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of Duke University talks with EconTalk host
about why milk is in the back of the grocery store. Michael Pollan and others argue that milk is in the back so that customers, who often buy milk, will be forced to walk through the entire story and be encouraged by the trek to buy other items. Munger and Roberts argue that competition encourages stores to serve customers and that alternative explanations explain where milk is found in the store. The conversation also discusses restaurant pricing, government "nudging" and related issues of grocery economics.
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0:33Intro. [Recording date: August 29, 2013.] Russ: Topic for today is milk. Want to alert listeners that later this week we expect to be releasing a bonus, mid-week episode.... EconTalk All-stars. Audio and video of the event to be released.
1:56Russ: Now, on to milk. The idea for this week's episode came from a brief video interview with Michael Pollan, who described the supermarket as "a treacherous environment if you are trying to eat healthily." He then went on to say, "It's designed"--the supermarket--"to extract as many dollars from your wallet as possible. So for example the milk will always be the maximum number of paces from the door." The idea being that you hav they are going to put all these items along the way. And I mentions I think that they are the high-margin items. And that way, through impulse-buying, you are going to make more money for the grocery store. When I heard that, I stopped listening, actually. For years, when I taught microeconomics or price theory I would almost always ask my students the following question for homework. "True, False, or Uncertain: Milk is at the back of the store because that way you have to go through the whole store and are likely to buy lots of other stuff along the way." Now, a lot of students--and you out there listening--might also give the same answer. Which is: A lot of people would say, True, that way the firm can maximize its profits. But that's a bad answer. It's true, firms do want to make a lot of money. And it might even be true that milk is at the back of the store to make you go through the whole store. I don't think so, and I'm going to give you an alternative explanation in a minute, and then Mike's going to chime in. Well, probably more than chime in. But if it is true that that's why they put the milk in the back of the store, you have to ask another set of questions: Why is the store so clean? Why do they clean the restrooms? Why do they hire friendly checkout people? Couldn't they make more money if they didn't sweep the floor, and hire ruder people? Why do they bother being open 24 hours sometimes--when they are selling very few items? Why do they give away samples? Why don't they charge for them--because you'd be willing to try something at least at a small amount? And is it even true that the milk is always at the back of the store? Or better yet: Is it true that milk is the most popular item, guaranteed to make you wander around the whole store? Does Barnes and Noble put the most popular books at the back of the bookstore so that you have to go through the whole store? That way you'll buy a lot more books? I don't think so. They put them, strangely enough, at the front, where it's most convenient. What about 7-11 and other convenience stores? The whole idea of a convenience store is to make it more convenient. It's small. You don't have to travel as far for items that you buy frequently. There's really no 'back' of the store. So, yes, the milk is in the back of the store in the cooler, but that's very close to the front. And they even put sodas sometimes on ice right in front of the store to make it more convenient so you won't have to walk through the whole store. Even though it's tiny, they still want to make it even easier. So one view of the world, which is Michael Pollan's, is that the grocery store exploits you. It makes you walk through the store so you'll be suckered into filling your cart. Now I have a different view. Yes, the grocery store wants to make a lot of profit. But that urge, as it often is--almost always--is constrained by competition. And competition forces the greediest of grocery store owners to serve its customers. Or we'll go somewhere else! Sometimes, of course, firms don't compete very hard. They don't want to. They'd rather not. They'd rather have a cartel so they don't have to work so hard to serve the customer. But in general those things lack a competition, as cartels are hard to sustain without government. They tend to break down. Firms are always looking for an edge. The way you look for an edge is to make the consumer happier. And then they are more likely to come into your store. Now, Ari Indek[?], who follows me on Twitter, writes that you can follow me on EconTalk and other things at EconTalker, Ari Indek writes that ShopRite, the grocery store chain, actually puts the milk up front in a mini-cooler, to make it more convenient. Now, Pollan also claims that the highest markup items are at eye-level. He argues that the 'real food'--and by that he means that the unprocessed food, the produce--is lower margin, and that's around the edges. So if you want to eat healthy and to save money, you should shop the perimeter of the store. But as Brendan O'Donohoe argued in our potato chip episode here on EconTalk, only 15% of the people are like me, who tend to snake up and down all of the aisles. Wouldn't it be true then, that it would more profitable to put the vegetables, the low-profit items, in the middle of the store, and put the high-profit, high-margin, high-processed items--which are things like the cereal and other things--wouldn't that go on the perimeter, according to Pollan? So, if I'm right, why is milk in the back of the store? If I'm right that grocery stores don't do it there as a conspiracy to sucker you into buying stuff you don't necessarily want, or that's high profit, that's at eye level, what's my explanation? And before I do it, I'm going to let Mike react.
Mike, what's my explanation? What are your thoughts?
Guest: My first thought on listening to that, I can just see you in a retirement home wheelchair shouting at the television, 'No, it's not true!' You're like two years away from that. Russ: No doubt. When you and I get together, I do tend to somehow lose my EconTalk hat. It's not on right now. And as a result I did get a little ranty there. I should have warned the listeners.
