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A STUDY OF RETAIL FOOD PRICES-
IN THE UNITED STATES VIRGIN ISLANDS
Frank L Mills
Team Leader & Director, CRI
Francisco Depusoir
Assistant Professor of Accounting
S.B. Jones-Hendrickson
Research Economist/Associate Professor of Economics
Malcolm C. Kirwan
Vice President of Business & Financial Affairs
Norma S. Levin
Senior Analyst (retired), O.M.B.
John Munro
Associate Professor of Data Processing
James D. Williams
Assistant Professor of Marketing/Chair, Business Administration Division
Prepared for VI Department of Licensing and Consumer Affairs
Caribbean Research Institute
UNIVERSITY OF THE VIRGIN ISLANDS
Arthur A. Richards
President
Darshan S. Padda
Vice President
Research and Lpad-Grant Affairs
February, 1990
A STUDY OF RETAIL FOOD PRICES
IN THE UNITED STATES VIRGIN ISLANDS
Frank L Mills
Team Leader & Director, CRI
Francisco Depusoir
Assistant Professor of Accounting
S.B. Jones-Hendrickson
Research Economist/Associate Professor of Economics
Malcolm C. Kirwan
Vice President of Business & Financial Affairs
Norma S. Levin
Senior Analyst (retired), O.M.B.
John Munro
Associate Professor of Data Processing
James D. Williams
Assistant Professor of Marketing/Chair, Business Administration Division
Prepared for VI Department of Licensing and Consumer Affairs
Caribbean Research Institute
UNIVERSITY OF THE VIRGIN ISLANDS
Arthur A. Richards
President
Darshan S. Padda
Vice President
Research and Iand-Grant Afairs
February, 1990
ACKNOWLEDGEMENTS
This study is the result of many months of work by several
individuals. The professionals who made up the team represent areas of
expertise in business management, accounting, marketing, finance,
microeconomics, data analysis and statistical methodology. Some of our
team members work on the St. Croix campus, and we were often hampered by
difficulties in their ability to secure timely flights to the meetings
which were held on the St. Thomas campus. The intervention of hurricane
Hugo only served to extend the date of completion of this work.
We are particularly appreciative to Mr. Malcolm Kirwan, Vice
President for Business and Financial Affairs, for the voluntary
contribution of his time and support to this study. His penetrating
insights and incisive questions were invaluable in keeping the team on
track in many of its deliberations. In addition, his knowledge and
experience in business management often provided the basis for his
critically constructive comments of the work as it progressed.
Three members of the team are currently in the Division of Business
Administration. Dr. James Williams is Chairman of the Division of Business
Administration and Assistant Professor; Mr. Francisco Depusoir is Assistant
Professor of Accounting on the St. Croix campus; and Mr. John Munro is
Visiting Associate Professor of Data Processing. Dr. Williams made
significant contributions to the study with his expertise in price and
marketing theory. He also contributed in several other areas, most notably
in traveling to Washington to research many libraries, in assisting
substantively with the construction of the survey questionnaires, and in
organizing the focus group meetings. Professor Depusoir joined the team to
replace Mr. Francois Dominique. (Mr. Dominique was at that time an
Extension Specialist in Community and Rural Development with the VI
Cooperative Extension Service in St. Croix. Before leaving his position,
he had done extensive preliminary work in the development of the instrument
that was used to gather local food prices data.) Professor Depusoir's
background in accounting was critical to our understanding of the layers of
taxes and fees that are inherent in the local wholesale and retail food
industry. We are also appreciative for his direct assistance in obtaining
food prices data in Miami, St. Maarten, and St. Croix. His willingness to
assist throughout the study was commendable. Professor Munro provided
total support in microcomputer data entry and generation of the food prices
data tables. He also gave considerable input in the interpretation of many
of the data tables.
Dr. S.B. Jones-Hendrickson, Research Economist at the Caribbean
Research Institute and Associate Professor of Economics in the Social
Sciences Division, St. Croix Campus, was our main link with the field of
microeconomic theory. His insights into the food industry and its
relationship to the Virgin Islands economy provided an appropriate basis
for much of the discussion that dealt with the economic operation of firms
within the food industry. We are also appreciative to him and to Professor
Depusoir for enduring the numerous flights from St. Croix to attend
meetings.
Our technical editor for the entire document is Mrs. Norma Levin,
retired Senior Analyst with the Office of Management and Budget. We are
grateful to Mrs. Levin for her assiduous attention to the maintenance of
records of our deliberations, as well as for her very valuable
contributions throughout the length of the study. Her previous experience
in business and in the local government often proved extremely
enlightening. Most valuable of all was her painstaking and critical
editing of the document as it progressed through all its drafts.
Our administrative and research staff at the Institute was also
supportive in many ways. Among them, we are particularly grateful to Mrs.
Monique Augustus for enduring the rigors of preparing all the drafts of the
study on her word processor. The preparation of the final document speaks
to the high quality of her work. She also deserves our thanks for the
myriad duties she performed in support of the entire study. Her colleague,
Ms. Rose Jeffrey and Research Analyst Ms. Karen Clarke also assisted with
word processing. Mr. Patrick Smith, Research Analyst, was instrumental not
only in the preparation of the charts, but was also responsible for
overseeing the final printing of the document. Mrs. Helen Dookhan, Office
Manager, provided support throughout the study with the budget, making
travel arrangements and related services, and Ms. Patricia Esdaille
suffered us without complaint in our repeated requests for copies of
supporting documents. Our appreciation also extends to Ms. Julia Hardwick
in the Business Office for generating several drafts of the questionnaires
that were used to collect data.
We are also appreciative of the efforts of Mr. Louis Penn, Assistant
Commissioner of Licensing and Consumer Affairs, for his willingness to
assist the team throughout the length of the study. Our thanks also go to
Attorney Alphonse Nibbs for his enthusiastic encouragement and assistance
whenever he was called upon.
And finally, we want to thank all managers, supervisors, and
representatives of transport firms in the food industry who gave us their
time and shared their knowledge with us. Mr. Richard Lauth, General
Manager of Pueblo Supermarkets in the Virgin Islands, was undoubtedly the
most helpful throughout the study. His personal appearances at focus group
meetings and his willingness to provide information was commendable.
Frank L. Mills
Director, CRI
February, 1990
CONTENTS
0. Executive Summary ...............................................
1. PREFACE .............................
1.1 Description of CRI ............
2. TERMS
2.1
2.2
OF REFERENCE ...........................
Mandate ................................
Objectives .............................
3. INTRODUCTION .........................................
3.1 Overview: USVI Economy .......................
3.2 Retail Overview ................................
3.3 Consumer Market ................................
3.4 Cost Structure .................................
3.5 Sources of Supply and Distribution ............
3.5.1 Wholesale ...........................
3.5.2 Shipping and Air Freight ...............
3.5.3 Trucking ...............................
3.5.4 Warehousing ............................
3.5.5 Customs and Excise Taxes ..............
3.6 Pricing and Pricing Strategies ................
4. REVIEW OF THE LITERATURE ............................
5. METHODOLOGY ..........................................
5.1 The Survey Design ...........................
5.1.1 The Market Basket ......................
.5.1.2 On-Island Sample and Questionnaire .....
5.1.3 Off-Island Samples and Questionnaire ...
5.1.4 Field Surveys ..........................
5.1.5 Focus Groups ...........................
5.2 Methods of Data Analysis ......................
5.2.1 Pricing Monitors and Controls .........
5.2.2 Procedures and Calculations ...........
5.3 Limitations to the Study ......................
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6. EMPIRICAL FINDINGS .............................
6.1 Outline of the Data .....................
6.2 Relationship Between Price and Cost ......
6.3 Prices of Market Basket Items ............
6.4 Food Prices Among Food Groups ............
6.5 Ocean Freight and Inland Distribution ....
7. EXPLANATION ..................................................
7.1 Introduction ..............................................
7.2 Market Structure .......................................
7.3 Distance From Sourcing Point .............................
7.4 The "Cost" of Doing Business in the USVI .................
7.5 Structural Characteristics ...............................
7.6 Social Impediments ......................................
7.7 Profit Margin ..........................................
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7.8 Summary ................................................... 93
8. CONCLUSIONS ..................................................... 96
APPENDIX ........................................................ 99
0. HIGHLIGHTS OF THE FINDINGS
I An aggregated price comparison reveals that USVI supermarket prices were
substantially higher than state-side supermarket prices in all the food groups
surveyed in the study.
Overall, prices of food are 17 percent to 29 percent higher in the USVI than in
Puerto Rico or on the mainland.
Depending on the selection of foodstuffs purchased, a consumer in the USVI may
pay from 9.4 percent to 33.7 percent more for the surveyed food items.
Miami is the principal immediate source for much of the food consumed in the VI.
The greater the distance of the Caribbean locations--USVI, San Juan, St. Maarten--
from the source of food, the greater the difference in prices.
Frozen items have higher price differentials than non-frozen items.
A food basket which costs about $71 in Miami will cost $83 in San Juan, $100 in the
VI, and $108 in St. Maarten.
On average, food group prices are lower than those in the VI as follows: dairy
products in San Juan, 19 percent; frozen foods in Miami, 31 percent; groceries in
San Juan, 44 percent; produce in Miami, 29 percent.
Management of the two major supermarkets reportedly uses the national norm of a
one-percent net profit as a bottom line goal for successful operation.
9 The industry is dominated by two firms. No evidence of collusion in price setting was
found among the firms, although observation indicates that the price-setting of the
perceived leaders is followed indirectly when expediency dictates.
1i The cost contribution of labor to the food industry in the USVI is at least 45 percent,
a cost comparable to, or higher than, the nation's labor food cost index.
Certain structural characteristics of the VI economy such as the frequency of
interruption of basic infrastructural services add to the normal costs of firms doing
business, and concomitantly, add to the costs of the consumer in higher prices.
V Management asserts that shrinkage contributes about four to six percent above
ordinary costs.
Other costs incurred here by food retailers which tend to be higher than elsewhere
include freight and brokerage customs duties, utilities, excise and gross receipts
taxes.
1. PREFACE
1.1 Description of the Caribbean Research Institute
The Caribbean Research Institute (CRI) was formally established in
1965 and conceived to fulfill two functions: 1) in respect to the United
States Virgin Islands, CRI was to act as a central research agency; and 2)
CRI was to undertake and facilitate research throughout the Caribbean
region.
The philosophical mission of the Institute is to serve as a
coordinating and clearing house for faculty research; to provide research
support to various United States Virgin Islands government agencies; to
conduct sponsored research; and to develop scientific linkages with
Caribbean counterparts to broaden the professional perspective.
The functional mission of CRI is carried out through the three
centers into which it is organized: Social Research, Water Resources
Research, and Environmental Research. In this configuration, the Institute
has developed and administered projects in Virgin Islands history, social
and economic problems, and the decennial census; in water quality and
supply; in land and resource management, and wildlife and fisheries
biology. CRI also operates a field station at Lameshur Bay, St. John,
called the Virgin Islands Ecological Research Station.
CRI is an integral part of the Research and Land-Grant Programs which
are under the leadership of Vice President Dr. Darshan S. Padda. The
Institute is managed by its Director, Dr. Frank L. Mills.
5
2. TERMS OF REFERENCE
2.1 Mandate
The Department of Licensing and Consumer Affairs, Government of the
Virgin Islands, pursuant to Act No. 5364 (Bill No. 17-0104) contracted with
the University of the Virgin Islands "for the implementation and conduct of a
comprehensive and in depth study on the causes of high food prices in the
Virgin Islands".
2.2 Objectives
This study, conducted by CRI, attempts to answer four general
questions:
a. What is the nature of the cost structure of specific type and size
of food retailers in the Virgin Islands?
b. What are the existing retail prices for selected food products?
c. What is the nature of the competitive structure in the retail food
industry?
d. What are the opinions and perceptions of selected business
leaders/other experts relative to these cost/price relationships
in the Virgin Islands?
To answer these questions, determination must be made of:
a. (1) the physical distribution costs incurred by food retailers
when goods for resale are purchased from off-island sources;
(2) the various taxes on the purchase of food products for resale
and the relation of these taxes to total costs;
(3) hidden costs of retailing food products in the Virgin Islands
and their impact on consumer prices; and
(4) any other elements of cost which significantly- influence the
consumer price level.
b. (1) the level of retail prices for selected food products on a
recent date in the Territory and comparative off-island areas.
3. INTRODUCTION
3.1 Overview: USVI Economy
The economy of the U.S. Virgin Islands is best characterized as a
microstate economy with limited natural resources. This economy is heavily
dependent on the foreign trade sector and services for employment and
income generation. Estimates of the impact of tourism on the Gross
National Product vary from 60 to 75 percent. The ratio of imports to
exports in the United States Virgin Islands approximates $1.13 through
$1.50 imported for every $1.00 exported. If the contribution of Hess Oil
is removed, the economy is more starkly dependent on the foreign trade
sector.
Over the years, the decision makers in the USVI have engaged in
activities promoting the islands with a variety of fiscal incentives
instituted to attract businesses, mainly those tourist-oriented. With this
single-minded approach to development, imported goods and services have
entered the economic structure at prices which appear to have markups
higher than goods and services in a demarcated and structured economy
comparable to the USVI. No easy comparison exists for the USVI economy
situated between the traditional Caribbean economic structure and that of
the advanced U.S. economy. This economic straddling apparently results in
the USVI system in all areas, in prices which tend not to be in accord with
the income levels of the vast majority of territorial consumers.
