Sacramento Press Release
Advice to Consumers

White Liquid Gold:

Sacramento Supermarkets
Charge Too Much for Milk

Retail milk prices in California are among the highest in the nation. This is so despite the fact that California has surpassed Wisconsin as the biggest producer of milk in the nation. (1) At the same time, according to a Sacramento Bee newspaper article, more than 4 million Californians lack access to nutritious food due to the disappearance of food stores from poor neighborhoods. (2) Furthermore, according to a U.S. Department of Agriculture survey, "youngsters are drinking 16 percent less milk and 23 percent more carbonated soft drinks than their counterparts of the last 1970s." (3) In fact, California consumption of fluid milk dropped by more than 6 million gallons or .8 percent between 1997 and 1998. (4)

Evidence shows that it is grocer gouging, particularly by supermarket chains, and not wholesale milk costs, that forces California consumers to pay too much for milk. On January 14 through January 18, 1999, Consumers Union, nonprofit publisher of Consumer Reports magazine, surveyed milk prices in 59 food stores in the Sacramento area. Consumers Union has conducted and published semi-annual milk price surveys of both San Francisco and Los Angeles areas for the past several years. This is Consumers Union's first extensive Sacramento area milk price survey. Patterns that consistently show up in the San Francisco and Los Angeles studies emerge in the Sacramento survey as well. These patterns point to the fact that there is a great deal supermarket retailers can do to increase competition for milk sales, thereby lowering the price of milk at the checkout counter.

The three main findings of this report are: 1) Supermarket milk prices in the Sacramento area are slightly (approximately 4 to 6 percent) lower than they are in San Francisco (and San Francisco milk prices are typically lower than in Los Angeles).
2) Supermarkets in the Sacramento area generally charge among the highest prices for milk. By contrast, many neighborhood Mom-and-Pop markets charge considerably less for milk--anywhere from $.40 to $1.40 less per gallon.

3) Retail milk prices at most of the major supermarket chain stores in the Sacramento area-Raley's, Safeway, Lucky, and Bel Air-are matching or nearly matching one another in high milk prices. The Albertson's chain charges the highest milk prices in the survey--$3.99 per gallon of whole milk.

California is the biggest producer of fluid milk in the nation. Last year, California produced 3.2 billion gallons of milk, as compared to Wisconsin, which produced 2.6 billion gallons. The next biggest milk producing states were New York, at 1.3 billion gallons, Pennsylvania, at 1.25 billion gallons, and Minnesota, at just over 1 billion gallons. (5) California is ranked #12 in the nation in per capita production. (6) There is little justification, from a consumer perspective, for the state with the biggest milk supply to boast among the highest retail milk prices in the nation.

A study, published in March 1998, by the U.S. General Accounting Office (GAO), presented information on retail milk prices in 28 U.S. cities from 1991 through 1997. The study covered states with farm prices set by federal marketing orders, and therefore, excluded California, which has its farm price set by the California Department of Food and Agriculture (CDFA). (7) The chart on the next page compares retail prices in May/June 1997 in cities covered by the GAO report, as compared to average retail milk prices in the Los Angeles and San Francisco Bay areas from Consumers Union's survey of 185 stores in May/June 1997. Retail milk prices were higher in Los Angeles and San Francisco than in all the cities in the GAO report.

The CDFA publishes monthly figures, collected by A.C. Nielsen, showing retail average whole milk prices in California, as compared to retail average whole milk prices in Utah/Idaho, Oregon, and Arizona. (8) The Nielsen numbers show that, in 1998, California's average price for whole milk was $.65 higher than in Arizona, $.35 higher than in Utah/Idaho, and $.12 higher than in Oregon, even though the farm prices in each of the states were very similar. Multiply these differences by the number of whole milk gallons sold in California in 1998 (294,671,000 gallons), and the cost to California families is clear. Consumers in California paid nearly $200 million more for milk than they would have if Arizona retail prices prevailed in California; they paid over $36 million more than if Utah/Idaho retail prices prevailed in California; and over $35 million more than they would have if Oregon retail prices prevailed in California.