7:22Guest: I think that's just fine. We'll think of me as the interviewer here early on. I went and tried to find, because you had warned me, that this was going to be your concern. And that you had said that you were going to try to give an answer. What interested me about it was the confusion that I think people have between firms that are trying to maximize profits, and therefore firms that are trying to exploit consumers. And I think that the explanation that you gave, I think you said it was 'constrained.' I would say, 'Directed.' So, both von Mises, when he talks about the consumer being the captain of the ship, when he talks about grocery stores and producers being the crew of the ship--and yes, it's true that they go around making the ship change direction. But the captain chooses that direction. Now he may not know much about the operation of the ship, but if there is something wrong, he'll switch ships. The actual person who came up with the phrase 'consumer sovereignty' was William Harold Hutt, W. H. Hutt. And I went back and looked at some of the things that he wrote. And it was surprising to me how much of an argument he had with Joan Robinson and Arthur Pigou. And some of the other people who argue about welfare economics. What I think is interesting is the way that Joan Robinson and the opponents of the view that you are probably going to give, would want to think of stores as being little, local monopolies. So, sort of the oligopoly firms operate at the local level. Like restaurants. Because you can't really compete if it's a convenience store. It's late at night. This is the only one I can go into, and so I'm stuck. Russ: I think that's a silly argument, but carry on. Guest: Right. So, and Hutt thought so, too. How can you possibly thought that's the nature of competition? But they were absolutely stuck on it. So I think in interpreting Pollan and the people, the sort of intellectual history of that, starts on a very strange view of the monopoly power of grocery stores. And so, checked the factual basis, what you had said. It is actually true, the dairy section of most grocery stores is on the far said, away, or at least in the far corner away from the doors. And I think I have an explanation of that also. But maybe we'll compare that in a moment. More and more though, convenience stores, even grocery stores to some extent, have these coolers near the door that are called 'Grab and Goes.'
And Grab and Goes are understood to be a response to a consumer's desire, sometimes, to get a gallon of milk and go. And they are actually quite frequent. So, Pollan, regardless of the interpretation that he would attach, is just factually incorrect. So, if it ever was a problem, and that's what consumers wanted, then consumer sovereignty, or von Mises, the consumer being the captain of the ship, said, "I'd like to have milk near the door, please.' And there it is.
10:46Russ: And you could argue, though, to give Pollan his due, you could argue that, okay, it took 70 years. That's not very effective. So it could be that now the grab-and-go phenomenon, and the convenience store phenomenon, have finally broken the grip of the monopolistic grocery store. Guest: But if the legacy of that Joan Robinson, monopolistic competition view, that is so hard to get rid of because it's just ingrained in the way people think about economics. Russ: I think it's a fa I think we've talked about it before as to why people are so eager to assume they are being exploited. And of course, by the way, this secret is so secretive, that, is so well kept, that of course Michael Pollan knows it. So, he's alerting the world to danger. So be careful, keep your eyes down, don't look at the shelves. Keep 'em down, actually keep 'em down at the level where the oatmeal is, in his worldview. He suggests that the processed cereal and oatmeal is down at the floor. In my grocery a lot of the processed cereal is down at the floor also. And I don't buy either one of them, so I don't pay a lot of attention to it except to notice that cereals are all up and down. But it's very comforting. I don't really understand. I think you'd sleep better at night thinking that the grocery story is your friend rather than your enemy. And I don't want to mislead you, listeners. I'm not here to tell you, oh, it's okay, it's really your friend. I don't think they are literally your friend. But I think it would comforting to know that that competition protects them
from the rapacious grocer. Guest: I think it also would be interesting to be compared to what? Because, famously, when Boris Yeltsin visited a Texas grocery store in 1989 when he was visiting from Russia--you know, he's a wealthy guy. Actually accused the store of being a 'Potemkin store'--that we had added a bunch of different products. So, if the complaint is there's too much product differentiation and that's somehow wasteful, okay, let's put that to one side. That we'd be better off if we had fewer choices and it's wasteful to advertise all these different things. That's not the complaint. The complaint is: Product placement is inherently at least duplicitous and probably manipulative because it gets people to buy things they don't really want and they have impulse purchases that they don't really want. It so often happens--I went and spent nearly two days looking at product placement. And it turned out that by learning things I turned out learning a lot less than I thought I did out outset. I was actually sympathetic to this view that you could manipulate people, most of the time were in a hurry. The fact is, most of the time what they are trying to do is maximize revenue. And maximizing revenue, given that the coats are relatively fixed, it's like maximizing profits. It is true that people buy more of they eye-level stuff--stuff that's eye level on the shelf. Russ: No doubt. Guest: But it's also true that high volume things get moved to eye level on the shelf because it's more convenient. So it's over-determined. It's not that they can make you buy whatever is at eye level. You probably would probably have this vague sense of unease--I don't like this store. And it might be that they have a bunch of stuff you don't want to buy at eye level. You might not be able to identify that, because you are so used to having your desires anticipated and fulfilled by product placement.