By comparison, in all tourist economies a cost-push type of inflation
normally is pervasive. Because so many goods and services are imported into
the USVI economy, a certain quantum of their costs, pushed up from the need
to import, is passed on to the local consumers. In addition, wage-push,
profit-push, and commodity inflation are all part and parcel of cost-push
inflation. In essence, no one monolithic reason for inflationary tendencies
exists in the USVI.
Cost-push inflation in the USVI economy, however, results principally
because factor payments to various groups traditionally rise faster than the
increase in productivity and technical efficiency.
To understand the nature of prices in the USVI and to attempt to
determine why they appear to exceed the capacity of the majority of the
people to meet those prices, a full examination of the impact of the
tourism industry on the local economy is required. Also needed is an
examination of the relationship in the USVI between those wages which tend
to nominally parallel the wage structure in the USA, but which do not
parallel the USA system in technical efficiency and productivity.
Assessment must be made of the nature of aggregate demand for goods and
services with an attempt to quantify the impact of the gap between
aggregate demand and supply for goods and services.
Finally, determination of the real impact of the population growth,
stratification, and the attendant consumption patterns on the nature of
prices in the economy is necessary. In a proverbial sense, if the economy
is growing on 'salt-fish income' but is demanding 'caviar activities', some
distortion in the aggregate demand/supply relationship is inevitable.
These are only a few of the features and factors that should provide some
insight into the nature of the price structure in the economy of the USVI.
3.2 Retail Overview
An attempt by the research team to obtain data on the number of
retail food outlets and the market share of each group was not successful.
With the limited data available, the study cannot address in depth the
volume of each of these food outlets or the impact on retail prices.
Nevertheless, supermarkets and large grocery stores appear to account for a
significant quantity of the food items purchased in the Territory. The
other types of food outlets, no frills, neighborhood groceries, convenience
and specialty food stores account altogether for a much smaller percentage
of food sold in the USVI.
Supermarkets and large grocery stores purchase in large quantities
and import in containers consigned directly to them. On the other hand the
smaller food outlets may have to purchase in smaller quantities and
therefore lose quantity discounts, or by purchasing from sub-distributors,
pay their additional costs of doing business.
The larger the food outlet is, the greater its gross receipts tax
burden. By law (VIC Title 33, Sec. 43), a tax of four percent is imposed
on the annual gross sales of a business.
Productivity of employees and greater fixed costs such as utility
costs created by more square footage engender analytical measures that can
be significant in the study of the retail structure of food outlets--large
vs small. However, the lack of data prevented such an analysis of the
retail food outlets operating in the USVI.
3.3 Consumer Market
Three primary markets account for the consumption of food in the
Territory: tourism, restaurants and hotels, and the resident population.
Measuring the impact on local food consumption of the tourism sector
of the market is not an easy task since many cruise ship touri-sts tend to
take their meals on board. Some purchasing of food is done by the cruise
ships themselves through ship chandlers.
Many tourists who arrive by air remain in hotels or condominiums.
Consumption of locally purchased food by this sector of the consumer market
is presumed to be much greater than that of tourists who arrive for the day
on cruise ships. Large numbers of hotel guests dine at restaurants
throughout the Territory and their food consumption should have profound
effects on the demand side of the consumer market. The condominium
dwellers enter the consumer market of local residents as well as that of
the restaurants.
The third, and perhaps largest, sector of the consumer market is that
of local residents. In a small island economy such as the U.S. Virgin
Islands, with a population of 110,000 and a limited market, consumer demand
has significant effects on food prices. The consumption and demand
patterns for the three major sectors differ significantly and to fully
understand the importance of the consumer market for food consumption in
the Territory, hard data needs to be available.
3.4 Cost Structure
The cost structure of a food store is normally very detailed to cover
all transactions which occur. Purchases for resale encompass many
diversified lines of merchandise and different brand names for the same
product. The primary objective of a cost structure furnishes management
with the necessary information regarding the operation of each department
and/or the entire store. Costs are generally reckoned in terms of cash or
its equivalent expended to acquire goods and services to achieve an
economic benefit which permits the profit-making ability of the firm. The
system utilized should be flexible to enable management to determine profit
or loss and make proper decisions on a timely basis.
This structure of a food store encompasses the orderly classification
of the almost infinite variety of costs incurred. These costs are
collected into groups called elements which are established in accordance
with the broad economic functions common to the food industry. The
functions include manufacturing (production), sales (distribution), and
administration (management).
The interrelationship of the functions and their corresponding cost
elements in the operation of non-manufacturing environments such as
wholesale, retail, and service industries must be understood in order to
determine the sufficiency of a firm's profit or its pricing strategy. In
the food industry, management combines such costs as labor, property, plant
and equipment, utilities, taxes, purchases and other costs to produce a
variety of goods to satisfy an assortment of human wants and needs. The
costs of the different factors needed to produce such goods, to sell them,
and to administer the company must be measured and reported in a manner
which will enable management to regulate all factors in the interest of
maximizing profits.
The major categories of costs for food retail entities doing business
in the U.S. Virgin Islands include: 1) inventory, 2) labor, 3) taxes and
fees, 4) cost of capital, 5) marketing and public relations, 6) risk
management, 7) utilities, 8) plant facilities, 9) management, and 10)
miscellaneous.
Inventory. Most merchandise is purchased primarily from three
sources namely, Associated Grocers, Certified Grocers, and Malone and Hyde.
Some purchasing is done through a few local distributors. The sourcing of
merchandise is very important as large volume purchases and the
availability of a wide assortment of food allows for discounts.
Labor. The cost of labor has a direct relationship to the
productivity of a food store. Labor rates in the U.S. Virgin Islands, with
a territorial minimum wage of $4.25, have already been relatively high.
Now, in conformity with the recently mandated federal minimum wage of
$4.65, an additional series of costs are incurred. In 1987 labor
represented 45 percent of the nation's food cost index. The U.S. Virgin
Islands food industry should be experiencing at least an equal, if not
greater, cost contribution compared to the national average of labor to
food shelf prices.
Additionally, the focus group, assuming a lower rate of productivity
in the USVI, alleged that the labor force of supermarkets operating here is
much larger than supermarkets of comparable size operating on the U.S.
mainland.
Taxes and fees. The taxes and fees paid for a labor force include
payroll taxes--social security taxes (FICA), Federal unemployment taxes
(FUTA), Virgin Islands unemployment taxes and workers' compensation.
Gross receipts taxes are imposed on total gross business receipts
without reduction for cost of goods sold or other expenses. Firms with
annual receipts in excess of $150,000 pay four percent on total receipts
whereas firms with annual receipts of less than $150,000 pay four percent
on all receipts in excess of $5,000 per month. These are selected
exemptions relative to the latter calculation.
Excise tax is imposed on all goods imported into or manufactured in
the U.S. Virgin Islands for sale in the course of trade or for processing
or manufacturing within the Territory. The rate is usually two percent to
ten percent of invoice value plus five percent markup.
Franchise tax is annual tax of $1.50 for each $1,000 of capital stock
with a minimum tax of $100.
Corporate income taxes are based on a three-bracket graduated
corporate rate structure with a top rate of 34 percent.
Taxable Income Tax
Less than $50,000 15% of taxable inc.
$50,000 $75,000 $7,500 + 25% excess
over $50,000
$75,000 $100,000 $13,750 + 34% of
excess over $75,000
$100,000 $335,000 $22,250 + 39% of
excess over $100,000
$335,000 34% on all taxable
income
An additional surcharge of 10 percent is imposed by the Virgin
Islands government on the calculated tax for all corporations paying income
taxes in the Territory.
Fees. All businesses operating in the U.S. Virgin Islands must
obtain a business license and pay the appropriate license fee which is
renewable annually. Licenses for food outlets range from a basic $100 for
- a strictly retail outlet, but if a business imports, and/or wholesales,
additional fees of $200 and $250 respectively are imposed. If liquor is
included in a retail outlet, a further license fee of $250 must be paid.
Custom duties are imposed under a combination of federal and local
law and administered by the U.S. Customs Service. The maximum duty rate is
six percent of the invoice value of foreign goods.
Another cost of doing business is cost of capital which includes
interest on debt for assets such as machinery, equipment, and cash advances
to forward purchase inventory.
Marketing and public relations costs include costs of advertising
which businesses incur to attract customers to their stores, entertainment,
and contributions. The latter two costs are incurred primarily by larger
businesses to foster goodwill and public relations.
Risk management costs refer to insurance and store security.
Liability insurance for food stores in the U.S. Virgin Islands is extremely
high as businesses strive to protect their assets. Pilferage, another cost
that is reputed to be higher among food stores operating in the Territory
than among those on the U.S. mainland or even among those in Puerto Rico.
In an effort to curtail the pilferage, security measures are implemented to
reduce or prevent high shrinkage.
Utilities. Water, electricity, and telephone represent the bulk of
these costs. Food stores must refrigerate their perishable items. The
cost of refrigeration in the U.S. Virgin Islands is generally high among
food stores largely because of the maintenance costs (generators, fuel
charges, air-conditioning, power outages, and surges) involved.
Long distance telephone call costs are generally high since a large
number of orders are made via telephone.
Plant Facilities Rent, general maintenance and depreciation are
some of the major costs in this group. General maintenance for a large
food store is usually expensive and scarcity of space and of prime
locations create high rentals.
Management Costs The costs associated with this category include
compensation of officers, travel and employee benefits, which costs are
generally determined at the corporate level.
Miscellaneous Costs Bank charges, supplies, and bad debts are some
of the major cost items usually found in this category. Bank charges
represent a significant cost largely because large numbers of checks are
returned unpaid to food stores. Store supplies such as the extensive use
of shopping bags and other packaging also represent a high cost item.
The smaller or independent retail food outlet may reduce some of
these expenses and eliminate others. Insurance costs or employee benefits
may be maintained at a lower level of cost. Contributions, entertainment,
security or garbage removal may be eliminated. In a cash-only operation
bad debt is virtually non-existent.
Many of these costs, if not on the same cost level, are applicable to
mainland food retail stores, but some are not, specifically gross receipts
and excise taxes. In the surveyed areas food in retail outlets selling
packaged goods is exempt from sales taxes. Customs duties are not apt to
apply directly to items in the inventory.
3.5 Sources of Supply and Distribution
The distribution system for food products, one of the most important
commodities imported into the Territory from the U.S. mainland and other
countries, relies heavily on mainland facilities. While air transportation
delivers some perishable products to the islands, the majority of food
shipments arrive on ocean carriers. Inherent in the distribution of food
to the Territory are wholesale distribution, shipping and air freight,
trucking, warehousing, and customs and excise taxes.
3.5.1 Wholesale
Wholesale distribution is an integral part of the food distribution
network since wholesalers provide primary distribution to retailers who, in
turn, supply the consumer. Distribution is frequently provided directly to
the consumer at both wholesale and retail prices. In the first instance a
secondary distribution occurs.
Wholesale distributors in the U.S. Virgin Islands are usually in an
extremely good position to take advantage of discounts as a result of their
buying habits, namely, large volume of one product. Considerable savings
to the consumer may be passed on when such purchases are made.
The services provided by wholesalers are, by and large, in the form
of bulk sales. Individual consumer sales represent a much smaller portion
of their market. A wholesaler often is the exclusive distributor of many
of the items which it sells. Its buying sources may be the same sources
used by Territorial supermarkets or independent food distributors on the
U.S. mainland. Figure 1 depicts a flow chart of typical wholesale
distribution network.
3.5.2 Shipping and Air Freight
An island economy must depend upon either air or ocean transportation to
move commodities from the sources of supply to those of demand. Of these
two modes of transportation, ocean shipping carries the bulk of the
cargoes. However, the size of the Virgin Islands market reduces the
feasibility of major carriers to provide direct ocean service from the U.S.
mainland without some transshipment of cargo.
Wholesale Distribution System
WHOLESALER
0
0
0
Fig. 1:
RETAILER
CONSUMER
The Virgin Islands imports significant quantities of food from off-
island sources, mainly the U.S. mainland. Consequently, prices of
groceries at the retail level must include transportation costs.
Presently, three major ocean carriers serve the U.S. Virgin Islands,
namely: Tropical Shipping, Trailer Marine Transport Corporation (TMT), and
Navieras de Puerto Rico.
Tropical Shipping operates direct service between southern Florida--
Miami and West Palm Beach--and the Virgin Islands with two weekly sailings.
Trailer Marine Transport, a subsidiary of Crowley Maritime Corporation,
sails mainly from Jacksonsville and Port Everglades, Florida, Philadelphia
and Lake Charles, Louisiana. TNT provides direct service to the islands
only from Port Everglades with all other shipments coming via Puerto Rico.
The other major shipper, Navieras de Puerto Rico or Puerto Rico Maritime
Shipping Authority (PRMSA), which is owned and operated by the government
of Puerto Rico, offers services from Elizabeth, New Jersey, Jacksonville,
and New Orleans. Cargo destined for the Virgin Islands on board Navieras
de Puerto Rico moves first to Puerto Rico.
Carriers' costs include two elements--terminal costs and line-haul
costs. Terminal costs include charges for loading and unloading a vessel,
billing, stevedore wages and the fixed costs of operating a marine terminal
facility. These latter costs are incurred twice in transporting cargo
between U.S. mainland ports and Puerto Rico, once in Florida and once on
arrival in San Juan; and the same is true when goods are shipped from
Puerto Rico to the Virgin Islands. Fuel and crew wages are included in
line-haul costs. Line-haul costs, unlike terminal costs, often vary
directly with'the distance the cargo moves.
