Advice to Consumers
Bay Area Press Release

White Liquid Gold:

Bay Area 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 6 through January 8, 1999, Consumers Union, nonprofit publisher of Consumer Reports magazine, surveyed milk prices in 79 food stores in four San Francisco Bay Area counties--San Francisco, Alameda (East Bay), Marin, and San Mateo (the Peninsula). Consumers Union has conducted and published semi-annual milk price surveys of both San Francisco and Los Angeles areas for the past several years. Consistent patterns emerge from these surveys that 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) Supermarkets in the San Francisco area generally charge among the highest prices for milk. By contrast, many neighborhood Mom-and-Pop markets charge considerably less for milk--anywhere from $.86 to $1.36 less per gallon. 2) In general, the major supermarket chains--Safeway, Lucky, Bell Market, Mollie Stone's, Cala Foods, Andronico's, Petrini's and Faletti Foods--are matching or nearly matching one another in high milk prices within each county. 3) For the last several years there has been a widening gap between the price farmers receive for their milk and the retail price consumers pay. Grocers frequently use even the smallest increase in the farm price as cause to raise retail milk prices by a margin greater than the actual increase, and they often fail to pass on the full decrease when the farm price goes down. The cumulative effect of this growing gap shows that there is little correlation between the retail price of milk and the farm price, particularly when the farm price goes down. Consumers Union's last San Francisco milk price survey was conducted nine months ago, in April of 1998. At that time, the farm price--at $1.31--was $.34 per gallon less than the current $1.65 farm price. Most of the stores in this survey charge between $.38 and $.66 per gallon more than they did last April. This is $.04 to $.32 more per gallon than the farm price increase.

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 for production per capita. (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 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 retail 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 in retail prices 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. While California milk sales dropped by .8 percent between 1997 and 1998, continuously rising supermarket milk prices (during a period in which the farm price dropped $.25 per gallon) 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 San Francisco supermarket than at a smaller, independent market--up to $1.36 or 47% per gallon more in San Francisco county, up to $.77 or 26% per gallon more in the East Bay, up to $.90 or 32% per gallon more on the Peninsula, and up to $1.00 or 34% per gallon more in Marin 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 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 Cala Foods, located in the Mission District of San Francisco. Cala Foods charges $4.23 for a gallon of whole milk, while 23rd and Mission Produce charges $2.89 per gallon of whole milk, a difference of $1.34 per gallon, and Bahia Produce and Meat, less than a block away from Cala Foods, charges $2.99 per gallon, a difference of $1.24 per gallon. Another example is Bell Market in South San Francisco, which charges $3.79 for a gallon of whole milk, while Super Market Castillo in South San Francisco charges $2.89 for a gallon of whole milk, a difference of $.90. This phenomenon of supermarkets charging considerably more than smaller markets in the same neighborhood exists in all four counties surveyed in this study.

As in past milk price surveys by Consumers Union, this study continues to show a uniformity of milk prices between the major San Francisco area supermarkets, all of which have among the highest milk prices of the stores surveyed. In San Francisco county, the major supermarkets (Bell Markets, Mollie Stone's, Safeway, and Cala Foods) charge between $4.23-$4.25 for a gallon of whole milk, exactly the same at $4.23 per gallon of 2% lowfat milk, and exactly the same at $3.89 for a gallon of nonfat. Lucky Stores charge less than their supermarket competitors in San Francisco county, but Lucky matches the other supermarkets in the three other counties surveyed. In San Francisco county, Lucky charges $.48 per gallon less for whole milk, $.48 per gallon less for 2% lowfat, and $.30 per gallon less for nonfat. Lucky's two-gallons-for-less offer of their non-name brand milk, Farm Fresh, is also less than the Safeway equivalent in San Francisco county, but matches Safeway's two-gallons-for-less offer of their non-name brand milk, Dairy Glen, in the three other counties surveyed. In San Francisco county, Lucky charges $.44 less than Safeway per two-gallons of non-name brand whole milk, $.14 less per two-gallons of non-name brand 2% lowfat, and $.52 less per two-gallons of non-name brand nonfat milk.

