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A blog about economics in the South Caucasus by ISET

Georgian Consumers Outsmarting Supermarket Managers?

Seasons change, and so do Georgian food prices. In the second week of June, Georgia’s major food retail networks (Carrefour, Goodwill, Fresco and SPAR) lowered their prices by an average of 3.9% y/y and 1.8% m/m. Compared to the end of May, prices moved the most for the following food items: eggplant (-21%), pasta (-10.3%) and coffee (-5.7%); wheat flour (+11%), buckwheat (+10.5%) and garlic (+6.8%).


THE LAW OF ONE PRICE … WHAT LAW?

Why should exactly the same product sell at dramatically different prices in different shops? It shouldn’t. At least that’s what the economics “law of one price” says. The reality – in Georgia and elsewhere – is, of course, different. Very different. Let’s take a quick look at some of the most common grocery items sold in major Tbilisi supermarkets:

 

Category Product Brand Name Minimum
Price
Maximum
Price
% difference
between MIN and
MAX prices
Grocery items Buckwheat Supremo, 0.8 kg 2.65 2.9 9.40%
Rice Supremo, 0.8 kg 1.95 2.5 28.20%
Wheat flour Mziuri Veli, 1 kg 1.65 1.81 9.70%
Wheat flour Makfa, 1 kg 1.55 2.05 32.30%
Bread White Batoni 0.71 0.8 12.70%
Sugar Chveni Sufra, 0.9 kg 1.75 1.95 11.40%
Sugar Supremo, 0.9 kg 1.65 1.75 6.10%
Pasta Supremo, 1 kg 1.4 1.8 28.60%
Vegetable Oil Zlato, 1 liter 3.5 3.99 14.00%
Vegetable Oil Oleina, 1 liter 3.45 3.95 14.50%
Eggs Koda M 0.3 0.32 7.00%
Eggs Dila M 0.3 0.32 7.00%

As is easy to see, there is very little difference in prices of some items, say, Koda and Dila eggs, which sell at 30-32 tetri. Yet, how come one supermarket is offering exactly the same 1kg package of Makfa flour for 1.55 GEL while another is pricing it at 2.05GEL (a difference of more than 32%)? Makfa flour may be an extreme case, but there are significant differences, well above 10%, in the prices of most grocery items.

 One possible explanation is that supermarket managers don’t know what they are doing and base their pricing decisions on greed rather than calculation. Greed, however, may be a poor guide for profit-making. Once bitten, consumers may get twice shy about shopping at greedy outlets. With competition among Georgian supermarket chains increasing over time, greed and stupidity will be quickly punished. 

Another possibility is that some supermarket chains are better than others in securing low prices from their local and international suppliers. For instance, this is the reputation of the largest US retailer, Wal-Mart. If this is the case in Georgia, we should observe some supermarkets being consistently cheaper than others in most food categories.

Finally, supermarket managers may be very smart guys who know how to lure consumers into their establishments. One common trick is to use so-called “loss leaders” – the term for goods advertised or sold at or below cost price. As explained on thekrazycouponlady.com, “the objective behind having a few of these for a sale period is to “lead” customers into the store with the premise that, once inside the store, the customers will also purchase full-priced items, making up for the profit loss.” 

It is indeed quite common for shoppers to succumb to the impulse and fill up their shopping carts once they get into a store. But smart shoppers – hopefully, there are some of them in Georgia – can do much better!!! Why not hunt for “loss leaders” and stockpile items that are sold at rock bottom sale prices? Outsmart supermarket managers, buy cheap and avoid paying the full price every time you run out of a product!

Launched in November 2014, the Retail Food Price Index (FPI) monitors the level of supermarket prices based on weekly observations of 33 food products (broken into five product categories), which account for 75% of food spending by an average Georgian household.The project is implemented by ISET Policy Institute’s Agricultural Policy Research Center (APRC) in cooperation with the largest four supermarket chains in Tbilisi: Carrefour, Goodwill, Fresco and SPAR. The Index is calculated as a weighted average of food prices, using the shares of commodities in the total food budget of a typical Georgian household as weights. The FPI data is collected for the following product categories: (i) groceries (flour, grains, sugar, oil, pasta, eggs); (ii) fruits and vegetables, (iii) meat, (iv) milk products and (v) non-alcoholic beverages. A specific brand is typically chosen to represent each product so that prices are easily comparable across different supermarkets and over time. The Retail FPI report is updated on a biweekly basis, however, information on sharp price fluctuations for specific products is available in the spotlight section every week.
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Simon Appleby on Wednesday, 22 June 2016 15:08

It is good that you mention the issue of loss leaders. In Europe, America and Australia, farmers and processors are regularly outraged to find out that, after having been beaten down on price to close to the cost of production by supermarket oligopolies, that their primary produce (like milk, pork, beef and bread) is sold at less than cost, to entice shoppers in to buy soft drinks, snack foods and other non-staples made by multinationals at a hefty margin. It is very difficult for regulators to avert this without price-fixing, which is even more destructive.

It is good that you mention the issue of loss leaders. In Europe, America and Australia, farmers and processors are regularly outraged to find out that, after having been beaten down on price to close to the cost of production by supermarket oligopolies, that their primary produce (like milk, pork, beef and bread) is sold at less than cost, to entice shoppers in to buy soft drinks, snack foods and other non-staples made by multinationals at a hefty margin. It is very difficult for regulators to avert this without price-fixing, which is even more destructive.
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