Although cargo travels only one way to the Virgin Islands from the
U.S. mainland, line-haul costs are usually for a round trip. Very few
containers return to U.S. ports filled with cargo from the Territory.
Therefore, consumers essentially bear the cost of the empty bottoms
returning to the port of origin.
Products requiring controlled temperatures or refrigeration are
generally shipped at higher rates than goods moving in dry or non-
refrigerated containers. The costs of needed special equipment such as on-
board generators and special control temperature monitors and their
maintenance are passed on to the shipper in higher freight rates.
Consequently, the absence of backhaul cargo and the existence of these
additional fixed costs increase shipping costs for the Territory.
3.5.3 Trucking
Once containers are unloaded, customs completes its inspection, the
necessary documentation is finished, and the appropriate duties paid to the
U.S. Customs, the Excise Taxes to the Virgin Islands Government. The
containers are then moved from the port and located at their destination by
an on-island trucker.
Trucking is very competitive in the Territory since numerous trucking
companies operate container hauling businesses. A comparison of the rates
charged for trucking indicates, in most cases, parity between rate levels.
Trucking rates vary depending largely on the terrain and distance
containers must move. A field survey of four trucking companies selected
from St. Thomas and St. Croix indicates that increased container size does
not affect average trucking rates.
Cargo trucked to Charlotte Amalie, St. Thomas, and Christiansted or
Frederiksted, St. Croix averages $75 per container. However the average
fees per container to outlying areas vary depending on the distance, from
$125 to $200 per container in St. Thomas and from $100 to $150 in St.
Croix. The differences in these rates reflect the physical differences in
the terrain between the islands.
3.5.4 Warehousing
To have a true picture of the impact of shipping on the price of
food, the movements of food products from the source to the islands should
be traced.
Foods destined for the islands must first be railed or trucked to
warehousing facilities located either in the New York/New Jersey area or
Florida. The two major supermarket chains operating in the Virgin Islands
maintain warehouses in these locations as well as in Puerto Rico.
Additionally, costs of drayage are charged for the transportation of
containers from the warehouses to the ports from which the ocean carriers
sail. Some carriers absorb this charge, whereas others pass these charges
on in the form of higher freight costs.
Therefore, warehousing also becomes a distribution factor to be
considered in the movement of food from the U.S. mainland to the islands.
A perishable cargo has greater risk of spoilage and/or damage and
higher rates to cover such risks. Over a week may be required to move food
cross-country, store it in a warehouse, and then ship it via ocean shipping
and on-island trucking to the store shelves.
3.5.5 Customs and Excise Taxes
Customs duties in the USVI, imposed under the U.S. customs law, are
administered by the Customs Service, U.S. Treasury Department. Customs
duties are at the rate of 6 percent ad valorem on all articles, goods,
merchandise and commodities having a place of manufacture or origin outside
the territorial sovereignty of the U.S. and brought into the Virgin
Islands. Currently large quantities of fruits and ground provisions are
imported from foreign countries.
Excise taxes are levied only on goods imported into the Virgin
Islands for business use or resale. For the taxable figure on which excise
taxes are computed, five percent of the net invoice price is added to the
original invoice total. The prescribed tax rate, which varies by item
category, is then applied to this new invoice total. Foodstuffs, livestock
feed and educational materials are excluded from excise taxes. Generally
non-exempt items, not otherwise classified, are levied at three percent.
Customs duties, excise taxes, despite the exemptions, and brokerage
fees appear to be a significant cost of doing business in the Territory.
3.6 Pricing and Pricing Strategies
For decades, food prices have been the subject of consumer interest
and concern on regional, national and international levels. Formal
research efforts over the past half century have been undertaken by various
government agencies, quasi-government organizations, and private groups to
understand, evaluate and predict distinct areas of man's second most
important sustenance--food. Present day national and regional concerns are
typically concentrated around the quality and price of foods. The concept
of market basket arose from the attempt to ascertain the contribution of
selected (typically consumed) food costs to the overall expenditures of
stratified end-consumers' groups. Probably the most well-known ongoing
studies of the end-consumer's market basket have been the annual and
quarterly studies conducted by the U.S. Department of Agriculture, U.S.
Department of Labor--Bureau of Labor Statistics, and the American Chamber
of Commerce Researchers Association monthly studies which are in detailed
presentations of the nation's cost of living.
Much of the earlier food study research, particularly during the mid-
40's, centered around national and international food shortages, efficient
production systems and distribution inequities.
These studies focus on the cost of living index and offer an
understanding of not only price changes of selected items over periods of
time, but also regional price differences of designated Metropolitan
Statistical Areas (MSA) throughout the United States and its territories.
National MSA's range in population size from a scant 2,500 to over 7
million. The MSA comparisons have presented an intriguing view of the cost
of food items and -ood groups from various parts of the nation. The
indexed reports have shown, within the same period, 20 percent+ price
differences of selected food items in distinct regions of the nation.
These price differences suggest that non-farm cost factors such as
distribution, localized demand, market, and competition play a significant
role in the determination of shelf (retail) price of food items.
From a national perspective, the Economics, Statistics, and
Cooperatives Service in conjunction with the U.S. Department of Agriculture
reports that "...the food price system has become more dependent on
production factors outside of its control, such as labor, energy, and
capital. These factors are increasing in cost at relatively fast rates"
(Boehm & Kite, 1979, p. iii). This phenomenon continues to impact
virtually all end-consumers, with the degree of intensity based, in part,
on the regionally weighted costs of the above-mentioned factors. Clearly,
the concept of efficiency and efficient markets comes into consideration
when one views these national food pricing issues.
This same study additionally reported that "...the food system has
become more concentrated. There are fewer farmers, fewer processors, fewer
retailers, and fewer input suppliers. This increase in firm concentration
increases the potential for higher prices" (Boehm & Kite, 1979, p. iii).
From such a situation develops the concept of oligopoly pricing in which a
few firms within a select industry tend to protect one another in a less
than full competitive nature.
Pricing strategies have classic representation in most current
marketing tests but their inherent implications are seldom revealed and/or
compared to the 'real' world situation. The three most common pricing
strategies, 1) market-oriented pricing; 2) cost-oriented pricing; and 3)
performance-oriented pricing, are traditionally employed either singularly
or in combination by a major portion of the retail industry. The food
industry tends to follow this national pattern.
These pricing strategies tend to be employed within distinct patterns
associated with the size and type of food outlet as well as the intensity
of competition. The larger the food outlet and the higher the level of
competition within its geographical market, the greater the likelihood the
food outlet utilizes a mix of food pricing strategies of which market
oriented pricing and performance oriented pricing tend to be the most
common. The smaller the size of the food outlet coupled with a low level
competitive environment, the greater the likelihood the food outlet employs
only one pricing strategy, most commonly the cost oriented pricing
strategy.
These pricing strategies carry profound implications towards food
shelf pricing. Cost-oriented pricing strategy responds to such concepts
as: a) cost-plus pricing; b) break-even analysis; or c) standardized mark-
up. The determination of shelf price is, therefore, solely based upon the
effectiveness of cost management. Order-volume, inventory management,
labor, energy and distribution within the U.S. Virgin Islands are all
hampered by the size of the market and its geographical location. These
factors are likely to result in consistently high shelf prices of food
items.
Performance-oriented pricing strategy considers some or all of the
following: a) store profitability; b) department profitability; c) return
on investment; or d) cash flow. In the use of performance-oriented
pricing, the store management looks at the efficiency and productivity of
its operation as an entity. Efficiency/productivity management tends to
present relatively moderate to low shelf prices of food items.
Market-oriented pricing strategy tends to be the most fluid and the
most vulnerable of the three strategies. This strategy pays attention to:
a) market share; b) consumer demand; c) survival; d) competition; and/or e)
product promotion. Traditionally, only the larger, more sophisticated
operations employ this strategy. The strategy is seldom employed by itself
unless the market population is vast and the amount of competitors
substantial and quite sophisticated. Such stores frequently offer to their
customers loss leader specials (products priced at or below invoice cost),
multiple-value coupon redemption (up to three times the value of the coupon),
and/or volume discounts for bulk purchases. This strategy, utilized
frequently in the larger MSAs of the mainland, is pleasing to the end-
consumer, and results in the lowest shelf prices of food and non-food items.
The U.S. Virgin Islands stores included in this survey reflect a
consistent pattern based on previous national food pricing studies as in
Table 3-1.
Table 3-1. Strategic Food Price Setting USVI
Percent Employed
Store
Category Market-Oriented Cost-Oriented Performance-Oriented
Supermarkets 55.0 35.0 10.0
No-Frills 22.5 67.5 10.0
Specialty 19.5 71.5 9.0
As noted above, the supermarkets employed market-orientation in price
setting more than the other two categories. However, the no-frills and
specialty stores' price setting was heavily based upon a cost-oriented
strategy.
Performance-oriented pricing requires tracking of all itemized
inventory and departments and their respective sales. Consequently,
performance oriented price-setting was employed very little by any of the
local island stores. Traditionally, only large scale operations with
access to advanced computer systems can afford the level of sophistication
required to monitor and measure such activities.
A food cost study produced by the Economics Research Institute in
Washington, D.C. noted that retail food prices also reflect costs not
directly related to farm prices or supplies. Further, farm value
contributed only 30 percent to the retail food price for all foods in the
Bureau of Labor Statistics Market Basket in 1987 (Dunham, 1987). Thus a
decrease in farm value may be partially or completely offset by increases
in processing and local marketing costs which include promotion,
distribution, energy, labor, and/or physical structures. Included also in
the 70 percent of food prices based on these other factors is that of
profit.
Food is primarily distributed by, and to, private sector, profit
oriented, organizations. Through the chain of distribution, profit factors
taken from each segment of the chain add to the eventual shelf price of the
food item. Oligopoly pricing can have a profound effect on profit taking
and profit aggregate amounts. However, in the last decade, food industry
input costs and productivity have played a major role in the cost of-foods.
Pretax margins of food chains typically averaged about 1.8 cents per dollar
on sales and slightly over 1 cent after taxes (Dunham, 1987). Though low
as a percentage of sales, the absolute profit in dollars appears
significant due to volume sales and high inventory turnovers. The U.S.
Virgin Islands market population, however, does not permit the volume for
this absolute dollar profit achieved by the national food chains on the
mainland.
According to the 1987 Economics Research Institute report, the farm-
to-retail price spread rose 43 percent during the period 1980-87 (Dunham,
1987). To some extent, the relationship of farm-to-retail price spread
tended to follow the general inflation rate suggesting that input costs of
the food industry have responded to the higher food processing and
distribution charges. This study revealed additionally that the largest
single component of the input cost for food price determination was, in
1987, labor costs which averaged around 45 percent of the food cost index
(Dunham, 1987). Food containers and packaging materials represented 15
percent of the food cost index, transportation and energy 11 percent and 8
percent, respectively (Dunham, 1987).
Consumer demand is also a critical factor in determining food prices.
The evolving nature of consumption and buying habits has profound effects
on the demand side of the market system. With all other variables held
constant, the larger the consumer group the lower the retail prices, is a
commonly accepted premise in the food industry. Similar findings indicate
no change regardless of geographical location of retail food outlets and
seasonal patterns.
Consumer demand should reflect a negative price-demand condition.
Even with a transient population added to the census figure of 110,000, the
absolute demand in the USVI is not by itself large enough to lower food
shelf prices. Limited market demand also increases for the food retailers
the operating risks incurred by product shelf life and inventory turns.
Productivity measures derived from economies-of-scale due to volume-order
inventory management would also be hampered within a relatively small size
market population, thereby additionally causing high food prices.
Added to the prices of food and non-food items the territorial
consumer must pay are the costs associated with the structural factors of
an island market. These factors include increased cost of distribution,
increased spoilage and/or energy costs due to heat and humidity, and,
traditionally, a limited functional operating infrastructure (i.e.
roadways, rail, air and sea systems, power, and communication).
The U.S. Virgin Islands have a small group of supermarkets which, for
all intents and purposes, represents an oligopoly. The degree of
management of pricing by this supermarket oligopoly may or may not be a
factor in the Territory.
The costs of labor have a direct relationship to a food store's
productivity. Labor rates in the U.S. Virgin Islands, based on a
territorial minimum wage of $4.25 as opposed to the federal minimum wage of
$3.35, are relatively high. In 1987 labor represented 45 percent of the
nation's food cost index. The U.S. Virgin Islands' food industry should be
experiencing at least an equal, if not greater, cost contribution compared
to the national average of labor to food shelf prices.
4. REVIEW OF THE LITERATURE
The.quantity of existing literature on the subject of food prices in
the USVI is not ample. Some literature on the regional scene, worthy of
note, is evident. A considerable quantity of literature on the subject
comes from the United States mainland. Basic to the study of food prices
is the VI legislation governing the pricing of goods and services in the
USVI. Chapter 2, of the VI Consumer Protection Law of 1973, Section 101,
discusses "unfair trade practices". Under Section 102 (c), goods and
services are defined to mean foods "... which are primarily for personal,
household or family needs". In Chapter 17, Section 1012, "Setting prices
and quantities for sale", notes that the "Consumer Services Association
(CSA) may determine the prices of quantities at which all or any article of
food and general supplies may be sold by wholesales, retailers,
producers...". A reasonable margin of profit is allowed and a wholesale
and retail price are permitted to be set for each item.