I'm not coming back to this store. I'm not really sure why, but they don't seem to have anything. Russ: Before I forget, I have to quote Walter Williams, who, when we interviewed him ages ago, I'm pretty sure I quoted this story of his because I like it so much. His story is, he talks about your relationship with your grocer: I don't tell my grocer when I' I don't tell my grocer what I but if they don't have it when I get there, I fire them. I'm not going to come back. I remember shopping at a Venture store which was a chain now defunct in St. Louis, with one of my children. We went shopping--it was a Target, K-Mart, Wal-Mart competitor that didn't make it. And I was taking one of my kids to buy a basketball or something, and they didn't have any. The shelf was empty in the basketball section. I think my child, who was probably 6 at the time, said: I think this store is in trouble. Yeah. You're on to something. But it might have been me. I don't have the transcript. But usually when a store is out
of stuff it's a death sentence. And actually Venture was in a death spiral at the time. I don't think they were trying very hard, or they weren't doing very well at it. Whichever. But a store that systematically puts the most profitable items at eye level, as you suggest, is probably not going to be as pleasant a place to shop, and whether I notice that or don't is
a different question, I guess. You can debate that. I don't deny the fact that people have impulse issues. I'm sure that
I'm sure there are consultants who try to exploit those mistakes. They are looking very hard at what people do, and I'm sure that there are listeners here--I hope one of them is Brendan O'Donohoe, who used to be deeply involved in this, for Frito Lay--I'm sure he and others perhaps listening know a lot more about what grocery stores are trying to do. But what they are trying to do and what they are able to do, or what they'd like to do, those are not the same thing. Guest: That's what I
think is interesting is their description of what they actually do is often very consistent with trying to anticipate and fulfill desires that the consumers have that they may not have really consciously thought out. If you look at the end caps, the end of the aisles, the things that are on sale-- Russ: Very valuable real estate-- Guest: or right by the place where you are pushing your cart where you wait in line, so you are sort of trapped there because there are two carts ahead of you, what sort of stuff is there? Well, there's candy. And candy not in big packages--it's individual packages because that's the highest profit way to sell it. Okay, that's an impulse purchase. We'll give them that one. But fingernail clippers? Batteries? You look and, Oh, I need that. You can call that an impulse purchase but it's more like they are trying to make a list of stuff you might need, and you think, oh, my wife would have been so mad if I' I told her I' thank goodness it was here. They actually try to anticipate. These aren' these are remind-you, you need them purchases. Russ: And you used the phrase, 'over-determined.' That's an econometrics phrase. What you meant by that is that it's hard to distinguish different hypotheses given the data. The data are consistent with some of these different views. I am sure that the stuff they put at eye level is the most popular. The question is: Is it the most popular because they put it at eye level, or do they put it at eye level because they are trying to make it easy for us to find the stuff we want? Guest: I found a surprising number of studies that said it was the second. That I think is something it's easy to lose sight of. If you think of the store inherently as trying to manipulate you, the fact that they look to see what it is people want and then they put it at eye level, that's actually consistent with convenience. Russ: I also want to concede--often, when I go to Costco, I have a very good time. I almost have a good time. But often when I get home, I regret some of the pleasure I overindulged in. Do I really need two [?] Guest: In fact, your lovely wife may point out--why did you get that? Russ: You bought another pair of reading glasses? Well, I'm always thinking what if they are lost. We have 19 now. So, I now have 240 oz. of ketchup, 60 peaches. So there is sometimes buyer's remorse. And if I found that
to be a common problem at Costco, I would try to go less often. Or I wouldn't go there at all. Guest: But to the contrary, it's so much fun. Russ: That too. I enjoy shopping there. I actually get pleasure from it. Which is interesting. It's an obvious mix of perimeter and snaking. I do a lot of--I do both. I sometimes just do perimeter and sometimes I go down most of the aisles. If I have a list in my hand. In my experience the snaking phenomenon is because I don't shop there often enough, whatever it is. It's the most efficient even if it's the most horrible. I'm going up
I'll find everything on the list if I have to. Guest: It's like the salesman problem--you'll only cover each aisle once. So it's efficient given that you don't know where anything is. Because the alternative would be to hop around, and you'd end up covering a lot of aisles three or four times. So it makes sense to go and look on each one. It's efficient given that you don't know the store that well.
20:18Russ: So, it's nice that there are some studies that back up my view. I didn't go to the trouble--this was my suggeste I wanted to tell the listeners. Usually when Mike and I talk, Mike proposes an idea that's in his brain, that's bugging him or he's interested in or that he wants to talk about. This one, as you can tell, is mine. It was my idea, but you did the homework, which I appreciate. Of course, those studies could be wrong. They could be pawns of the industry. Who
knows where the truth lies? My goal here, though, is to try to get listeners to imagine that there's an alternative and that imagining that alternative, whether it's true or not--I think it's true, but even if I'm wrong--when you start, as I do, I often start with the presumption that the result is a competitive result rather than an exploiting, monopolistic result, it helps you see things you wouldn't otherwise see. Now, the underlying hypothesis could still be wrong. Maybe they don't compete very hard. I want to mention--you earlier alluded to Joan Robinson and you mentioned restaurants. Sometimes there's a restaurant that's very convenient for you, so it has some advantage in keeping your business and it can do an imperfect job and you'll still keep coming because it's so convenient. That can be tru it can be true about your gas station. But it's not convenient for everybody, is one of
the problems with that kind of analysis. And these businesses, groceries and restaurants, etc. are unbelievably competitive. They are constantly struggling to stay afloat. They have very small margins. They are very high cost. And in the case of the restaurant business, most of them don't make it. So the idea that a restaurant can exploit you is very hard for me to understand. Now, a successful restaurant, a restaurant with a reputation, a restaurant that's been in business for a long time and has a great brand name, they get a window of opportunity to take advantage of that for a while. They can serve you a bad meal and you'll come back. They might serve you two or three bad meals and you'll come back, because you had 50 that you liked. Eventually, you'll stop going there. But certainly new restaurants, and most restaurants, are constantly struggling against the competition. Do you want to react to that? Guest: Well, what's interesting about the monopolistic competition model is that it is true that the restaurant can decide what price to charge. And they are probably not literally charging price = marginal cost. They don't do enough volume to get to the point where they are going to charge price = marginal cost. That is, the amount that it costs for them to make and serve that one meal is not what the price is. The price is very substantially higher than that. Now, some nights there might be nobody here: and we ought to cut our prices. But they don't. They may have happy hour or something like that. But the thing is, it's a relatively homogeneous