Thursday, July 21, 2011

The Federal Reserve does not cause inflation, Costco does! Something that makes you go "Hmmmm"....

A study (HERE) shows that where merchandise discounter Costco opens a store, the average price of groceries INCREASES at grocery stores in the surrounding community(s).

""The study, which is titled Competing with Costco and Sam's Club: Wharehouse Club Entry and Grocery Prices, looked at what effect the opening of a Costco had on grocery prices in nearby supermarkets. The authors found that on average customers who continued to shop at the supermarkets near a Costco tended to spend 3% more on groceries than they did before the bulk retailer opened. The Costco Inflation effect was generally larger in smaller towns...."" (article HERE)
This is at odds with with known research regarding the opening of a Walmart and the effect on area prices.  The study did not look at Sam's Clubs, perhaps because Sam Clubs seem to generally open up near Walmarts, whereas Costco is a stand alone business.  One of the possible explanations is that Costco attracts the "value" shopper, the Kroger,Tom Thumbs, and Albertsons of the world concentrate on the less price sensitive shopper (fancy way of saying someone willing and able to pay more for the same good/service)...

""Instead, Courtemanche says he thinks Costco tends to drive the cost conscience customers out of the local supermarkets. The remaining customers are willing to pay more. Store managers figure that out and raise prices...""
As someone who goes to Walmart (or a Costco if one was nearby)  as a LAST resort, I identify with this reason.  Perhaps that means I have too much discretionary income for my own good. 

Look at the whole article HERE for other possible reasons. If you are interested in business or consumer behavior this is worth a read. I see an opportunity to discuss elasticity of demand.
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