a single advertisement for milk in the 98 grocery ads by Ralphs, Vons, and Hughes, pulled from the food section of the May 21, 1997 Los Angeles Times. This lack of competition is also prevalent in the San Francisco Bay Area, where there is little or no advertising for milk and where major chain supermarkets generally mimic one another in milk prices. Inadequate competition such as this underscores the fact that grocers know consumers need milk and will continue to buy it at almost any price.

This survey showed that Vons, Ralphs, Lucky, and Hughes supermarket chains nearly match one another on milk prices. Most Vons stores in the survey sell a gallon of whole milk for $3.59 or $3.55, depending on the brand chosen, and two gallons for $4.27. Most Ralphs stores in the survey sell a gallon of whole milk for $3.59 or $3.57, depending on the brand chosen, and two gallons for $4.27. Most Lucky stores in the survey sell a gallon of whole milk for $3.57 or $3.53, depending on the brand chosen, and two gallons for $4.27. Many Hughes stores sell a gallon of whole milk for $3.59 or $3.54, depending on the brand chosen, and two gallons for $4.27.

The uniformity of supermarket milk prices in the San Francisco Bay Area last fall, coupled with the conspicuous absence of price-cutting and advertising of milk by the major chains, prompted Consumers Union in September to request that the California Attorney General investigate whether there exists at least an unspoken agreement between the big supermarkets to set milk prices, a concept called "Parallel Pricing," which drives up the cost of milk to consumers. A letter from Attorney General Dan Lungren, dated October 1, 1996, expressed interest in the "apparently odd" pricing pattern for milk in the San Francisco Bay Area supermarkets and indicated that an investigation will ensue. That investigation is currently underway.

Most of the major supermarkets are milk processors as well as retailers. They offer, in addition to higher-priced name brands (Hughes, Ralphs, Lady Lee, and Jerseymaid,), lower-priced, non-name brand alternatives (Special Buy, Imperial Supreme, Farm Fresh and Westwood): one gallon for $3.53-$3.55, and two gallons for $4.27. In generaI, there are fewer of the lower-priced, non-name brand gallons on the shelves in comparison to the well-stocked, brightly-colored, higher-priced name brand gallons. Since the quality of the milk in both the name brands and the non-name brands is the same (all brands must meet minimum standards set by the CDFA), consumers should take advantage of the lower-priced offer by the supermarkets. However, not all of the supermarket chains offer the two-gallons-for-less special, no store offers the special on half-gallons, and the special is often not available in each of the three categories--whole, low, and non-fat. Furthermore, only consumers with transportation from the grocery store and with families large enough to consume two gallons of milk before the expiration date can easily and realistically take advantage of the special two-gallons-for-less offer at the supermarket chains.

On March 6, 1997, Consumers Union published the latest San Francisco Bay Area Milk Price Survey. That study surveyed grocery stores in four Bay Area counties--San Mateo, San Francisco, Marin and Alameda. There were two major findings in that report. First, Bay Area supermarkets were charging considerably more for a gallon of milk than smaller, neighborhood markets. The second finding was that five of the six major Bay Area supermarket chains (Cala Foods/Bell Markets, Lucky, Falletti Foods, Andronico's and Petrini's), within each county, nearly matched one another in milk prices. The notable exception was Safeway, which had dropped its price $ .24 per gallon since the previous study and was charging 7-8% less than its supermarket competitors.

The San Francisco survey findings are largely replicated by the Los Angeles survey. Los Angeles area supermarkets are charging considerably more than local neighborhood markets for milk. Additionally, supermarket prices are fairly uniform from chain to chain, and there appears to be very little competition, in terms of marketing and price-cutting, on milk.

A difference between the San Francisco and Los Angeles area milk markets is that there are many more brands available to consumers in Los Angeles than in San Francisco. Twelve different brands of milk were found in the San Francisco survey, with most smaller stores stocking Berkeley Farms and Clover, and the supermarkets carrying, for the most part, their own brands (Safeway sells Lucerne and Dairy Glen, Lucky sells Lady Lee and Farm Fresh). In Los Angeles, the survey found 23 different brands of milk available to consumers, with no one brand prevailing among the smaller stores and the supermarkets carrying, for the most part, their own brands (Hughes sells Hughes and Special Buy, Vons sells Jerseymaid and Westwood, Ralphs sells Ralphs and Imperial Supreme, Lucky sells Lady Lee and Farm Fresh).

The plethora of milk brands in Los Angeles means little to consumers' taste buds or health, since for the most part, the quality of the milk is the same regardless of brand. However, with considerably more brands of milk available from processors (some of which are also big supermarket retailers), the likelihood of competitive wholesale prices to Los Angeles grocers is increased. And greater competition in retail prices should logically follow. The Los Angeles survey found more smaller stores selling a greater variety of brands with prices well under $3.00 per gallon than were found for that price in the San Francisco survey. The greater number of milk processors in the Los Angeles area may be a contributing factor.

Children are drinking 16% less milk and 23% more carbonated soft drinks than their counterparts of the late 1970's^vi. Families dependent upon government assistance for food stamps and faced with the challenge of stretching their food budgets, may be tempted to purchase lower-priced beverages, devoid of nutritional value, instead of milk. Many of Los Angeles and Orange counties' poorest consumers purchase the highest-priced milk at supermarkets because they can be assured that both food stamps and WIC coupons will be accepted there.

All the major Los Angeles area chain supermarkets accept food stamps and Women Infant Children (WIC) milk coupons. Many of the smaller markets in this survey also accept food stamps, but only a few of the smaller markets (where milk can be purchased for considerably less) accept WIC milk coupons. Trader Joe's and Smart & Final stores offer some of the lowest prices in the Los Angeles area for a gallon of milk and do not accept WIC milk coupons.

In an article entitled "Do the Urban Poor Pay Mor for Food? Issues in Measurement," researchers from Ohio State University conclude, "The effectiveness of programs that provide aid to the disadvantaged through food stamps or income transfers is weakened when the same amount of money will buy more food in the suburbs."^vii By the same argument, the effectiveness of programs that provide aid to the disadvantaged through food stamps is weakend when tax dollars for food stamps and WIC coupons are spent on the highest priced milk, enriching the biggest retailers. Children make up eighty to eighty-five percent of the food stamp population. When food dollars are wasted on excessive milk prices, poor children get less food to eat.