product. Maybe they have a few things that are specials, or happy hour from 6-8. Grocery stores have a more complicated pricing model, and they do it in a number of ways. They have sales that they advertise--loss leaders that they try to get people in on. And even convenience stores may have milk that's pretty close to the price in a grocery store. Whereas toothpaste is 5 times as much. So they have really high prices because they don't sell that much at the 7-11, the Circle K; they don't sell that much, it's a really high price, but it's 11 o'clock at night, I really need it, there's no where else for me to go--I'm actually glad that it's open. Some people are mad that the price is so high. Russ: And they have low turnover of the items, so they have to carry some of those fixed costs per item, it's going to be a little bit higher. So it looks like the margin is very high. But it may not be in reality. Guest: The margin is very high on that one thing. If they knew they were going to sell it, it would be different. But this is basically an insurance policy. What they've done is they've bought a bunch of things, and every once in a while one or two people are going to buy a couple of them. They may end up throwing it away, but they have this inventory and they have to carry this inventory. It's a really terrific service. Grocery stores can use some things like that that are loss leaders, but generally they turn things over quite a bit more. The interesting thing about grocery stores lately is they move more and more to loyalty programs, where you have a card and there are substantial discounts on all kinds of products, if I show my Kroger card, my Piggly Wiggly card, my Harris Teeter, here in North Carolina. If I show that card I get substantial discounts. I think there's just a bunch of odd things about that. Russ: Yes, there are. Guest: One of them is that they are using the information about the patterns of your consumption, your purchases, to try to market things better. But I find it fairly common--if I don't have my card, the person at the checkout will just use theirs. Russ: Yeah, I know. Guest: That seems bizarre to me. Russ: Well, that hurts the price discrimination explanation. The claim is that they are trying to give a good price to
the loyal, or the ones who are smart enough or the ones who are concerned enough about price to have the card but they exploit everybody else. Especially the people with the allegedly relatively inelastic demand who don't care so much about price, and therefore can be exploited by the high marked price and don't get the discount with the card. The same is true of coupons, by the way. 'Do you have a coupon?' 'No, I don't.' 'Don't worry--we have some here.' That's bizarro. It's certainly bizarro for the price discrimination model. It's just hard to understand, period. Guest: Well, I think there are two functions for this. One is: We announce sales and we announce reductions for loyalty programs, like those cards are going to get people in the store to begin with. But if someone is in the store they seem to say, let's provide them with friendly service. I don't think that anyone has gone to the checkout person and said, You will be fired if you use your card. It seems to be, it's at least tacitly accepted.
26:28Guest: Like I said, it turned out I knew less than I thought I did. I still want to hear, Professor Roberts, if I can be the interviewer for a second, your explanation, for why milk is in the back. Russ: Because I'm going to put you off for a minute. Guest: Okay. Russ: I'm going to duck the question, because I want to jump onto something you alluded to about restaurants that's too fun not to mention. But don't let me get away with this. Because it could be I don't have an explanation. And I just want to talk about the
Red Sox. Or the Cardinals. Because it's August 29th and they are both in first place. Guest: Both in first place. Russ: I think we should schedule an interview for September 30. I know causation and correlation can get confused, but who knows? Why take a chance? Anyway, the thing I want to jump to is something I heard from Earl Thompson, UCLA economist, that's so interesting and if you've never heard the idea or the argument before, I think you'll find it intriguing out there. Which is that if you want to know the markup on something--and a lot of times people say, oh, the liquor is so expensive, that's where they
they lose money on everything else but they get it back on the liquor. Or, they make it up on the desserts. Or whatever it is. And one of the things that ignores--it ignores a couple of things. It ignores the fixed and sometimes not so fixed cost of a liquor license, which makes the actual profit of the item different from what the markup is. I think people think, I know what a bottle of wine costs, and this is so much more than that in the restaurant. But
of course the steak is a lot more, too. You say, well, okay, but t there's not much labor cost in a bottle of wine. How could that be the legitimate, competitive markup? And Earl Thompson's insight was, if you want to understand the markup on restaurant items,
you should think about how long it takes to eat them. Because what you are doing at a restaurant is two things. You are eating the food, which has fixed and variable costs--excuse me, an up-front and a labor cost. But you are also renting a table. And--this is another topic--the table is rented for $0. The rent for the table is implicit in the items. Now, why that is, is an interesting maybe we' put it aside for the moment. You can sit at the table for a long time. There's no meter. There's an argument for putting a meter there. But, for either cultural or convenience reasons--I think it would hurt the pleasure of the meal to se I think that's the reason. Guest: At some point they may start to say, look, you either order stuff or go. Russ: They will. So there is a meter, but it's very casual. There's a lot of looseness in that meter. So, basically, you pay for your table rent in the retail price of the item. So, coffee--oh, gosh, co it costs the they make a killing on the coffee. They don't. Coffee is what you linger over. The wine is what you linger over. The dessert adds real minutes to the meal. And all of that reduces the number of times a table can turn over in the course of an evening. And so you have to pay for the privilege of consuming those long-time items. And I think that's an incredibly deep insight into pricing in restaurants and how
to think like an economist. I think it's beautiful. Guest: Yeah. I had not thought about that before. So, the idea of average cost and marginal cost is sort of facile. So, just complaining about that, you can't mean that. Russ: So, if Earl is right--and I think he is--and if I'm right in agreeing with him, that raises a question. And I'm going to just and then you can press me on the question or you can just answer the question and we can go on. But we would spend a long time in my micro class talking about this. Which is the following. If it's true that the markup for the item, the price of the item, includes, is affected powerfully by the amount of time it takes to consume it because you were implicitly renting a table, why is it that so many restaurants have take-out menus that have the same prices as their sit-down in the store menu? And that's a very good question to challenge Earl Thompson's view and my view. And listeners, I challenge you to think about how I would answer that question. Because if I'm right, then take-out should be cheap. And eat-in in the restaurant should be the more expensive price. The fact that they are together seems to refute the claim that the price of the item reflects the time it takes to eat it. And that would be true certainly for drive-by windows at fast food restaurants, but even just regular restaurants that offer you take out. That would seem to be a refutation of that. But it's not. Of course, there's an answer. It may not be right, but there's an answer. You want to think about that, Mike, or do you want to press me? Guest: Nope. I think that is interesting. I think for fast food, surely the answer is that they are rarely completely full. They don't have the same, not exactly the same peak load problem. And people don't linger as long at fast food restaurants anyway. Russ: Great point. Guest: The question is more interesting for relatively expensive restaurants that have a take-out menu. And I've noticed more than a few--it's not