Supermarket retailers reap high profits on milk, a product that is important for the healthy growth and nutrition of children. In economic terms, milk is an "inelastic" food item. That is, regardless of the size of a family's food budget, the health of the economy, the season of the year, or changing fads, consumers continue to buy milk at almost any price. There is no good, reasonably-priced nutritional alternative to milk. Many consumers are unaware of the price they pay for milk, and their busy lifestyles preclude them from shopping around for the best milk prices. 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 that customers will buy items not on their grocery lists. California milk sales dropped by .8 percent between 1997 and 1998. And yet, according to Consumers Union's milk price surveys, supermarket milk prices rose an average of $.31 per gallon in San Francisco and an average of $.22 cents per gallon in Los Angeles between 1997 and 1998, a period in which the farm price dropped $.25 per gallon. This retail price increase in the context of the farm price decrease points to retailer confidence that consumers will continue to buy milk, regardless of price.

The supermarket chains, which gouge consumers on milk, consider milk a lure because it is so essential to families. Small neighborhood Mom-and-Pop markets, where milk can be purchased for considerably less than at the supermarkets, generally do not reap much profit on milk. Like the big retailers, small markets sell milk to lure customers into their stores, but most of the profits made by small markets are on non-milk products. Small markets continue to thrive without high profits on milk. Increased competition and price-cutting by the supermarkets on milk (where most milk is purchased) will not impact small markets, which already charge so much less for milk than the supermarkets and which, generally, do not make much profit on milk sales.

Consumers can pay considerably more for a single gallon of whole milk at a Sacramento supermarket than at a smaller, independent market--up to $1.40 or 54% per gallon more. This discrepancy, a phenomenon that 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 middleman. 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 Albertson's, located in the Citrus Heights/North Highlands district. Albertson's charges $3.99 for a gallon of whole milk, while Mike's Market in North Highlands charges $3.29 per gallon of whole milk, a difference of $.70 per gallon, and Saver Liquor & Food charges $2.59 per gallon, a difference of $1.40 per gallon. Another example is Lucky in Davis, which charges $3.75 for a gallon of whole milk, while Fast & Easy Mart charges $2.99 for a gallon of whole milk, a difference of $.76. This phenomenon of supermarkets charging considerably more than smaller markets in the same neighborhood exists in most of the neighborhoods surveyed in this study.

Sacramento area supermarket milk prices are very uniform and among the highest in the survey. Most of the major supermarkets (Raley's, Bel Air, Safeway, and Lucky) charge $3.59 for a gallon of whole milk, $3.59 for a gallon of 2% lowfat milk, and $3.29-$3.39 for a gallon of nonfat. Albertson's charges more than its Sacramento supermarket competitors, at $3.99 per gallon of whole milk, $3.99 per gallon of 2%, and $3.79 per gallon of nonfat. Lucky and Safeway match or nearly match each other in the price of their higher-priced name brand milk (Lucky brand at Lucky and Lucerne brand at Safeway)--$3.59 for a gallon of whole, $3.59 for a gallon of 2%, and $3.35 or $3.39, respectively, for a gallon of nonfat. Lucky and Safeway are also uniform in their non-name brand milk (Farm Fresh at Lucky and Dairy Glen at Safeway)--$3.49 for a gallon of whole milk, and $5.09 for two gallons of whole milk, $4.95 for two gallons of 2%, and $4.25 for two gallons of nonfat.

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 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 more the supermarkets could do to compete for milk sales and bring retail prices down.

Farmers are often blamed for the high retail price of milk. And yet, there is an ever-widening spread between the retail price of milk and the farm price due to 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. The minimum dollar amount farmers are paid for their milk is set by the CDFA, calculated using economic formulas based on market prices for manufactured dairy commodities, such as cheese, butter and nonfat dry milk.

