PERSPECTIVE ON SUPERMARKET MERGERS; Choice Is Instigator, Not Victim; Consolidation follows shift in buying patterns. Price gouging is unlikely. 

The Los Angeles Times; Los Angeles, Calif.; Feb 22, 1998 

By Shirley Svorny 

Worried about a possible supermarket monopoly in their neighborhoods, members of the Sherman Oaks and Studio City homeowner associations recently asked state Atty. Gen. Dan Lungren to intervene in the planned merger of Hughes Family Market with Ralphs Grocery Co. Their concern was that, post merger, Ralphs would have too large a share of the local market and free rein to raise prices. The homeowners asked the state attorney general to require Ralphs to sell one of its stores in their neighborhood and they have prevailed; Ralphs has agreed to do so. In fact, the company will sell 19 stores in Southern California.

Concerns like this might make sense if we lived in a small town, but in the San Fernando Valley today, shoppers have more choice than ever. In fact, it is the growing range of shopping options that has led to the current consolidation in the sector in which chain supermarkets--Ralphs, Vons, Albertsons, Lucky and Hughes--compete.

Over the last 10 years, we have seen a substantial shift in grocery shopping patterns away from supermarkets and toward discount warehouse purchases at stores such as Costco and Petco. Valley residents also have access to a wide array of specialty stores such as Gelson's, Whole Foods and Trader Joe's.

One could even include restaurants such as Boston Market and other takeout venues as an additional option for consumers preparing their evening meal. My own shopping includes regular stops at Costco and Ralphs, less frequent stops at Petco, Albertsons, Trader Joe's and Whole Foods, and an occasional Friday night call to Ameci's for prepared pizza.

What this means is that purchasing patterns in the grocery industry have changed. Just as mom-and-pop stores gave way to supermarkets, supermarkets now face competition from a variety of other food sellers and food preparers. The consolidation in the supermarket industry is a response to changing patterns of purchasing, the effect of more choice in this industry rather than a harbinger of a world with few options.

The idea that Ralphs would have free rein to raise prices in an area like the Valley makes no sense. In addition to competition from other supermarkets, discount warehouses and specialty groceries, Ralphs faces competition from Target, Kmart and Sav-On Drugs in the sale of personal products, paper goods, over-the-counter drugs, stationery items, snack food and sodas. Stores such as Sav-On and Costco compete with the supermarkets for liquor sales. Clearly, with this level of competition any attempt to charge higher prices would be met with substantial loss of market share over time.

In the Valley, with more than one million residents driving around every day, a company that attempts to price gouge in one isolated area will be sorely punished over time. If Ralphs were to raise its prices in an area like Studio City, many people living on the borders of the area would jump to other markets, driving north instead of south or east instead of west, to shop. Some would stop at Vons on the way home from work or on the way to other errands. Even though there are people who must shop at their local supermarket--because they cannot drive or do not have access to a car--there are enough others who can shop elsewhere to keep competitive pressure on local prices. Every shopper in a neighborhood does not have to be mobile to get a competitive result and competitive prices.

It is also unlikely that local stores will ignore the needs of neighborhood shoppers just because the stores belong to the same chain. Even if it owns every store in an area, a chain supermarket that ignores neighborhood variations in shoppers' tastes does so at its own peril. Each store must accommodate its customers to maximize profits. Of the three Ralphs I regularly frequent (within four miles of one another) each attempts to meet the needs of its own clientele; only one finds it profitable to carry fresh ground chicken, and only one has sufficient demand to set aside shelf space for the particular brand of low-cholesterol eggs I prefer.

On the side of mergers are the economies of scale in the purchase and distribution of grocery products. Clearly, the growth in non-supermarket sellers has put pressure on supermarkets to take advantage of the economies of scale available through consolidation. It is competition that has generated these changes in the supermarket industry, and it is this same competition that offers price and quality protection to consumers over time.

The Studio City Homeowners Assn. has been reported to be surveying residents to see what store they would like in place of the Ralphs that will close. This is unnecessary as the market for which there is the most local demand will be the one to purchase the location; it will offer more for it than anyone else. I offer the bold prediction, however, that a statistically sound survey would find Ralphs itself the first choice of shoppers for the vacant location.

The irony in this situation is that the efforts of homeowner groups are at cross purposes with their stated concerns about keeping prices low and increasing choice. If the entry of new stores or the expansion of existing locations is even marginally discouraged by the high cost of dealing with homeowner groups, then the unintended consequence will be higher prices and less choice for all Valley residents.

Credit: Shirley Svorny is a professor of economics at Cal State Northridge and an affiliated scholar at the Milken Institute in Santa Monica