In the context of these CSA guidelines, prices in the USVI will
possibly be perceived to fall under the purview of the Consumer Services
Association. However, any study of food prices should consider the results
of a market basket analysis and the implicit inflation factor attendant to
a market basket analysis.
In this regard, the studies of the American Chamber of Commerce
Research Association (ACCRA) Cost of Living Index provide a basis for
understanding some questions of cost in the context of the USVI. While the
present study is not limited to a cost of living component exclusively, the
ACCRA methodology is a useful point of departure.
In an island-specific case, Huntley Manhertz's (1977) "The Price
Determination Process in a Small Open Economy--The Jamaican Experience" is
a seminal article vis-A-vis specificity of food price determination in
economies such as the open economy of the USVI. The article "has as its
main focus, the examination and explanation of the movements of retail or
consumer prices in Jamaica. By necessity, some explanation is included of
those economic factors which influence the overall behavior of domestic
prices at the different levels of major economic activity (production,
distribution and consumption)" (Manhertz, 1977, p. 1).
Other works which consider food prices are by Hines (1973), Gordon
(1961), Lanzioletti (1958), and Afriat (1972). Hines considered "Income
Prices and Productivity in Jamaica." Gordon looked at "Different Changes
in Prices of Consumer and Industrial Goods." Lanzioletti investigated the
"Pricing Objectives in Large Companies" of the American mainland, while
Afrait made an "International Comparison of Prices and Output."
In a recent study, Stahl (1989) discusses oligopolistic pricing with
sequential consumer search. Focus was on a number of stores' choice of
prices for a homogeneous good with constant marginal cost. Consumers were
expected to search each store, sequentially, with perfect recall. As the
consumers search for the best price, the pricing of goods is expected to
move from marginal cost pricing to monopoly cost pricing. This consumer
search theory is apropos to this USVI study of food prices. Most of the
consumer search models of food pricing center on finite stores and do not
consider sequential search. The models assume that the consumer is either
fully informed or fully ignorant about food prices. (See, for example,
Braverman, 1980; Varian, 1980; Salop and Stiglitz, 1977; and Stiglitz,
1979). There are a number of variations on the theme under the rubric of
what is called the "Nash Equilibrium" for pricing-setting (Diamond, 1971).
Overall, the literature of food prices is spotty, but rich. Many of the
studies focus on pricing norms which may not be in accordance with the
norms of island economies.
Food prices in the Caribbean, and specifically the USVI, must be
considered in the context of not only the level of prices, but also the
structure of the economy, its predictability in maintaining level prices,
and administrative policing efforts to regulate prices in a market economy.
Structure refers to the relative level of prices for different foods which
may be substitutes or complements. Predictability is defined as an
understanding of when prices will rise or fall given the nature of the
local market as it interfaces with the international market.
5. METHODOLOGY
5.1 The Survey Design
This food price study was designed to survey and compare current food
prices, relate those prices to selected off-islands areas, and to define
the general characteristics, features, and services of food markets within
the Territory. Further, an attempt was made to ascertain the specific food
price-setting strategies employed by the food market industry in the U.S.
Virgin Islands with respect to both formal price setting (strategic in
nature) and operational price setting.
To these ends, a sample of retail food outlets was derived from the
several groups in the Territory. Since Virgin Islands consumers spend the
bulk of their food dollars in the largest retail food outlets, supermarkets
in Miami, San Juan, Washington, D.C., and St. Maarten were selected for
comparative purposes. Two questionnaires were developed. A detailed
instrument was used territorially and a less comprehensive one used for
off-island. Both included a selected list of food items--a market basket--
to be used to record food prices.
The territorial questionnaire was completed by store managers.
Selected resource personnel completed the off-island questionnaires. As a
validation procedure, members of the team, on a date selected to reflect a
normal pricing period, used the same market basket in a field survey of
prices.
Focus group meetings were held on St. Thomas and St. Croix with
executives of territorial food outlets and representatives of the three
major ocean carriers. Interviews were also held on a one-to-one basis and
documents examined toward a better understanding of territorial warehousing
and trucking.
5.1.1 The Market Basket
Supermarkets carry 10,000 to 40,000 different items based on type and
size. The U.S. Department of Labor, Bureau of Labor Statistics, has a list
of 76 items as a representative subset of these thousands of items. This
list is employed in national, regional, and state-local studies. The
market basket utilized in this food market study was derived initially from
this list of representative food elements. Since no USVI consumption
pattern data are available, the research team concluded that these food
elements, also the basis for the food-group portion of Consumer Price Index
Reports, were acceptable and reasonable as a foundation for the Virgin
Islands food price study. The market basket was subsequently modified at
the initial focus group meetings with food market personnel to reflect the
58 more commonly purchased food items locally.
Based on perceived consumption and demand patterns for the USVI, the
initial list of food items for the market basket included three items,
fresh kingfish, frozen kingfish, and potfish (food fish of the size that
are commonly caught in fishtraps or fishpots). However, when the survey
data were completed, these three items were not common as supermarket items
and, therefore, were deleted from the market basket list.
The market basket does not take into consideration, for weighting
purposes, the specific food product consumption volume in the Territory.
Included in the market basket were the following food groups with a
total of 58 items:
Cereals and bakery products (7 items);
Meats (6 items);
Ham and miscellaneous (7 items);
Poultry (3 items);
Fish (4 items);
Eggs (1 item);
Dairy (4 items);
Fresh fruits (6 items);
Fresh vegetables (9 items);
Processed fruits and vegetables (4 items);
Fats and oils (4 items);
Other foods (1 item); and
Beverages (2 items).
The individual items and unit weights are shown in Table 5-1.
Wherever possible, national brands for these items were selected to permit
more consistent and unbiased data and to facilitate easier comparison with
the off-island price surveys. The selection of national brands increased
the probability of locating the same items in each of the surveyed stores.
Standard sizes, not necessarily at the lowest unit cost, were based on the
general availability indicated by some focus group members. Although bulk-
packaged or giant-sized items usually yield the lowest unit price, such
sizes are not commonly available. For purposes of comparison, all
statistics of the 58 food items were computed on a common base.
Table 5-1. List of Items and Unit Sizes included in the Market Basket
Item description Unit size
CEREALS AND BAKERY
Flour, Gold Medal 5 pound
Rice, long grain Uncle Ben's 10 pound
Bread, white, Holsum 16 ounce
Bread, whole wheat, Hearthside 16 ounce
Cookies, Chips Ahoy, Nabisco 16 ounce
Crackers, soda, Keebler export 26 ounce
Corn Flakes, Kelloggs 18 ounce
MEATS (USDA CHOICE FRESH)
Chuck, ground (70%) 1 pound
Chuck roast 1 pound
Rib roast 1 pound
Sirloin steak 1 pound
Chuck steak 1 pound
T-bone steak 1 pound
HAM & MISCELLANEOUS
Bacon, sliced, Oscar Mayer 1 pound
Pork Chops, end cut, frozen 1 pound
Ham, rump, smoked 1 pound
Ham, canned, Hormel 3 pound
Sausage, frozen link, Jones 1 pound
Frankfurters, chicken 1 pound
Bologna, Oscar Mayer 12 ounce
POULTRY GRADE A
Chicken, whole, fresh 1 pound
Chicken legs, fresh 1 pound
Turkey, Butterball, frozen 12-14# 1 pound
FISH
Chunk light tuna, Starkist water/oil 6.5 ounce
King fish, fresh 1 pound
King fish, frozen 1 pound
Pot fish, fresh 1 pound
continued
Table 5-1 (continued). List of Items and Unit Sizes Included in the Market
Basket
Item description Unit size
EGGS
Grade A, large eggs 1 dozen
DAIRY
Milk, fresh, St. Thomas Dairy 1 quart
Butter, Lurpak 8 ounce
Ice cream 1 gallon
Cheese, cheddar 16 ounce
FRESH FRUITS
Apples, red delicious 1 pound
Bananas 1 pound
Oranges, navel 1 pound
Grapefruit 1 pound
Lemons 1 pound
Peaches 1 pound
FRESH VEGETABLES
Potatoes, white 1 pound
Lettuce, iceberg 1 head
Tomatoes, field grown 1 pound
Beans, green 1 pound
Cabbage 1 pound
Carrots 1 pound
Celery 1 pkg
Onions, yellow 1 pound
Peppers, sweet 1 pound
PROCESSED FRUITS AND VEGETABLES
Orange juice, frozen, Minute Maid 16 ounce
Tomatoes, canned, Goya 16 ounce
Peas, green, canned, Goya 16 ounce
Baby food, vegetable chicken, Gerber 1 small
continued
39
Table 5-1 (continued). List of Items and Unit Sizes Included in the Market
Basket
Item description Unit size
FATS AND OILS
Margarine, tub 1 pound
Shortening 1 pound
Peanut butter 16 ounce
Vegetable oil, Wesson 2 quart
OTHER FOODS
Sugar, white, Evercane 1 pound
BEVERAGES
Coffee, roasted (instant Maxwell) 16 ounce
Cola, regular, cans (Coca Cola) 1 6-pack
5.1.2 On-Island Samples and Questionnaire
The on-island survey of food markets attempted to obtain information
from six distinct food market types:
1) Supermarkets: large, self-service stores that carry a complete
line of food products, i.e. meat, fish, produce, packaged food
products, and dairy items, as well as some non-food products such
as cosmetics and non-prescription drugs and have minimum annual
sales of $2 million, according to the Food Marketing Institute.
2) Large super stores: offer a wide variety of products not
traditionally found in the supermarket, such as prescription
drugs, clothing, or hardware goods. Annual sales are generally
slightly less than $2 million.
3) No-frills stores: warehouses, bulk sales stores with limited
product assortments. These may or may not handle fresh meats,
produce, and other perishable products. Whereas most
supermarkets carry 18,000 to 25,000 items, a warehouse store
handles only 4,000 to 5,000 different products.
4) Neighborhood grocery stores: 'Mom & Pop' stores, typically small
single proprietorships with a limited assortment of food and non-
food items.
5) Convenience stores: generally chain stores (such as a 7-11 food
store) which include food, non-food and other services (i.e.
gasoline, laundry facilities, deli, etc.).
6) Specialty food stores: carry a narrow product mix with deep
product lines. Such stores (produce store, bakery or fishery,
etc.) sometimes obtain lower prices from suppliers because they
buy limited lines of merchandise in large quantities.
A total of 26 food stores were selected by specific food store type
as shown in Table 5-2:
Table 5-2. Food Price Study Questionnaire: USVI Sample
Selection
Food Store Type St. Croix St. Thomas St. John Total
Supermarkets 3 3 0 6
Large Stores 2 2 0 4
No-Frills Stores 2 2 0 4
Neighborhood Groceries 1 2 1 4
Convenience Stores 1 2 2 5
Specialty Food Stores 0 2 1 3
Total 9 13 4 26
An instrument was created to survey this sample of food markets and
to include:
1) general background information;
2) pricing objectives (tactical and strategic);
3) the contribution of the various cost components in the derivation
of the prices of food items.
4) a list of specific food items for which sales price and invoice
cost data might be obtained.
The on-island survey was designed as a two part demographic
questionnaire. Part 1 recorded store location, type, hours, ownership,
floor space, special customers services, pricing policies, the number of
full and part-time employees, and their hours, wages and fringe benefits.
Financial data based on 1988 sales and expenses by departments was
requested in Part 2. The cost of each item on the market list and its
average quarterly dollar sales were also included in Part 2 as were the
costs of pilferage, spoilage, outdated goods, bad checks and counterfeit
bills.
Consultations were held with the store owners or representatives to
insure full understanding of the data requirements, definitions of terms,
and time frame within which the questionnaire should be completed.
Assurances were made of the confidentiality of all information and its use
only for aggregate statistical analysis.
This survey instrument (Appendix V-a) was presented in two focus-
group sessions--one held on St. Croix and one on St. Thomas--to the sample
of local food merchant owners and managers whose outlets were selected by a
random process within each of the six groups. Only two retail food chains
belong in the supermarket group in the islands and therefore both were
included in the sample.
Minimal changes were made to specific line-items of the instrument
during the focus group meetings to tailor the questions and issues to the
unique aspects of an 'island' food-store industry.
An apparent lack of quarterly and annual financial data by
departments within the surveyed stores made necessary a request for
estimated percentages in this area.
Although many islanders purchase from street-side vendors that
typically offer fresh vegetables, fruits, fish, and locally-produced
beverages, the research team believed that no comparable, accurate data
could be derived from these operations and they were not included in the
survey sample.
From the original randomly-selected list of retail food outlets,
response indicating a willingness to participate was received from seven.
As a result the surveyed sample included two supermarkets, and one no-
frills store in St. Croix and one supermarket, two speciality stores and
one no-frills in St. Thomas.
5.1.3 Off-Island Samples and Questionnaire
This instrument was comprised of two areas:
1) A request for general background information; and
2) a list of specific food items for field price surveying.
The off-island survey of food markets (Appendix V-b) obtained
information only from supermarkets since they tend to generate the largest
sales volume within their market areas. Because of the 80-20 principle,
consumption patterns in which 80 percent of the buying of foodstuffs occurs
in about 20 percent of the retail outlets, supermarkets have been
traditionally viewed as the basis for national food price and performance
studies, including the U.S. Consumer Price Index.