East Bay and Peninsula supermarkets (Safeway, Lucky, Bell Markets, Mollie Stone's, Cala Foods, Petrini's, Andronico's, and Falletti Foods) generally match one another on the price of milk: $3.75 per gallon for whole, $3.75 per gallon for 2% lowfat, and $3.59 per gallon for nonfat. Safeway and Lucky also match one another on their two-gallons-for-less offer of non-name brand milk: $5.09 per two-gallon offer of whole milk, $4.95 per two-gallon offer of 2% lowfat milk, and $4.25 per two-gallon offer of nonfat milk. Marin county Safeway, Lucky and Mollie Stone's milk prices are uniformly high; however, other chain supermarkets in Marin, such as United Markets and Andronico's, charge less at $3.48 per gallon of whole milk. Small chains such as Whole Foods and Wild Oats in Marin county charge between $3.59 and $3.69 for a gallon of whole milk.

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)

Consumers Union's last San Francisco milk price survey was conducted nine months ago, in April 1998, when the farm price was $.34 per gallon less than the January 1999 farm price. We went back to many of the same stores surveyed last April to find milk prices up $.38 to $.66 per gallon and up $.74-$.84 per two-gallon special at the supermarkets that offered the two-gallon deal. This is a clear example of the widening gap between the farm price and the retail price of milk, and shows that many grocers have used the increase in the farm price since April 1998 to reap an additional $.04 to $.32 per gallon profit on milk sales.

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.

Some consumers and policymakers 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 prices for a gallon of whole milk were found at small, independent markets: in San Francisco county, the lowest price surveyed was $2.89 at 23rd & Mission in the Mission District; in Alameda county, the lowest price surveyed was $2.98 at Richmond Food Center in Richmond, on the Peninsula, the lowest price surveyed was $2.89 at Super Market Castillo in South San Francisco, and in Marin county, the lowest price surveyed was $2.99 at Quick 'N Easy Grocery in San Anselmo. In general, considerable savings on milk prices can be found at specialty, discount chains and co-operative stores, such as Trader Joe's in San Francisco and San Mateo counties, at $2.99 per gallon of whole milk; Rainbow Grocery in San Francisco, at $3.05 per gallon of whole milk; and Food Maxx in Hayward, at $3.08 per gallon of whole milk. Trader Joe's was the only store we surveyed that had not raised milk prices since our last survey, in April 1998. The lowest-priced supermarket chains in the current survey are Andronico's in Marin, and United Markets, also in Marin, which sold gallons of whole milk for $3.48 per gallon.
 

Most of the major supermarkets are milk processors as well as retailers. Safeway and Lucky offer, in addition to higher-priced, name brands (Lucerne at Safeway, and Lucky brand at Lucky stores), lesser-known brand alternatives (Dairy Glen at Safeway, and Farm Fresh at Lucky) for less. San Francisco county Safeway stores sell one gallon of Dairy Glen brand whole milk for $3.97 (as compared to its Lucerne brand which sells for $4.23 per gallon) and two gallons of Dairy Glen whole milk for $5.53; Lucky sells one gallon of Farm Fresh brand whole milk for $3.57 (as compared to its Lucky brand, which sells for $3.75 per gallon) and two gallons of Farm Fresh whole milk for $5.09. San Francisco county Lucky stores sell milk for less than Safeway. However, in Alameda, Marin, and San Mateo counties, Lucky and Safeway generally match each other's prices on all three types of milk surveyed, including their two-gallons-for-less offers.
 

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.
 

This survey was conducted anonymously by Consumers Union staff members, without notice to store owners or managers. (13) The data was gathered by walking into each of 79 San Francisco Bay Area 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.

6 Memo to Consumers Union from Bob Maxie, California Department of Food and Agriculture, February 8, 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 Tyler Baldwin, Consumers Union's Administrative Assistant, for her help in collecting and documenting the data for this survey.

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