basic economics

Sofia Klotz

Business 1.0

Professor Lamel

October 6^th 2012

                                                            Blog #2

The grocery market is a 491.2 billion dollar industry and accounts for 72% of the country’s food retail market.  9.8 billion dollars of the total revenue are profits, which makes for a 2% profit margin after all expenses. Currently there are 2,279,952 million people employed in this industry with wages totaling 47.6 billion dollars.  In all retail markets the objective is simple: to buy or produce their products at a lower cost than the price they sell them for. 

Costs for this industry include wages, energy, infrastructure, marketing, and inventory. However, unlike other industries such as clothing, automobiles, energy, and electronics, the grocery industry faces a unique setback: food can spoil. This setback creates a shorter shelf life and therefore less time to sell the product. This puts forth a huge pressure to price the products at the maximum profit point. This price point is found by using the basic theory of supply and demand.

In the grocery industry however, a surplus of a perishable product is much more costly then a surplus of cars. This is due to the fact that when the product expires, the rest of the inventory that the store has left instantly becomes a loss. With a car, if there is a surplus the seller has a greater amount of time to change the price to attract more buyers.  Setbacks like perishability of products increase the costs because the company must insure that the products’ profitability margins can make up for potential losses due to products going bad. 

The other main way that the grocery industry makes a profit, and therefore offsets the risk of inventory going bad, is by charging manufactures a slotting fee. This is a fee that a manufacture will pay to have their products in a desirable location, which will result in higher sales of the product, thus benefiting both the manufacturer and the retailer.  However, there is a lot of debate whether this is good or bad for the consumers. Retailers try to use it as a marketing strategy. They declare that since they charge this extra fee, they can in turn lower the price of the product to consumers. On the other hand, the manufacturers say that if they did not have to pay this fee, their wholesale price would then be less.  Over all the economics of the grocery industry are quite complex and take many different things, such as what was touched upon above, into account. 

http://clients1.ibisworld.com/reports/us/industry/ataglance.aspx?indid=1040