Four off-island locations were included in this survey. These
locations were selected since they offer unique features for comparative
purposes. San Juan, Puerto Rico, was selected because its geographic
location is similar to that of the Virgin Islands, and it is frequently
part of the line of flow of distribution of goods and services to the USVI.
Miami, Florida is also located in the line of flow of distribution as one
of the major shipping points for sea freight to the USVI. Because of its
similar ethnic characteristics, Washington, D.C. was surveyed. St.
Maarten, Netherlands Antilles, also an island in the Caribbean, was
selected since it is affected by many of the same distribution factors as
the Territory and has similar demographics.
Supermarket prices in the USVI and Washington, D.C., were surveyed in
late August, San Juan and St. Maarten in early September, and Miami in
November, 1989.
Since the surveys in the several areas were made in different months
and the resulting data were not adjusted on any seasonal basis, monthly
and/or quarterly variations in volume and prices (summer, winter, harvest,
growing seasons) did not affect the calculations based on surveyed prices.
The third quarter, July, August, and September, according to generally
accepted consumption patterns in the United States, historically has the
lowest sales. During this quarter all surveys were completed except for
those in Miami.
The Thursday-through-Saturday schedule was chosen for the off-island
survey since these three days show the highest shopping activity and the
best--lowest--prices are often offered during this period. Holiday
weekends were specifically avoided since they typically produce unusual
consumption patterns and pricing conditions.
Further, the items to be surveyed were determined to be much more
commonly found in supermarkets rather than in convenience, neighborhood,
and other non-supermarket retail outlets. Supermarkets also better reflect
the price sensitivity and effects of competition and price trends, and more
easily make the adjustments needed to meet changing market demands.
5.1.4 Field Surveys
Additionally, a field survey instrument (Appendix V-c) was developed
as a validation document to obtain on-shelf prices of pre-selected food
items.
For the field survey, specified store types were selected as shown in
Table 5-3.
The same rationale used for the off-island surveys applied here with
the selection of a Saturday for the recording of the on-shelf prices.
The field survey does not take into consideration, for weighting
purposes, the sales volume from each store nor the consumption volume of
selected food products within the respective store.
Table 5-3. Field Survey of USVI Food Markets
Selection
Food Store Type St. Croix St. Thomas Total
Supermarkets 4 2 6
Large Stores 1 1 2
No-Frills Stores 1 1 2
Neighborhood Groceries 2 0 2
Convenience Stores 1 1 2
Specialty Food Stores 0 2 2
Total 9 7 16
5.1.5 Focus Groups
The study team was faced with several complex issues associated with
the collection and interpretation of data on retail food prices and costs.
Moreover, development of an approach to lead to an informed explanation of
the reasons for price differences between the Virgin Islands and the
geographical areas targeted for comparison was necessary. To help address
these methodological problems, the team decided to utilize the expert
contributions of a focus group to enhance the credibility of the research
findings and interpretations.
Focus group studies are a commonly used market research technique,
particularly useful in exploratory research. Focus group interviews bring
together six to ten people for a round-lible discussion intended to explore
issues, search for answers, generate ideas, or formulate hypotheses that
can be tested using quantitative methods.
The focus group sessions were conducted by the team to elicit the
opinions and motivations of selected food market and distribution
personnel. The interviews were conducted, in general, to address the depth
and breadth of fundamental food market issues in the Virgin Islands with a
focus on three main purposes.
The first purpose was the collection of data to assist in the design
and refinement of the food study questionnaire. The second was to gain a
better understanding of the price/cost relationship in the industry. The
third purpose was to determine from the collective opinion of the group,
the major factors which, in their informed judgement, contribute to
differences in price between the Virgin Islands and target off-island
locations.
The team began with the basic proposition that differences in price
are accounted for by differences in the costs of doing business, not only
the costs of operations, but that element of profit which represents a
return on the investment of shareholders and owners. Thus in order to
explain price differences, clearly a first important and necessary step was
to determine and isolate any significant differences in the cost of doing
business in the Virgin Islands in comparison to the target locations.
To identify these differences, the informed opinion and judgement of
experts and leaders in the retail food business was deemed useful. The
team reasoned that these significantly different elements of cost would
form the basis for developing working hypotheses whose validity could be
tested using quantitative methods. Extending the logic of this
methodological approach, data would then be collected for the purpose of
making cost comparisons for the cost categories identified. These cost
comparisons, in turn, should indicate whether existing cost differences do
in fact justify and explain significant differences in food prices between
the Virgin Islands and the locations targeted for comparison.
In a meeting on June 6, 1989 the team met with Richard Lauth, USVI
General Manager, Pueblo International, Inc., in an attempt to develop an
in-depth understanding of the primary price/cost and operational
considerations of supermarkets in the Virgin Islands; obtain necessary data
elements for the construction of a questionnaire; and seek his support and
participation in the food price study.
Mr. Lauth outlined the unique cost issues for Pueblo in operating its
business in the Virgin Islands. Such unique cost items included freight
(inland and overseas); gross receipts tax; excise tax; customs duties; the
high cost of liability insurance; a substantial shrinkage factor
(perishable items, damage resulting from shipping (dented cans, etc.), and
theft (approximately 4 percent in the VI compared to 1.5 percent in Puerto
Rico).
In addition, Mr. Lauth discussed other considerations pertinent to
territorial food market operations: the purchase of most merchandise from
three mainland distributors (Associated Grocers, Certified Grocers, and
Malone & Hyde), costs of energy, maintenance of electrical equipment,
(generators, fuel charges, air conditioning, and power surges), general
maintenance (such labor is 30 percent higher in the Territory than in
Puerto Rico), supplies (shopping bags, cleaning materials, etc.), a traffic
department staff to process documentation and prepare gross receipts and
excise tax forms, the high costs of rent, losses from counterfeit checks
and cash, long distance telephone charges for ordering inventory, and the
depreciation/amortization of property, plant and fixtures (higher original
cost and shorter life use value in the USVI as compared to the States).
Mr. Perez, District Manager, Grand Union Stores, was interviewed in
July, 1989 to allow him to review the survey questionnaire; to permit the
team to gain a further understanding of price/cost and operational issues
of supermarkets in the Virgin Islands, and to seek his support and
participation in the food study. At that time, Mr. Perez was very recently
appointed by Grand Union to serve in the Territory.
Mr. Perez agreed that the questionnaire would capture the most
significant line-items of his supermarket operation, but indicated that the
questionnaire was so detailed that too much time was necessary to complete
it. In addition, a lack of computerized inventory and invoice and sales
tracking data for Grand Union would not permit any accurate historical
information on the invoice cost and selling price of the market basket
items. Mr. Perez also felt that if the Virgin Islands government wishes to
request such information on a regular basis, advance notice is necessary so
that plans for the collection, dissemination, and distribution of such data
may be formulated.
In another focus group meeting held on Wednesday, July 19, 1989, in
St. Thomas, the team met with representatives of three major ocean freight
shippers (Appendix III) to gain an in-depth understanding of the economic,
legal, and operational role of ocean freight shippers in the Territory, to
ascertain the physical distribution flow of food products to the Virgin
Islands, and to develop comparison of the distribution costs of trans-
shipment through Puerto Rico as opposed to direct shipments to the Virgin
Islands.
From this meeting the team learned that the Federal Maritime
Administration (FMA) regulates domestic shipping (between Puerto Rico and
the USVI or between the islands of the Territory). Rate fluctuations,
however, respond to supply and demand as well as to what the market will
bear. These rates are public information and are reviewed by the Inter-
state Commerce Commission (ICC). Any changes must be filed with the ICC,
usually with 30 or 60 days' notice.
The value of the commodity and the kind of container service required
influences rates (i.e. frozen food containers are more expensive than dry
goods). Approximately 70 percent of all foods are shipped from South
Florida and about 20 percent from Puerto Rico--local Puerto Rican products
and those trans-shipped. Containers generally return empty from the VI
and, therefore, a 50 percent return cost is built into charges.
In general, shipping fees include a net ocean rate which may include
rail shipment, handling (loading), landing (unloading), arbitrary
(trucking, point-to-point); and documentation.
Two additional focus group meetings were held: one on St. Thomas on
July 26, 1989 and one on St. Croix on July 27, 1989 with local food store
owners/managers (Appendix III).
In St. Thomas, the team and focus group members reviewed the food
study questionnaire for any revisions and/or additions and to solicit their
support throughout the food study period. The initial discussion centered
around the asking of questions about selected survey questionnaire line-
items. Certain food items were eliminated since these items are not common
to the Virgin Islands. The eliminated items were replaced by food items
with high local demand.
In general, the attendees supported the objectives of the food study,
but questions arose as to the political use of the results. Further, the
time necessary to complete the questionnaire was deemed excessive.
However, all focus group attendees agreed to support the food price study.
A final focus group meeting of food store owners/managers was held on
St. Croix on November 27, 1989 to summarize and review preliminary findings
of the study and to include any significant operational areas which were
not addressed through the questionnaire, field study, and/or previous
interviews. Only Pueblo International, Inc. (Appendix III) accepted the
invitaiton to attend.
At this meeting, the same concerns relative to the high cost of doing
business in the USVI as expressed at the earlier meeting with Mr. Lauth
were repeated. Comparisons with Pueblo locations in Miami were emphasized
as was the impact on territorial prices of those issues specific to the
Territory.
5.2 Methods of Data Analysis
5.2.1 Pricing Monitors and Controls
Pricing monitors and controls, apparently utilized by the national
food industry, attempt to address operational performance of pricing
policies as a set of checks and balances. The extent (as measured by
quality and quantity) to which these monitors and controls are employed
within a firm appears related to the level of price management
sophistication of the respective business.
The following typical price monitor and control mechanisms were used
to survey the U.S. Virgin Islands food market industry:
Periodic review of all prices
Periodic review of select items
Check against local competition
Check against regional/national food price studies
A consolidation of survey findings for the U.S. Virgin Islands food
market price regulating mechanisms indicates a parallel to typical national
trends.
Table 5-4. Pricing Monitors and Controls Employed USVI
Regulating Composite Super Mrkt. No-Frills Specialty
Mechanism
Percent
Periodic review
of all prices 85.7 100.0 50.0 100.0
Periodic review
of select prices 42.9 66.7 50.0 0.0
Check against
local competition 57.1 100.0 50.0 0.0
Check against regional/
national price studies 14.3 33.3 0.0 0.0
Source: Food Study Survey of Retail Food Outlets, 1989
From the sample of seven participating retail food outlets, the
larger food stores with greater resources seem to utilize more of the price
regulating fields with a greater degree of sophistication. Such
sophistication in the check against local competition as well as the check
against regional/national price studies seems quite evident from the above
data and results in a stronger market position.
5.2.2 Procedures and Calculations
In order to compare prices the 58 items on the survey list were
separated into five categories: dairy, frozen food, grocery, meat, and
produce. These categories were based on the facilities and physical
arrangement of the stores. Therefore, for example, a frozen food category
included frozen pork chops, sausage, turkey, ice cream, and concentrated
orange juice. These food groups are presented in Table 5-5, including
items and unit weights.
When price data from retail food stores were collected and a
particular national brand item in the specified size was not available, an
alternative size of that national brand item was included. If the item in
that national brand was not available in any size, an alternative brand,
and possibly size, was surveyed. These differences were noted on the
survey forms. In a few cases a food item was not available in any brand
nor in any size. When that occurred, determination was made that average
prices for other stores in that category would be calculated, and the
calculated price used in the unit price and average calculations. Many of
the items on the survey list were not available in non-supermarkets. In
those cases, averaging was not done, and price comparisons were made only
between available items in these outlets.
Table 5-5. Food Groups for Average and Index Calculations of Market Basket
Items
Item description Unit weight
DAIRY
Grade A, large eggs 1 dozen
Milk, fresh, St. Thomas Dairy 1 quart
Butter, Lurpak 8 ounce
Cheese, cheddar 16 ounce
Margarine, tub 1 pound
FROZEN FOODS
Pork Chops, end cut, frozen 1 pound
Sausage, frozen link, Jones 1 pound
Turkey, whole, Butterball, 12-14# 1 pound
Ice cream 0.5 gallon
Orange juice, frozen, Minute Maid 16 ounce
GROCERY
Flour, Gold Medal 5 pound
Rice, long grain Uncle Ben's 10 pound
Bread, white, Holsum 16 ounce
Bread, whole wheat, Hearthside 16 ounce
Cookies, Chips Ahoy, Nabisco 16 ounce
Crackers, soda, Keebler, export 26 ounce
Corn flakes, Kelloggs 18 ounce
Chunk light tuna, Starkst water/oil 6.5 ounce
Tomatoes, sauce, Goya 16 ounce
Peas, green, canned, Goya 16 ounce
Baby food, vegetable chicken, Gerber 1 small
Shortening 3 pound
Peanut butter 18 ounce
Vegetable oil, Wesson 2 quart
Sugar, white, Evercane 1 pound
Coffee (instant Maxwell) 16 ounce
Cola, nondiet, cans (Coca Cola) 1 6-pack
MEAT
Chuck, ground (70%) 1 pound
Chuck roast 1 pound
continued
Table 5-5 (continued). Food Groups for Average and Index Calculations of
Market Basket Items
Item description Unit weight
MEAT
Rib roast 1 pound
Sirloin steak 1 pound
Chuck steak 1 pound
T-bone steak 1 pound
Bacon, sliced, Oscar Mayer 1 pound
Ham, rump, smoked 1 pound
Ham, canned, Hormel 3 pound
Frankfurters, chicken 1 pound
Bologna, Oscar Mayer 12 ounce
Chicken, whole, fresh 1 pound
Chicken legs, fresh 1 pound
PRODUCE
Apples, red delicious I pound
Bananas 1 pound
Oranges, navel 1 pound
Grapefruit 1 pound
Lemons 1 pound
Peaches 1 pound
Potatoes, white 1 pound
Lettuce, iceberg 1 head
Tomatoes, field grown 1 pound
Cabbage 1 pound
Carrots 1 pound
Celery 1 pkg
Onions, yellow 1 pound
Peppers, sweet 1 pound
To obtain effective comparisons between prices of products in
different sizes, a unit price calculation was made so that the price was
representative of the specified size or quantity of that item.