Since October 1998, the farm price has risen dramatically, largely due to a decreased supply of fluid milk and an increased demand on milk supplies. El Niño's heavy rains in 1998 put stress on California herds, causing the cows to produce less milk. At the same time, consumption and sales of cheese and higher fat products, such as ice cream, increased the demand on milk supplies. The January 1999 farm price of $1.65 per gallon in Northern California (which was up $.34 per gallon since the previous April) reflects both production declines and higher demand for milk. On February 1, 1999, the farm price jumped again, to $1.71 in Northern California. The CDFA predicts, based upon the assumption that the Chicago Mercantile Exchange cheese price will remain at its current level, that the farm price for April and May 1999 will drop a dramatic $.60, to $1.15 per gallon. (9)

California law does not regulate how high retail milk prices can go. In essence, retailers can charge as much as the market will bear. Since the late 1960s, retailers have, however, been prohibited from selling milk for less than their actual cost. Supermarket chains claim that true, market-driven competition is limited by this governmental intervention. While 30 years ago, the intent of the sales-below-cost law was to stabilize a volatile dairy market in California, the law's effect now is to give retailers a legal excuse to reap the highest profits on milk, and not to compete on milk. In essence, the law was created to deal with market inefficiencies, but its effect now is to create market inefficiencies. Only 13 states have a sales-below-cost law on milk.

This legislative session, Senator Jackie Speier is authoring a bill, sponsored by Consumers Union, to repeal the retail sales-below-cost prohibition on milk in the California Food and Agriculture Code (sections 61383 and 61384). Doing away with the law will not force retailers to lower milk prices, but it will remove an excuse they use to justify charging almost identical prices, and will give grocers the opportunity to use milk as a low-priced inducement to shoppers. Retailers are allowed to sell most products as a "special." Repeal of retail sales-below-cost prohibitions on milk could do much to stimulate supermarket competition for milk sales in a market where both producers and consumers seem continually to get the short end of the deal.

Enforcement of the sales-below-cost law is the responsibility of the CDFA. In a letter to Consumers Union, dated November 18, 1998, John Dyer, Supervising Staff Counsel to the CDFA, described sales-below-cost enforcement:

The statute dates from 1967. Its historical purpose was to prevent chains from overwhelming "mom and pop" stores through cut throat competitive tactics. That purpose (and perception) is perhaps dated. In any event, for the period for which we have records and institutional memory, the department sought to enforce this statute in the courts maybe seven times. The most recent of these actions was filed in 1989. We lost and have not filed a case since. Nor have we devoted much in the way of resources to any other kind of enforcement. (10)

The threat of sales-below-cost enforcement by the CDFA dampens supermarket competition on milk and keeps milk prices high. But the fact is that the CDFA has not enforced the retail sales-below-cost law for many years. Not only is the law no longer relevant in the current marketplace, but by the CDFA's own admission, the law has not been enforced for a decade. The sales-below-cost law on milk represents unnecessary regulation of a product, the price of which should be driven by the marketplace.

Many consumers may be familiar with a campaign by a group called Mad About Milk to lower California's nutritional standards on milk. Consumers should not be confused: the sales-below-cost legislation that is being carried by Senator Jackie Speier and sponsored by Consumers Union this session has nothing to do with California's nutritional standards on fluid milk. California has higher nutritional standards than other states. Consumers Union supports the availability of a broad selection of healthy dairy products with content accurately and fully disclosed. This allows consumers to comparison-shop and buy products that meet their needs at prices they are willing to pay.

Consumers Union does not believe that Mad About Milk's effort to lower California's nutritional standards on milk will result in lower retail milk prices for consumers. Historical and current data show that most fluid milk is sold to consumers at prices much higher than competition would dictate and that retail prices are not significantly linked to farmer and processor costs. The assumption that lowering California's standards, thereby marginally lowering the wholesale cost of milk, will result in lower prices to consumers is not supported by historical fact. Since California's high milk prices are more the result of grocer gouging than wholesale milk costs, any lowering of California's nutritional standards will most likely result in consumers paying the same price for a product with less calcium and protein. Out-of-state dairies that meet the California's nutritional standards can and do sell milk in the state.

This debate is not about consumer choice, as Mad About Milk asserts. Californians now have at least 10 types of milk available to them (Lactose Free, Nonfat, 1%, 2%, Whole and Enriched, as well as Organic Nonfat, Organic 1%, Organic 2%, and Organic Whole) often by two or more labels in pints, quarts, half gallons and gallons. With 50 or more options for fresh fluid milk represented in grocers' dairy cases, California consumers are not clamoring for more milk choices. Additional fluid milk options, with accurate content disclosure, may have theoretical benefits but do not provide meaningful consumer gain in the form of lower prices at the check-out counter.