half, but I've noticed more than a few that do have a separate take-out menu where it's cheaper. There are discounts. But by and large you are right, and that does seem like a mystery. If the explanation is correct. If Earl Thompson's explanation is correct. And it's intuitively plausible. Then you immediately run into a problem: Why would they have the same prices for take-out? So I'm really just restating it. I think there are some places that have different take-out menus, but not many. Russ: A lot of them have the same. And forget the complicated how long it takes to eat a thing. If I'm not going to be sitting at a table, shouldn't I get a break? And a better way to say it: If I'm going to be sitting at the table, shouldn't I have to pay a premium? And yet another way to say it is: A restaurant that has lots of take-out can have a smaller eating space, in theory, and have lower prices because they have lower rent. So shouldn't they distinguish between those? And wouldn't a restaurant that offered a bargain on take-out monopolize the take-out business? Shouldn't there be competition among restaurants for take-out so that those who refuse to offer a discount should be in trouble relative to those that do? Guest: Yeah, I think that's the--it's not the: I should get a break. Because nobody cares what you should get. But: why wouldn't they give me a break in order to attract my business? And the peak problem then--you'd have to rebuild everything because the peak problem is going to be in the kitchen. I can't provide service to the people who are paying a premium to be at the tables if I'm also really backed up on take-out orders. Russ: Yeah. That's another issue about space. By the way, that of course plays another role in the price of the good: it's not just how long it takes to eat it. It's how long it takes to cook it. Obviously an item that takes longer, we would expect it to have a bigger markup over its raw material cost than an item that can be cooked very quickly. Guest: Yes, the time and preparation effort. Russ: Well, I'll give you my answer. It's a guess. Obviously we don't know the real answer. Maybe it's a mistake on the part of restaurants. People say there' you always want to say, well, they kind of have an interest in it. Guest: If there's a mistake, you should be in the restaurant business. Russ: That's one answer. That was one of my thoughts for Michael Pollan, too: why don't you open a grocery where the milk is all in the front? Guest: He'd make a killing. Russ: And the answer, he's going to make a killing, oh my gosh, with all the healthy food? Maybe later we'll get to some nudging, because I know that's something you've been thinking about. Because that all can get wrapped up into this. But my explanation, which is the best I can do, is that if there was a big differential, which there is in terms of cost--I think--between take-out and sit-down--I think sit-down is more expensive. Now take-out has its own costs that maybe aren't so obvious. So that could be part of the problem, maybe there are some aspects of take-out that I'm not aware of--that it's very costly to bundle it all up, maybe people don't show up sometimes for their take-out orders, food gets thrown away. So there may be some issues here I'm not aware of. But my other thought was that when you come in for take-out, what if you said: I I'd like to eat it here? Are they going to say: Oh, we're going to charge you more for that. So if you drive through the McDonald's take-out line and say the take-out price at the window is half, and you've got the little bag. Are they going to have to now monitor that you don't want to come in to the restaurant and sit down with it? It just adds a whole level of other costs and monitoring that I don't think they want to deal with. But that' it's the best I can do.
36:33Russ: So, let's talk about the milk. So, the reason I think it's in the back--it's always been my presumption, and I've got a little bit it's anecdotal but it's a little bit of evidence--is milk has to be in coolers. And it's hard to put a cooler in the middle of the store. Obviously we're finding ways tech that's part of the reason why it's taken 50 years to put the grab-and-go mini coolers in the front. I think that's a technological change. But it's hard to put a cooler in the front. And it's very inconvenient to fill a cooler from the front. So, milk is brought to the store in trucks. It's cold. It needs to stay cold. You don't want it wandering around. And it's just hard to have a cooler in the middle of the store. Or the front of the store. So the coolers tend to be on the back wall of the 7-11 and the Harris Teeter. There are some freezers in the middle of the store now--for ice cream--so that does challenge my claim. But my argument would be it's not to inconvenience customers to make them buy other stuff. It's that it's the cheapest way to provide the milk. Guest: Well, I think that's exactly right. And actually I think there's evidence for it, from, again, the time that I spent, more evidence than I would have expected. Milk is not only heavy and bulky and relatively fragile, but the coolers that you have the milk in produce quite a bit of heat that has to be vented. Russ: That's a better point. Guest: So that it has to be against a wall. To start with it has to be against a wall. And it would be easy if you could deliver it from the back. And so almost all milk--if you see someone putting more milk in from the grocery store, it's not from the front. There are these slightly angled metal sort of tray things and they are loaded from the back. And it has to be in the back to do that. And that's true for grocery stores, not for convenience stores, but as you said, convenience stores aren't that big anyway. So the grocery stores do that for milk. Freezers you load once and they may turn over every two or three weeks. You have to put new milk out almost every day. And you do it from the back-- Russ: So, the inventory part is a big part of it. But how is it, on this venting issue, how does the ice cream part of the store that's not against the back wall, how do they manage that? Because it's not as frequent? Guest: A lot of them are horizontal, and the ice cream ones, they have fans that keep the cold air in. The ones that are big, that have the heavy doors aren't open nearly as often. And so what they have is pipes that run under the floor. The milk gets opened so often--they are three times as powerful. It actually takes a more powerful cooler for the milk than it does for the freezer because people don't open the freezers as much. Milk is constantly being turned over, and the doors are constantly being opened. It just produces a lot more heat. The question is not how cold does it have to be. The question is how often does warm air come in. And milk, just a lot more. Russ: You said you didn't learn anything. You said you got dumber. You got smarter! Guest: It wasn't so much that I really felt like I got dumber before. What happened was that everything I thought was true just turned out to be more complicated. So, maybe that's what getting smarter is--finding out that you don't know the things that you think you did. I just assumed that it was true. It isn't so bad--you have to walk to the back to get the milk, to look at the dairy. In fact there's almost no other way that they can do it. And if you were going to design a store, it would be awfully expensive for you to do anything except the way that all the stores do it. And so it's not a conspiracy. It's just technology. Russ: And this grab-and-go think, this new innovation of the freezer at the front: what do you think about that? Guest: Well, it's a smaller cooler, and it produces heat. But it's not the massive one. They just re- if it's out they restock it by hand. They restock it from the front. There aren't actually that many people that just want to get milk. That's just a myth. It's not true that you run into a grocery store and just want milk. If you want that, you go into the Circle K--you go into a convenience store.