Determining index values for comparisons between supermarket prices
on and off-island required data collection, data entry, and calculations.
The shelf prices for various items--and in the case of a difference in
size, the actual surveyed size or weight--was entered into a computer-based
spreadsheet. For each item in each store, a unit price was calculated. An
average unit price based on unit prices for stores in each area (USVI, San
Juan, Miami, and Washington, D.C.) was then calculated for each item. This
average unit was used to calculate a group or category average price. No
weighting was done for the item prices or varying number of items in a food
group.
After group averages were calculated, those averages were indexed to
the USVI average. The USVI average was a simple unweightedd) average using
unit prices from the supermarkets surveyed on St. Croix and St. Thomas.
This index represents the price difference (percentage) when compared with
the USVI average price for a food category. For example, if an average
price in the USVI for a particular category was $1.80 and the Washington,
D.C., price was 10 percent or 18 cents lower ($1.62), that index figure
would be calculated as 0.90 indicating that the Washington, D.C., price was
90 percent (0.90) of the USVI average price.
For St. Maarten, N.A., the shelf prices in Dutch guilders were
converted to US-dollar prices using the official conversion rate in effect
on the day that the price survey was conducted in St. Maarten.
5.3 Limitations to the Study
Regrettably, in the search for complete and pertinent data for this
study, the gathering of data met some obstacles which reduced the
availability of some of the desired empirical information. Therefore
responses to the questions posed as the objectives of this study, are of
necessity limited, particularly in the area of local cost analysis.
Including the multiple units of Pueblo and Grand Union,
representatives of 26 food outlets were originally invited to participate
in this study. Although about half expressed interest in participation,
only four, plus representation for Pueblo territorially, attended the
original focus group meeting on St. Thomas, only two on St. Croix. An
additional meeting was arranged with Grand Union at a later date. This
lack of response resulted in the final sample of seven.
Interest was expressed by retailers in St. John, but none sent a
representative to the initial general focus group meeting and therefore did
not participate.
Plans to use financial data in a definitive cost analysis were
thwarted by the reluctance of the respondents to divulge the necessary
figures. Only three of these completed and returned that section of the
questionnaire.
Virgin Islands tax returns are not available for review, and invoices
from suppliers are not written in a form which permitted the analysis
anticipated. Local customs officials were extremely uncooperative in the
attempt to corroborate shipping and tax information by the use of customs
documentation.
Difficulties also arose in the surveys planned for Miami and
Washington, D.C. Eleven major retail food chains were contacted by
personal telephone calls and follow-up cover letters with the questionnaire
designed for their use enclosed. None responded positively. Subsequent
limited information used in this study was gathered by university personnel
located in these cities and contacted by team members. However, no
financial information was made available.
Personal contacts by a team member were eventually utilized in St.
Maarten and another team member personally gathered the data there.
These obstacles and the resultant delays, although frustrating, were
not permitted to detract or deter the team from, on the whole, meeting its
objectives.
6. EMPIRICAL FINDINGS
6.1 Outline of the Data
The market basket survey of food prices provided the most data for
this study. But the shelf price of a particular food item in one store is
raw data and provides very little, if any, empirical information. Only
when prices in one locale are compared with corresponding prices in another
locale do patterns emerge which permit conclusions. Thus, the individual
food item shelf prices were adjusted for standard item size, averaged for
stores in a particular area, and consolidated into food group averages for
effective comparison. The food prices alone indicate only the amount of
money a consumer pays for each food item; other information, methods, and
measures must be used to determine the cost components and decisions that
result in that shelf price.
6.2 Relationship Between Price and Cost
Typical for large food store operations in the United States is the
'regionalization' of pricing decisions. All the U.S. Virgin Islands
supermarkets followed this pattern and set their pricing territorially as
opposed to store-by-store. The implications of regionalized price setting
are:
chain store structured/orientated
regional based planning
high level of sophistication in price setting
strong likelihood of employing industry market data
senior management involvement in price setting
Only one out of three supermarkets made pricing decisions at the
General Manager level here in the Virgin Islands, suggesting a 'higher
order' of decision making, possibly at a group or regional vice-president
level.
The no-frills and the specialty stores also followed traditional U.S.
food store characteristics and trends in setting prices by employing a
local or store-by-store posture. Three of the four stores (combining no-
frills and specialty) set prices at the store level with the decision being
made by the local Virgin Islands general or store manager.
The implications of localized price setting are:
single store or closely-held ownership
local-based planning
low to moderate level of sophistication in price setting
limited employment of industry market data
Another method in assessing the level of sophistication in price
setting is the ability to, and degree of, responsiveness to cost changes of
merchandise. Characteristically, larger stores, such as supermarkets, tend
to respond to cost changes more readily and more completely with both on-
hand and newly arrived inventories. The survey clearly bore this out since
all three supermarkets changed prices on both on-hand and newly arrived
inventory on the basis of the new invoice cost of the specific item(s).
None of the no-frills or specialty stores made the 'wholesale' adjustment.
In fact, three of the four no-frills or specialty stores only changed
prices of new items when their new respective invoices showed price
changes.
Operational or periodic pricing represents price adjustments based
upon changes in the consumer market, operational cost changes, and/or cost
fluctuations of merchandise to be sold. Typically, operational price
adjustments are implemented to:
match competitive price changes (going-rate)
adjust to new invoice costs (cost plus)
promote a product (advertising or floor specials)
reduce inventory or stimulate slow-moving commodities
respond to manufacturer/distributor requests/incentives
adjustments based upon periodic operational cost increases (i.e.,
cost of electricity or cost of labor)
The significance of store size and/or type is of far less concern in
periodic pricing. A broader perspective of store operations (i.e.,
combining all of the USVI stores together) is shown in Table 6-1.
Table 6-1. Operational Food Pricing Characteristics in the USVI
Super Mrkt. No-Frills Specialty Composite
Types of Periodic
Price Adjustments Percent
Cost Plus 53.3 72.5 80.5 66.6
Promotion 18.7 19.0 15.0 18.0
Going Rate 11.7 17.5 0.0 17.0
Mnfg./Dist. Request 10.3 0.0 20.0 13.0
Inventory Change 0.0 5.0 0.0 5.0
Oper. Cost Changes 1.0 0.0 0.0 1.0
Clearly, the findings reflect a preponderance of focus upon cost
management. As tradition would expect, promotion and going rate would
follow. What seemed to be atypical was the relatively small percentages
associated with promotion and going rate in relationship to cost plus. No
definitive evidence exists to conclude much from this anomaly. However,
previous research focused on U.S. industries exhibiting comparable-minimal
promotion and/or competitive pricing movements suggests a trend towards
oligopoly tendencies.
As noted earlier (Chapter 3.2), price management, either discrete or
overt, plays a significant role in oligopoly dynamics. Therefore, one
might deduce that a possible lack of competitive pressure within an
oligopoly regime would coincide with a relatively small percentage of price
movements actually determined by promotion and/or going rate market
factors. With the very limited number of dominant retail food markets
within the U.S. Virgin Islands, to consider and/or classify the local food
market as being oligopolistic is not an error.
6.3 Prices of Market Basket Items
After a unit price was calculated from the shelf price in the
supermarket of each market basket item surveyed, the average shelf or unit
price was calculated. Tables 6-2a, 6-2b, 6-2c, 6-2d, and 6-2e, show these
average unit prices by food groups for supermarkets in the USVI and the
selected off-island areas.
In addition, within each food group, the item with the greatest
average price difference (using USVI average prices as a base) is
indicated.
The overall averages show the most representative values to be
compared between the surveyed areas, since the individual high and low
prices tend to offset each other. These averages when compared to the USVI
average provide an index value which represents the best indication of the
average prices for the food items surveyed.
As an example, Table 6-2(c) shows peanut butter--a grocery item--with
a unit size of 18 ounces. The average shelf price for the six supermarkets
surveyed in the USVI (adjusted for the 18-ounce unit size) was $3.41. For
the three supermarkets surveyed in Miami, the average shelf price (adjusted
for the same unit size) was $1.86. Similarly in Table 6-2(e), for the
three supermarkets surveyed in Washington, D.C., the average shelf price
adjusted for the 1-pound unit size of sweet peppers was $0.71, while the
USVI average shelf price for that unit size was $1.38.
The column headed "USVI/highest lowest" in the Tables 6-2(a-e)
indicates the maximum difference between the USVI average price for an item
and the non-USVI prices for that same item. This percentage is negative
when the non-USVI price is lower than the USVI price. As an example, for
grade A large eggs, Table 6-2(a), the San Juan price has the largest
difference from that of the USVI price. The value of -20 indicates that
the San Juan average price is 20 percent lower than the USVI average price.
Table 6-2(a). Comparison of Supermarkets in the USVI and Selected Off-Island Stores by Food Groups
USVI Miami San Juan D.C. St. Maarten6 USVl/highest
Item description Unit1 av.2 av.3 av.4 av.5 lowest
DAIRY PRODUCTS PERCENT
Eggs, large,
Grade A 1 dz 1.36 1.12 1.09 1.23 1.53 -20
Milk, fresh,
St. Thomas Dairy 1 qt 0.90 0.79 0.78 0.74 2.06 129
Butter, Lurpak 8 oz 1.19 2.39 0.71 1.57 2.35 101
Cheese, cheddar 16 oz 4.25 2.39 4.29 3.45 3.36 -44
Margarine, tub 1 tb 2.02 1.39 0.96 1.61 1.12 -52
Group Average 1.94 1.62 1.57 1.72 2.08 -19
Indexed to USVI7 1.00 0.83 0.81 0.89 1.07
1 Unit prices were calculated based on BLS standard sizes with revisions as suggested by USVI focus group.
2 Average prices from six USVI supermarkets surveyed in August, 1989.
3 Two supermarkets in the Miami area were surveyed in November, 1989.
4 Three supermarkets in the San Juan area were surveyed in September, 1989.
5 Three supermarkets in the Washington, D.C. area were surveyed in August, 1989.
6 One supermarket in St. Maarten was surveyed in September, 1989.
7 The Miami, San Juan, and Washington, D.C. group averages were divided by the USVI group average to
yield the index value. The one St. Maarten store total was divided by the USVI average to yield the
Index value.
Table 6-2(b). Comparison of Supermarkets in the USVI and Selected Off-IsLand Stores by Food Groups
USVI Miami San Juan D.C. St. Maarten6 USVI/highest
Item description UnitI av.2 av.3 av.4 av.5 lowest
FROZEN FOODS PERCENT
Pork Chops, end cut,
frozen 1 lb 2.82 1.78 1.49 2.89 2.28 -47
Sausage, frozen,
Link, Jones 1 Lb 3.92 2.92 3.94 2.78 3.92 -29
Turkey, butterball,
frozen 12#-14# 1 Lb 1.65 0.87 0.83 0.99 1.32 -50
Ice cream 1/2 gL 4.54 3.19 5.16 4.02 9.54 110
Orange juice,
frozen, Minute
Maid 16 oz 2.98 2.19 2.96 2.00 2.19 -33
Group Average frozen foods 3.18 2.19 2.88 2.54 3.83 -31
Indexed to USVI7 1.00 0.69 0.90 0.80 1.20
1 Unit prices were calcuLated based on BLS standard sizes with revisions as suggested by USVI focus group.
2 Average prices from six USVI supermarkets surveyed in August, 1989.
3 Two supermarkets in the Miami area were surveyed in November, 1989.
4 Three supermarkets in the San Juan area were surveyed in September, 1989.
5 Three supermarkets in the Washington, D.C. area were surveyed in August, 1989.
6 One supermarket in St. Maarten was surveyed in September, 1989.
7 The Miami, San Juan, and Washington, D.C. group averages were divided by the USVI group average to
yield the index value. The one St. Maarten store total was divided by the USVI average to yieLd the
index vaLue.
For milk prices, the largest difference in price occurs on St. Maarten
where the price is 129 percent higher than the USVI price.
The grocery food group includes the largest number of items. Two of
the three highest priced items included in the market basket, coffee and
rice, are in this group. In the grocery food group, the difference from
the average USVI price (1.26) was found in chunk light tuna, with a San
Juan average price of $0.54, or 57 percent lower.
The meats food group (which did not include frozen meat) was
comprised of items with consistently higher unit prices. Although the
average prices of most meat items were not too far apart in the general
surveyed areas, the largest difference was observed in fresh chicken legs,
a very common meat item. The average price in Miami stores was $1.05 per
pound, or 73 percent, lower than the USVI average price for this much-
consumed food.