All consumers are hurt by the high price of milk. However low-income consumers are hit particularly hard. 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. A report by the United Nations Children's Fund (UNICEF) found that:

In this country [USA], researchers estimate that over 13 million children under the age of 12 live in food insecure households. The problem is often at its worst during the last week of the month when benefits like food stamps run out. Over 20 percent of American children live in poverty, according to the Census Bureau, more than double the rate of most other industrialized countries. (11)

Many of the poorest consumers purchase the highest-priced milk at supermarkets because they know that both food stamps and Women Infant and Children (WIC) milk coupons will be redeemed there. All the major chain supermarkets accept food stamps and WIC milk coupons. While many of the smaller markets also accept food stamps, only a few of the smaller markets (where milk can be purchased for considerably less) accept WIC milk coupons. The effectiveness of programs that provide aid to the disadvantaged through food stamps is weakened when tax dollars for food stamps and WIC milk coupons are spent on the highest-priced milk, enriching the biggest retailers. US Census Bureau statistics show that there are more than 2 million children under 18 years of age living in poverty in California. (12) When food dollars are wasted on excessive milk prices in California, poor children get less food to eat.

The lowest price for a gallon of whole milk was found at Savor Liquor & Food in North Highlands, which charges $2.59 for a gallon of whole milk. Several other small markets in an array of different neighborhoods charge between $2.79 and $2.99 for a gallon of whole milk. Savings on milk prices can also be found at discount chains, such as IGA stores, Super Saver Food, and Nugget Markets, which sell whole milk for between $2.99 and $3.49 per gallon.

Safeway and Lucky offer two-gallons-for-less of their non-name brand alternatives (Dairy Glen at Safeway, and Farm Fresh at Lucky). The non-name brand two-gallons-for-less specials at both Lucky and Safeway stores are the lowest prices in the survey, as long as two gallons are purchased. The prices of the Lucky and Safeway two-gallons-for-less specials of Dairy Glen and Farm Fresh (respectively) whole milk are exactly the same--$5.09 for two gallons of whole; $4.95 for two gallons of 2%; and $4.25 for two gallons of nonfat.

All brands of milk must meet minimum standards set by the CDFA. Since the quality of the milk in all the various brands meets those standards, consumers should take advantage of the lower-priced, lesser-known brands, especially the two-for-less specials offered by Safeway and Lucky. 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.

Consumers Union's milk prices surveys do not claim to be comprehensive compendiums 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.

The Sacramento area survey was conducted anonymously by a staff member for Senator Jackie Speier, without notice to store owners or managers. (13) The data was gathered by walking into each of 59 Sacramento stores and purchasing one gallon of each available brand of whole, 2%, and nonfat milk (the receipts have been retained). No payments were made to or solicited by Consumers Union from any person or entity connected with the survey.
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Endnotes:

1 "California Dairy Industry's Share of National Market Continues to Grow," California Dairy Review, Volume 1, Issue 6, Mary 1997.

2 "Four Million Californians Lack Access to Nutritious Food," Sacramento Bee, October, 1997.

3 "Yucky,Yucky...Yum? San Francisco Chronicle, September 18, 1996.

4 Telephone conversation with Candace Gates, California Department of Food and Agriculture, February 3, 1999.

5 Telephone conversation with Candace Gates, California Department of Food and Agriculture, February 4, 1999.

7 Dairy Industry: Information on Marketing Channels and Prices for Fluid Milk (General Accounting Office/RCED-98-70, March, 1998).

8 "Dairy Marketing Class 1 Price Letter-Selected Issues, AC Nielsen Scantrack Reports on Refrigerated Milk, Table 19," California Department of Food and Agriculture, February 1999.

9 Telephone conversation with David Ikari, Chief, Dairy Marketing Branch, California Department of Food and Agriculture, January 28, 1999.

10 Letter to Consumers Union from John C. Dyer, Esq., Department of Food and Agriculture, November 18, 1998.

11 "Malnutrition Accounts for Over Half of Child Deaths Worldwide, Says UNICEF," Nutrition Week, Community Nutrition Institute, Volume XXVIII, No. 1, January 2, 1998.

12 Estimates for People Under Age 18 in Poverty for California, U.S. Census Bureau, 1993.

13 Many thanks to Michael Miiller, of Senator Jackie Speier's staff, for his help in collecting and documenting the data for this survey.