40:08Russ: Yeah. I wonder what proportion of customers actually do buy milk when they go? Guest: Do buy only milk. Russ: No, any milk. Is it 90%? 60%? I have no idea. That's another interesting question. Do you have anything else to say about coolers, milk, eye-level, margins, groceries? Do you have anything else you want to add? Guest: Well, it struck me that there is, like tables in restaurants, a scarce resource in grocery stores, and that is shelf space that people are actually interested in. So, if I am searching for a particular product, I can find it even if it's not on the top shelf. If I'm searching for something that's a particular size and I'm going to either compute the price per ounce or I am going to use the little tags that have price per ounce, I can put those on the lower shelf. So, if this is something that someone needs but is likely to have forgotten that they need, and thus will say, Oh, I remember now and pick it up--the shelf space that's available there is very expensive. One of the things that the studies have found consistently is that those things--you can't see, I'm making air quotes--things that are on that highest-value shelf space, they are "overpriced." They are much higher priced compared to the price per ounce for the lower-down products. But part of the reason for that is they are occupying valuable shelf space. Russ: Yeah. There's a rental fee. Guest: There's a rental fee, just like the table. Russ: But it's my understanding--and I apologize to Brendan O'Donohoe, for when we talked about this--but it's my understanding that they pay a premium to get in those--that food manufacturers pay a
premium to get in those slots and for the end caps. And they stock them themselves. This is one of the most interesting things I learned from that potato chip podcast--and if you keep your eyes open at the grocery store you'll see it. You'll see people in the store who aren't working for Harris Teeter or Giant. They are working for Frito Lay. Guest: Well, they
are working they are just not being paid by them. Because they are doing the service that they would otherwise had to provide, but that's part of the implicit charge to the potato chip manufacturer or the soft drink manufacturer. It's an in-kind payment to the store because they'll do the stocking. Their return is that they get better shelf space. Russ: Yup. And the customers come in, and they like it. But it is a fascinating thing that in many ways a grocery store is just renting the space out to the manufacturers. We think of them as being something else. Guest: It's a mall.
It's become more like a mall. Now the boundaries between stores in the mall aren't as clear as in an old-fashioned mall, but they are much more clear than might have been in a grocery store 50 years ago, where there were stock boys and stuff came in in trucks and you put it in. And I want to say one more thing about groceries, and then let's talk about 'nudging.' The other thing I want to say about groceries--and I'll be interested to hear your experience--but I live in suburban Maryland, in Montgomery County. And Montgomery County is a highly regulated environment. It's very hard to open a grocery store here. Grocery stores, unlike restaurants, have very large footprints. They require a lot of space to bring in the trucks for the store itself, for the parking lot. So there's a lot of rent-seeking activity around the fact that the politicians here restrain the free market's ability to provide grocery stores when and where you want them. So where I live, it took forever for a second grocery store to open nearby. There was a Giant Grocery Store nearby that was not very well kept, not very attractive. When Harris Teeter finally opened up, the Giant got overhauled, finally, and became a fairly pleasant place to shop. But it was only when Harris Teeter opened that they became a more competitive place. And the political environment here, the regulatory environment, makes it hard for competition to work any kind of magic at all. It's a little like the old phone company slogan: 'We don' we don't have to.' When you are in a competitive environm you at least have to pretend to care, or you are going to lose your customers. The other thing that happens here in Montgomery County is that super-Walmarts--I don't think there's one here in Montgomery County--need a special permit. Any store of a certain size needs a special permit here in Montgomery County. I think the only store it's relevant for is super-W maybe Costco--I don't think so. But basically what it means is that for a super-Walmart to open, they have to jump through an enormous number of hoops. They have to be really nice to a bunch of legislators and county councilmembers. And as a result, there isn't one. That's part of the reason. It's also that land is expensive here. I don't want to suggest that this is the whole reason that there's not much grocery opportunity here. But my guess is that in regions of the country where the permitting and zoning process is a little more flexible and a little more liberal, then I think it's probably the case that you have more groceries to choose from, pricing is better, the store is cleaner and nicer. That's just my guess. We don't have a Wegman's here, for example. They are in northern Virginia. Wegman's is a phenomenal chain that would
clean the socks off of Giant if it were here. But they don't have to worry about them. They are not here. And I don't think it's because Wegman's doesn't want to be here. Guest: This is another thing. I had not read W. H. Hutt on this. There was a battle between Hutt and Joan Robinson about sort of the status of welfare economics: how should you think about standing of harms. And what Hutt said is that you ought to try to choose policies that do the greatest benefit for large numbers, rather than try to protect producers or labor, where it's relatively a small number but it's a significant harm if they go out of business. Whereas Joan Robinson, Pigou, and others said: We should protect producers also. And so what you are talking about, to the extent that, with the caveat that there are many other reasons why it's hard to open a grocery store--but if you have to get the permission of your competitors to open a discount grocery store, they are going to do everything they can to withhold it. Because they are going to go out of business. The stakes for them are enormous. And there's no voice in that process for consumers, because the difference of a nickel, the tiny margins, the differences that I might pay for a few products at the grocery store--sure, I'd prefer a Wegman's. But there's a G maybe there's another store. It would really change the