Wide variations existed in the average prices for the individual
produce items, with little consistency within each area. For every area
surveyed, except Miami, some produce item average prices were higher and
others were lower than USVI average prices.
Comparisons were made only between USVI prices and prices in each
other individual area. The off-island geographic areas were not compared
to each other.
68
Table 6-2(c). Comparison of Supermarkets in the USVI and SeLected Off-IsLand Stores by Food Groups
USVI Miami San Juan D.C. St. Maarten6 USVl/highest
Item description Unit1 mv.2 av.3 av.4 av.5 Lowest
GROCERY ITEMS PERCENT
Flour, Gold Medal 5 lb 1.54 1.54 1.79 1.45 2.24 45
Rice, Long grain,
Uncle Ben's 10 Lb 6.30 7.24 6.61 9.15 12.73 102
Bread, white,
Holsum 16 oz 0.99 1.03 0.73 1.09 1.09 -26
Bread, whole wheat,
Hearthside 16 oz 1.19 0.99 1.03 1.32 1.31 -17
Cookies, Chips
Ahoy, Nabisco 16 oz 3.09 2.29 3.04 2.49 3.52 -26
Crackers, soda,
Keebler export 26 oz 3.53 3.53 2.39 2.58 4.62 -32
Corn flakes,
Kettoggs 18 oz 2.34 2.39 2.01 2.09 5.20 122
Chunk Light tuna,
Starkist. water/oit 6.5 oz 1.26 0.60 0.54 0.99 1.17 -57
Tomatoes, sauce,
Goya 16 oz 0.77 0.45 0.53 0.71 0.98 -42
Peas, green,
canned, Goya 16 oz 1.12 0.65 0.78 0.73 0.86 -42
Baby food, vegetable
chicken, Gerber 1 sm 0.47 0.25 0.42 0.27 0.36 -47
Shortening 3 Lb 4.46 2.79 3.42 2.21 3.13 -50
Peanut butter 18 oz 3.41 1.86 2.99 2.12 2.83 -45
Vegetable oil,
Wesson 2 qt 5.55 3.14 3.01 3.63 6.40 -46
Sugar, white,
Evercane 1 Lb 0.82 0.41 0.48 0.42 0.45 -50
continued
69
Table 6-2(c). Comparison of Supermarkets in the USVI and Selected Off-Island Stores by Food Groups (cont'd)
USVI Miami San Juan D.C. St. Maarten6 USVI/highest
Item description Unit1 av.2 av.3 av.4 av.5 lowest
GROCERY ITEMS PERCENT
Coffee
(inst Maxwell) 16 oz 18.02 10.36 0 16.01 14.52 -43
Cola, regular,
cans (Coca Cola) 6 pk 1.69 2.11 1.76 1.52 2.44 44
Group Average 3.33 2.45 1.86 2.87 3.76 -4
Indexed to USVI4 1.00 0.74 0.56 0.86 1.13
1 Unit prices were calculated based on BLS standard sizes with revisions as suggested by USVI focus group.
2 Average prices from six USVI supermarkets surveyed in August, 1989.
3 Two supermarkets in the Miami area were surveyed in November, 1989.
4 Three supermarkets in the San Juan area were surveyed in September, 1989.
5 Three supermarkets in the Washington, D.C. area were surveyed in August, 1989.
6 One supermarket in St. Maarten was surveyed in September, 1989.
7 The Miami, San Juan, and Washington, D.C. group averages were divided by the USVI group average to
yield the index value. The one St. Maarten store total was divided by the USVI average to yield the
index value.
TabLe 6-2(d). Comparison of Supermarkets in the USVI and Selected Off-Island Stores by Food Groups
USVI Miami San Juan D.C. St. Maarten6 USVI/highest
Item description Unit1 av.2 av.3 av.4 av.5 lowest
HEATS
Chuck, ground (70%)
Chuck roast
Rib roast
SirLoin steak
Chuck steak
T-bone steak
Bacon, sliced,
Oscar Mayer
Ham, rump, smoked
Ham, canned,
Hormel
Frankfurters,
chicken
Bologna, Oscar
Mayer
Chicken, whoLe,
fresh
Chicken, Legs,
fresh
Group Average meats
Indexed to USVI4
3 Lb
1.87
2.50
4.12
4.99
2.17
5.94
3.74
3.16
12.09
1 Lb 1.51
12 oz
2.68
1 tb 1.29
1 lb 1.61
3.67
1.00
1.72
2.19
2.69
3.99
1.78
4.99
2.52
1.49
8.03
1.47
2.07
0.74
0.43
PERCENT
-20
-50
60
39
-25
-31
-47
-70
-48
-28
-37
-43
-73
1.49
1.26
3.67
4.36
1.62
4.08
2.72
0.95
8.46
1.29
2.76
1.17
1.84
2.74
0.75
0
0
6.60
6.93
0
5.19
3.19
0
6.33
1.50
3.35
1.15
0.86
3.90
1.06
2.83
0.77
continued
71
Table 6-2(d). Comparison of Supermarkets in the USVI and Selected Off-Island Stores by Food Groups (cont'd)
1 Unit prices were calculated based on BLS standard sizes with revisions as suggested by USVI focus group.
2 Average prices from six USVI supermarkets surveyed in August, 1989.
3 Two supermarkets in the Miami area were surveyed in November, 1989.
4 Three supermarkets in the San Juan area were surveyed in September, 1989.
5 Three supermarkets in the Washington, D.C. area were surveyed in August, 1989.
6 One supermarket in St. Maarten was surveyed in September, 1989.
7 The Miami, San Juan, and Washington, D.C. group averages were divided by the USVI group average to
yield the index value. The one St. Maarten store total was divided by the USVI average to yield the
index value.
Table 6-2(e). Comparison of Supermarkets in the USVI and Selected Off-Island Stores by Food Groups
USVI Miami San Juan D.C. St. Maarten6 USVI/highest
Item description Unit1 av.2 av.3 av.4 av.5 lowest
PRODUCE PERCENT
Apples, red
delicious 1 Lb 0.93 0.39 0.89 0.86 0.82 -58
Bananas 1 Lb 0.57 0.30 0.39 0.50 0.50 -47
Oranges, navel 1 Lb 0.82 0.73 2.02 1.13 3.45 321
Grapefruit 1 tb 1.24 0.33 0.95 0.73 0.42 -73
Lemons 1 Lb 1.45 0.95 3.36 0.60 1.15 132
Peaches 1 Lb 1.21 0.89 1.18 0.91 0 -26
Potatoes, white 1 Lb 0.72 0.32 0.60 0.42 0.90 -56
Lettuce, iceberg 1 hd 1.36 0.84 1.35 0.85 1.35 -38
Tomatoes, field grown 1 Lb 1.39 0.79 1.08 0.83 0.90 -43
Cabbage 1 Ib 0.62 0.25 0.97 0.27 1.07 73
Carrots 1 Lb 0.88 0.32 0.69 0.47 0.60 -64
Celery 1 pk 1.47 0.84 1.62 0.92 1.61 -43
Onions, yellow 1 lb 0.55 0.31 0.60 0.41 0.55 -44
Peppers, sweet 1 lb 1.38 0.64 1.05 0.71 1.14 -54
Group Average produce 1.04 0.56 1.20 0.69 1.11 -46
Indexed to USV14 1.00 0.54 1.50 0.66 1.07 -46
All items together
Overall Average 2.67 1.90 1.97 2.16 2.90 -29
Indexed to USV14 1.00 0.71 0.74 0.81 1.08
continued
73
Table 6-2(e). Comparison of Supermarkets in the USVI and SeLected Off-Island Stores by Food Groups (cont'd)
1 Unit prices were calculated based on BLS standard sizes with revisions as suggested by USVI focus group.
2 Average prices from six USVI supermarkets surveyed in August, 1989.
3 Two supermarkets in the Miami area were surveyed in November, 1989.
4 Three supermarkets in the San Juan area were surveyed in September, 1989.
5 Three supermarkets in the Washington, D.C. area were surveyed in August, 1989.
6 One supermarket in St. Maarten was surveyed in September, 1989.
7 The Miami, San Juan, and Washington, D.C. group averages were divided by the USVI group average to
yield the index value. The one St. Maarten store total was divided by the USVI average to yield the
index value.
6.4 Food Prices Among Food Groups
For each of the five groups (dairy, frozen foods, grocery, meat, and
produce) an unweighted average unit price was calculated. To illustrate,
the average unit prices for the five dairy products in Washington, D.C.
shown in Table 6-4(a) were added together ($1.23 + 0.74 + 1.57 + 3.45 +
1.61 $8.70) and this total divided by 5 (the number of items) giving the
group average of $1.72. In addition, an unweighted overall average unit
price was calculated for all food items together.
Both the item average prices (prices of market basket items, 6.3) and
group averages were calculated with more than eight decimal places of
accuracy, but were rounded to two decimal places for printing. Thus a
group average calculated from the item average values shown in Table 6-4(a)
may differ slightly due to rounding.
To enable the accurate comparison of prices in the several geographic
areas, a price index based on USVI unit price group average was calculated.
Table 6-3 summarizes these group aoI overall averages and the corresponding
index values. For instance, the St. Maarten meats group average, $3.90,
was divided by the USVI meats group average, $3.67, giving an index value
of 1.06. This index value indicates that the St. Maarten group average was
1.06 times the USVI average, or 6 percent greater.
Similarly, the Washington, D.C. meats group average ($2.83) yielded
an index value of 0.77, based on the USVI meats group average of $3.67.
Therefore, the Washington, D.C. meats average price is 77 percent of the
USVI meats group average price.
Table 6-3 summarizes, for each area surveyed, all items in each of
the five food groups averaged together, an unweighted average unit price
and the price index based on the USVI average for that group. From this
table the USVI-Miami differences are greatest, followed closely by USVI-
Washington, DC, and USVI-San Juan differences.
Table 6-3.
Comparison of Supermarkets USVI and
Group Averages
Selected Off-Island Stores
Group Average' Washington San St.
Group Index USVI2 D.C.3 Miami4 Juan5 Maarten6
Dairy Group Average 1.94 1.72 1.62 1.57 2.08
Indexed to USVI7 1.00 0.89 0.83 0.81 1.07
Frozen Group Average 3.18 2.54 2.19 2.88 3.83
Indexed to USVI7 1.00 0.80 0.69 0.90 1.20
Grocery Group Average 3.33 2.87 2.45 2.63 3.76
Indexed to USVI7 1.00 0.86 0.74 0.79 1.13
Meats Group Average 3.67 2.83 2.62 2.74 3.90
Indexed to USVI7 1.00 0.77 0.72 0.75 1.06
Produce Group Average 1.04 0.69 0.56 1.20 1.11
Indexed to USVI7 1.00 0.66 0.54 1.15 1.07
Overall Average 2.67 2.16 1.90 2.21 2.90
Indexed to USVI7 1.00 0.81 0.71 0.83 1.08
1 Group averages for each food group were calculated using unweighted unit prices for surveyed stores in each
location.
2 Six supermarkets were surveyed in the USVI in August, 1989.
3 Three supermarkets were surveyed in the Washington, D.C. area in August, 1989.
4 Two supermarkets in the Miami area were surveyed in November, 1989.
5 Three San Juan area supermarkets were surveyed in September, 1989.
6 One supermarket in St. Maarten was surveyed in September, 1989.
7 Each group average was divided by the USVI group average to yield the index value.
From an examination of the St. Maarten dairy group and produce group
averages, the same index value, 1.07, results from two different averages
($2.08 and $1.11). Since the USVI group averages for these two groups were
also different ($1.94 and $1.04), the results are correct.
With the USVI averages used as the base (divisor) for the index
calculations, the USVI indexed values are all equal to 1.00.
This aggregate commodity price comparison reveals that USVI
supermarkets were significantly higher than state-side supermarkets in all
the food groups surveyed. As shown in Table 6-3, dairy group average was
11 percent higher in the USVI supermarkets than the highest price for this
food group off-island (Washington, D.C.). In each of the other commodity
food groups, the group average was consistently higher in the USVI: frozen
foods (9.4 percent); groceries (13.8 percent); meats (22.9 percent); and
produce (33.7 percent). Therefore, depending upon an individual consumer's
purchases, prices are from 9.4 percent to 33.7 percent higher for selected
food items than if purchased in the States.
From Table 6-3, food commodity prices in San Juan, Puerto Rico are
substantially lower than in the USVI except in the produce group. Overall,
USVI consumers pay 17.2 percent more than their Puerto Rican counterparts.
Food prices in the USVI, however were not the highest among the
island supermarkets surveyed. St. Maarten was 8.6 percent higher in
surveyed commodity food group aggregates than those of the USVI
supermarkets.
The primary line of distribution of food to the USVI involves three
major paths: direct shipping from both Miami and San Juan, or from Miami
via San Juan, to the USVI. With transhipment via San Juan, the average
prices might be expected to increase. However, food items from Miami to
the USVI do not enter and then leave the San Juan market, but are only
transhipped via San Juan. Therefore the prices of supermarket items in
the primary line of distribution between Miami and the USVI are not
affected by those in San Juan supermarkets.
Table 6-3 also highlights the primary line of food commodity
distribution serving the U.S. Virgin Islands. The overall average of the
aggregated five food groups for the USVI is substantially higher than C
either Miami or San Juan (28.8 percent and 17.2 percent, respectively).