nature of business for those. They are the ones who
go down to the city council. They are the ones who show up at these meetings and say, no, no, there's all sorts of reasons we shouldn't do this. Hutt was really way ahead of his time, I think, in saying that these interest groups--a sort of a George Stigler theory. This was in the 1930s. A theory of interest groups that would say you're going to have very concentrated benefits that will be dwarfed by the costs that are imposed on many, many people--that's why you need to worry only about consumer sovereignty. Harms that are done to producers don't count. It's easy for us as economists to say that. Politicians don't feel that way. Russ: Yeah, that's a great point. I'm trying to find a way to work in something--we've been talking about milk, but milk sometimes does go into coffee, and coffee's called 'java', so maybe we can make an allusion to Jabba the Hutt. But it's probably cheap. Guest: I'm glad you didn't try to do that. Russ: But Hutt's an economist that--I don't hear his name very often. It's kind of cool. I'm happy for him. Guest: He was one of
Buchanan's favorite economists. He was South African. He wrote in a way that was not all that clear. But he, if there's one thing to know about him--he's the guy who came up with the phrase 'consumer sovereignty'. Russ: I didn't know that. That's very cool.
48:21Russ: Let's close talking about nudging and various
kinds of paternalism. What did you want to say about that? Guest: Well, one of the things about the nudge--and I've actually debated Cass Sunstein about this on occasion. The idea is: the way that we arrange things matters for the way people perceive them and compare and make choices. Russ: Which is certainly true. No doubt about that. Guest: Sure. Yep, there's no question. They also would say: Any way that they are arranged is a choice, so let's make a good one. One possibility is that stores are doing what Michael Pollan and others say, and they are arranging things in a way that's really manipulative. In that case, having a regulatory policy where we would arrange them better, maybe that's defensible. Suppose that we believe--as I do--consumer sovereignty drives this far more than manipulation. That is, consumers have certain things that they want, th those are put at eye level, and it may benefit me because I I forgot that I needed it, I pick it up very quickly, it's very convenient for me to do it. But we may not trust consumers to make the best choices for themselves. Because they choose things that are maybe too expensive, are not very nutritious-- Russ: The candy. Guest: The candy, salty things, things that are high in fat, not enough fruits and vegetables. And so there have been a series of experiments around the country with making small changes in the environment. And we'll put up some references to these rather than go into details. But let me just give you some of the
highlights. One of the things they did was they put a pretty large mirror on the grocery cart. Russ: Not a scale? Guest: Your big fat butt should go buy some apples. Russ: How about a flashing sign, a
little neon, like a ticker at the bottom of the screen, across the handle bars of the cart: Get your rear end over to the produce section. In fact, when you are in the candy section, alarm bells should ring. Sorry. I interrupted you. Guest: And the more that you put in--there's a flashing light: Here comes lard-butt. It's a mirror. We're joking, but there's almost nothing that you can say that's as strange as reality. They put mirrors, as Russ just said, his voice rising with indignation--they put mirrors on these grocery carts so that you could look--and it's from underneath--so that you could see the fat under your chin. It's not just a view of your face--though it is--but it's also angled specifically so you can see how fat your face is. And this is supposed to make you go over the vegetable aisle. Now, it turned out that for a number of grocery stores, if they could increase the volume of sales in their vegetables, it would actually be a benefit because the marginal increase in price over what they pay is highest there. Because turnover is so high. So much of it goes to waste. Russ: I lost you there. Say that again about vegetables. Guest: All right. Let's say on a head of cabbage. Let's compare that to a box of cereal. Russ: A staple of my diet, by the way. Guest: Well, so a box of cereal lasts for quite a while, and it's very competitive. It's a
very homogeneous commodity. I may go to one store or another for a difference of $.30 or $.40. I remember that my particular kind of corn flakes is cheaper. So that's very competitive. But if I'm going to buy cabbage, I'm going to buy cabbage. It isn't all that expensive. The cost from the farmer isn't that high. But it's about three or four times the cost that the grocery store paid for it. Russ: I don't know. By the way, that's exactly the opposite of what Michael Pollan claimed. Michael Pollan claimed that the high markup items are the processed cereals, etc.; that's where they make all their profit. Not on the vegetables. You are claiming the opposite? Guest: Well, let's compare apples and apples. Michael Pollan's claim, if I understand it, is that oatmeal is not very processed. And so oatmeal is much less expensive than corn flakes, which are very highly processed. And so oatmeal is down below and has a much lower price. So there you are comparing two kinds of cereals. Russ: He's not just claiming that corn flakes have a higher price. He's claiming they have a higher markup. A higher profit for the store. Guest: But compared to oatmeal. Which is a less processed kind of cereal, but both of them are dried and in boxes. Anything that's green has an enormous markup. Russ: You are saying because it spoils. You could lose it, throw it out. Guest: Yeah. Russ: So, again, that comes to my other point--just the costs are harder to see. That's fine. Guest: Yeah. And so, it seems like they didn't pay m I shouldn't have to pay so much for it. But they throw so much of it away that that's [?]-- Russ: And they have to water it, by the way. They do. Guest: They have to handle it. Russ: No, they water it. They spray it every few hours to keep it fresh. Guest: Well, sometimes you reach in there and the sprinkler comes on. Russ: Yeah. Guest: It turned out that the stores were thrilled with this. And so a number of them have actually implemented this. Russ: The mirror. Guest: Yes. It increased their profits. Russ: Because it got people to buy the higher-margin cabbage? I find that-- Guest: It actually, well, I'm quoting an interpretation of a study. Who knows if that's actually correct. Russ: Interesting. Guest: The person mentioned it as something that was interesting. It was an unexpected result. The two things that they noticed were: overall, people did not spend more at the grocery store at the ones that had these mirrors. So it was a controlled experiment: some of them had the mirrors, some did not. The ones that had the mirrors spent about the same total amount per trip as the ones that did not have the mirrors. However, the ones with the mirrors spent more on fresh vegetables--cabbage, things like that. And the claim was that the profit is slightly higher for the ones that had the mirrors because everybody else was just buying packaged, relatively staple[?], lower-profit foods. Russ: Ehhh. Call me skeptical about that one. It reminds me of the Kingsly Amis line, which is immortal, which is: Inside every fat person is a fatter person trying to get out. So you look in the mirror and you think: I'm not as fat as I thought I was. I'm going to get some more candy. I don't know. Could go either way, it would seem to me. I'm not so sure. I will say for the record that I have not bought a piece of candy at a check-out counter in at least 2 years. So it's possible to avoid it. And also, by the way--I'm going to press you on this, Mike--I don't buy those magazines there, either. Do you? Guest: Well, there's no point. Usually I'm in line long enough I've already finished reading it. So I'm not going to buy it. Russ: You treat it as a lending library. That's nice. Guest: I have to know if JLo really is going to get back together with Marc Anthony. Russ: I can't sleep. Whoever they are. I know who JL I don't know who Marc Anthony is. Guest: One of her many ex-husbands. Russ: Good to know. See? This show is full of value.
56:06Russ: So, on this nudge thing: some people would like, just like they have banned trans fats in many places, they want to ban large, sugary drinks. They want to ban all kinds of things. One argument is that: let's put the juices at eye level and the soda near the ground. Right? I guess. Let's put the fruits and vegetables as the impulse purchase. Let's put a bunch of plums at the checkout counter instead of candy. Guest: Yep. Even though that's impossible because some of them you have to keep cold, or you have to water, as we said before. It's just not set up for that. Russ: Well, they'd have to rearrange it. They'd put a little cooler there, just like they do with the other stuff. It would be nice. And actually, you know what else? We'd put economics books at the checkout counter instead of those trashy magazines, so you could get smarter. And maybe some Shakespeare. Guest: I don't think you should open a grocery store, Russ.
That's an idea whose time will never come. Russ: I think you are right. Two things I want to mention before we close. There's a nice post at the blog Modeled Behavior on this topic. I think the poster was Adam Ozimek--I'm pretty sure--talking about his own personal experience in the grocery business and challenging Tyler Cowen, a frequent guest here, about his interpretation of the milk thing, which is similar to Michael Pollan's. If I I'll check. And I also want to mention one of my all-time favorite articles at the Library of Economics and Liberty, which is "Everybody Loves Mikey," which was written by Michael Munger, which is related to this issue of consumer sovereignty. When I went to search for it in the middle of this podcast, I put 'everyone likes mikey,' and I misspelled 'mikey' and I put 'likes.' But the actual title is "Everybody Loves Mikey," and Google is so smart and because everyone really does love Mikey and doesn't just like him, it said: Did you mean 'everyone loves mikey'? And it found it for me. Guest: It saw through it right away. Russ: Yeah. So I think we're done. Do you want to say anything else about groceries? Or milk? Guest: Yes, I do. In today's Wall Street Journal there's an article that Mexico, the entire nation, is considering putting up signs at the entry to grocery stores that will show the amount of sugar, and just a picture of 12 teaspoons of sugar, as you walk into a grocery store: This is how much sugar is in a soda. In the hopes that they will nudge people towards buying less soda. They have a they are actually--Mexico, portions at least, have a bigger obesity problem than the United States. And they are hoping that just showing people, just information, about how much sugar is in soda will have an influence. That's
an interesting question, if all you are doing is providing information. Now obviously you are competing with othe requiring grocery stores to do this, I think, is pretty controversial. But it's a nudge attempt. It's not really increasing the price in any way. They are not taxing it. They are not outlawing it, like New York City did. They are just saying: Do you know how much sugar you are eating? Russ: No, it offends me not because it lowers consumer wellbeing dramatically. Right? It offends me because it treats me like a child. It assumes I don't know that sugar is part of the problem. I think they'd be better off, by the way, driving trucks around town blaring the Gary Taubes podcast on EconTalk, the episode about why we get fat. Maybe that would have a more effective, positive outcome. The other thought I have is that warnings get forgotten very quickly. You see it over and over and over again and then it just becomes part of your mental landscape that you just edit out. Guest: Probably just 2 or 3 times and it's gone. Russ: So they'd have to change it constantly. Guest: Yeah. Yeah.
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