From another perspective: Miami, the point of origin, is 29 percent less
expensive than the USVI; at the point of transhipment, San Juan is 17
percent less expensive than the USVI. Not all price differences can be
equated to distribution factors but these relative prices reflect generally
accepted views that the further the destination is from point of origin,
the more costly the commodities to be purchased.
6.5 Ocean Freight and Inland Distribution
The compilation of ocean freight rate data on specific food items in
the Virgin Islands presents a difficult task. These kinds of data do not
exist on invoices and shipping documents. It was not possible to develop
this specific freight rate analysis.
The impact of ocean freight charges on individual food products
varies from item to item depending on the weight, size, and price of each
food product. In reality, the nature of the food item determines its ocean
freight charges and its subsequent retail price. The weight of food items
does not, however, drastically affect different food items. But
significantly higher ocean freight rates pertain to food items requiring
controlled temperatures or refrigeration as opposed to items moving in dry
non-refrigerated containers.
Other supplementary charges such as documentation, landing fees, and
handling are also included in determining ocean freight rates.
Documentation per shipment has an average cost of $35. Landing fees and
handling charges vary by container size as indicated in Table 6-4.
Table 6-4. Landing Fees and Handling Charges
Container Size
20' 40' 45'
Landing $55 $100 $100
Handling 60 100 100
During the 1970's, a period in which the U.S. economy experienced
rapid inflation freight, costs in the maritime industry also spiraled
upwards and ocean freight rates followed this upward trend. At the same
time the price of shipping goods by rail in the U.S. increased by 115.8
percent. In view of these inflation rates and the general price trends in
that decade, the increases in ocean freight to the Virgin Islands were not,
prima facie, excessive.
While ocean freight rate fluctuation responds not only to
inflationary trends, supply and demand, and what the traffic will bear,
carriers are not free to change rates at will. The Interstate Commerce
Commission requires that a carrier file any planned rate increase 30 to 60
days before the effective date and since these planned changes are always
public information, competitors are, in effect, notified well in advance.
Plans to lower rates have more stringent time requirements. The Federal
Maritime Commission which is responsible for shipping between Puerto Rico
and the Virgin Islands administers the provisions of the Jones Act.
An attempt to record a two-year history of freight rates between
South Florida and the Virgin Islands was a somewhat more difficult task,
but with tedious research average rates as of June, 1988 and 1989 (Appendix
VII) were derived.
Figures 3 and 4 indicate rate trends over the past five years for
both refrigerated and dry groceries utilizing both 20-foot and 40-foot
containers. Ocean freight rates between 1984 and 1987 were generally
stable for dry and refrigerated groceries. However, unexpected competition
caused freight rates to decline drastically in early 1988. A major shipper
entered the market with direct shipment from South Florida in late 1987 and
in early 1988 two key employees from Tropical Shipping formed their own
freight shipping company.
80
Fig. 3: Dry Groceries Net Ocean Rates for (a) 20-foot
Containers and (b) 40-foot Containers
$US
100-
1 400C1------------------------------------------ ----- **********
1 60 0 --* **** ** ...........---- .......... ..... ............... .. .... .........-
1400 ... ...... ...... S................ ........... .. .. ......... .. ...............
1200 ...*********-* ........--------.:-- -- -- --
1 0 00 -*------ --- --- *-- *- -***** **-- *-- -- *-*-- -- *-- **- * --- --- *-- *-
1 0 0 .......................................... ... ............ ....... ........
8 0 0 ... ............ -------. . .. :. ---- ---: --- *----- ... -..*.. *. *.*..*. **** *.
0 ---------1---4----------:--------------l--- -----
1984 1985 1986 1987 1988 1989
VSS (b)
2200
22000-----------------------------------------------|
2 0 0 0 "-* .......... ...:............... :.............. : .. .......... ... ............ .
1 2800 -******-*-*-*-->-*-*****---***:*-------********------** --'---- y^^r-.-....
1 e 0 0 .......... ... .. .. . .......... : ............ ... .......... .... . .............
1 40 0 ..... ... .. ... : ........... ... : ....... ..............
1 2 0 0 .............. ............... .... ........... ............... .* ..............
1 000 ............... ............... .............................. -------------- ..............*********
8 0 0 ............... ............... ............... ............................ ....
600 ..............------. -- ............ ...!............................... ****** --- ---..............---
2 0 0 ............... -- ............... .- ............... ..... ......... ..... **** *.........* *
1 984 1985 1986 1987 1 988 1989
Fig. 4: Refrigerated Groceries Rates for (a) 20-foot
Containers and (b) 40-foot Containers
$Us (a)
-- Chill
Froze
1984
19
n
(b)
1985
1986
1987
1988
89
189
A simple computation made by dividing transportation expenses by the
cost of the food item permits a consideration of transportation charges as
$us
,-t.NoII I
4000
3500
3000
2500
2000
1500
1000
500
II.
.................. ... .... .. .... ...... ....... ....., ....
................. .............. . . ........
. .............. ............... ............... --............... ...............
. .
*-- -- - I- - -
1i
a percent of price. If the numerator remains constant, a large denominator
will cause transportation charges to be a small percentage of costs to the
consumer while a small denominator (a low-cost product) will cause
transportation cost to be a much higher percentage of the costs.
Inland freight costs, comparable on the two islands, are, by and
large, an insignificant portion of the total distribution costs and,
therefore, a small percentage of the total cost of doing business. This
cost should be a relatively small portion of those costs passed on to the
consumer.
7. EXPLANATION
7.1 Introduction
This chapter offers some explanations or answers in support of the
four key questions explored to meet the objectives of this study: (a) the
nature of the cost structure of the specific type and size of food
retailers in the USVI; (b) the existing retail prices for selected food
products; (c) the nature of the competitive structure in the retail food
industry; and (d) the opinions and perceptions of selected food industry
business leaders and other experts relative to the cost/price relations of
food in the USVI. (see Chapter 2, Terms of Reference).
As core explanatory factors of the price level in the USVI, six
points are worthy of consideration: (a) the market structure, (b) distance
from sourcing point, (c) the "cost" of doing business in the USVI (d)
structural characteristics, (e) social impediments, and (f) profitability.
7.2 Market Structure
In the early 1960's a large variety of smaller retail food outlets
existed in the USVI and with factor costs (labor, rent, etc.) lower than
today, the magnitude and variety of food outlets tended to permit a lower
price system in the USVI. However, in the 1970's, as the USVI economy
expanded and became more fully integrated with the market modes of the USA,
the food industry consolidated and responded to consumer demand for more
quality and more timely products. The industry's response to this consumer
demand necessitated some cost increases which were then passed on to
consumers in higher food prices. In a sense, therefore, the consolidation
of the food industry shifted the market structure from a more competitive
system based on many food outlets, to a system and structure which today is
oligopolistic.
An oligopolistic market structure is conventionally defined, as noted
earlier, as an industry or market structure characterized by only a few
firms selling either differentiated or undifferentiated products. In the
USVI the food industry is dominated by two firms: Pueblo and Grand Union.
To accurately determine their market share was not possible, but from
observations, apparently these two supermarkets implicitly set the explicit
prices that the other food outlets follow or adopt. While this
determination of market share is not scientific, Labor Market Review (July,
1989: 5), notes that among the top 200 largest private employers in the
USVI, Pueblo was ranked number 5 and Grand Union was ranked number 17.
Plaza Extra Supermarket was ranked number 53 and Sunshine and Prime Foods
were both ranked 62. Employment need not connote market share, but it does
give some indication in an industry such as the labor-intensive food
industry.
Absolutely no evidence of collusion was found. Nor did any business
leader admit to price setting or to even recognizing the price setting of
their competitors. But, in an indirect way, they all follow the perceived
leaders and react when expediency so dictates in the setting of food
prices. For example, if store A has a sale on item A on Wednesday,
invariably store B will have a sale on the same item or some named item of
a similar or closely related brand.
A few characteristics of the food industry such as large quantity
purchase, mutual dependence, price-rigidity, and nonprice competition in
the USVI permit us to characterize the market as oligopolistic. The two
dominant firms benefit from their ability to purchase goods in large
quantities. Theoretically, the lower the unit cost of items, the lower the
expected retail price. But some constraints do not permit this
straightforward line between lower unit cost and price.
Some level of mutual dependence exists between the two major
supermarkets and the other food outlets in the USVI. The situation in
price setting is akin to a game of chess. The leader or the person to make
the first move sets a price (makes a move) based on the possible reaction
of the opponent (competitor).
Price rigidity and nonprice competition is observable from the
marginal differences in prices from one store to another. This marginal
insignificance was most evident among the larger supermarkets. What was
noticeable was the level of nonprice competition such as advertising and
customer service. Within recent weeks, store coupons have begun to play a
central part in attracting a volume of persons to both supermarket chain
stores on certain days. These nonprice strategies are designed to retain,
and to expand, market share.
In sum, the market structure in the USVI today is an oligopolistic
structure. On St. Thomas, Pueblo and Grand Union dominate the system,
while all of the others appear to fall into the "follower" category. On
St. Croix, Pueblo and Grand Union also dominate, but here Plaza Extra and
Sunshine combined were seen as a distinct alternative to the two giants.
Hurricane Hugo has caused changes in the retail food structure,
particularly on St. Croix where a number of outlets, large and small, have
been closed. Given the capital structure of Pueblo and Grand Union, Plaza
Extra and Sunshine were not in the same competitive league. Prices are
still implicitly set based on what Pueblo and Grand Union do, even though
the proprietors of Plaza and Sunshine insisted that they do not consider
competitors' prices when they set prices. They do not consider prices
explicitly, but advertising is an implicit, nonprice mechanism of price
setting.
Paradoxically, while a consolidation in the food industry has
developed, an explosion of food outlets of specialities and convenience
stores has also occurred. The pricing structure of these outlets suggests
that with an increased number there should be a greater degree of
competition. But here a paradox emerges. These stores are too small to
impact on the volume of the large stores. Furthermore, purchasing at a
speciality or convenience store has its price. Consumers pay more for the
named brand, the exclusive product, the time of day, and the convenience of
the location.
7.3 Distance From Sourcing Point
From Figure 2, Average Food Group Prices in USVI and Four Off-Island
Locations, the picture of the importance of sourcing to price is graphic.
For this comparison, supermarkets comparable to Pueblo, Grand Union, Plaza
Extra and Sunshine were selected. The implicit question asked was: If a
food industry operates in a given locale with certain characteristics, do
differences in prices for named items occur and if so, why?
A partial answer is evident from Figure 2. Miami, which is the
principal immediate source for much of the food in the USVI, San Juan, and
St. Maarten, has the lowest levels of food prices. The graph indicates
that a basket of goods which costs $70.99 in Miami will cost $83.00 in San
Juan; $100.00 in the USVI; and $107.99 in St. Maarten. In Washington, D.C.
the same basket would cost $81.00.
In the USVI, San Juan, and St. Maarten, the key to the differential
in prices appears to be the shipment of food to these locations.
Central to this need for overseas shipment is the return leg of the
barges and trailers. Barges and trailers come to the USVI filled with
goods. They return empty, for the most part, to their source. The entry
to the USVI is cost-effective; the exit, costly. At least some of the cost
for these non-useful out-bound trailers and barges are passed on to the
businesses and subsequently to the consumers in higher prices.
The question of sourcing is applicable to all supermarkets. But some
of the supermarkets mitigate this cost impact by having their own
warehouses--for example--Pueblo in Puerto Rico. Also, some engage in
forward buying as opposed to spot buying. Forward buying occurs when a
merchant orders, and pays, for merchandise at current prices for future
delivery, sometimes as much as several months later, in anticipation of
rising prices. Plaza Extra manager/owner informed us in the focus group
interview that he tries to do as much forward buying as his capital will
allow; in turn he passes on to the consumers the resulting savings. Local
businesses are evidently not always able to utilize long-term forward
Average Food Group Prices in USVI
and Four Off-Island Locations
0.00,'
Miami SanJuan
USVI
StMrtn WashDC
Fig.
Sus
3.00i
2.50
2.00
1.50
1.00
0.50
buying options. Location in mainland USA might permit such options with
fewer impediments.
7.4 The "Cost" of Doing Business in the USVI
All businesses have normal costs of doing business in a given locale.
Highlighted here are those which are above and beyond the "normal" costs or
the added elements that businesses experience when they opt to do business
in the USVI.
These explanations result from observation, analysis and synthesis.
Observations come from a review and assessment by the team of business
operations in the locales compared to the USVI. Tangentially, the distance
from source was included in this review and assessment.
Much of the food which enters the USVI food markets has to be
refrigerated. Ocean freight costs are significantly affected by the costs
associated with refrigeration. Foods transported in controlled
refrigerated units have a significant cost differential from those food
items transported in dry, non-refrigerated units. Given the propensity of
the people of the USVI for commodities requiring refrigeration, a premium
is added to the cost of doing business in the USVI, a premium not as
readily found to the same extent in other locales.
The following synthesis is a result of the discussions with the
business leaders and focus group members of the foods industry in the USVI
and of Pueblo in Miami.
Collectively, the business leaders believe that the gross receipts
tax, the excise tax on some types of food items, the USVI local minimum
wage which has been higher than the federal minimum of the USA, and the
preponderance of paperwork needed for U.S. customs and local government
regulations have forced businesses to employ more labor services than would
be necessary to operate if in the USA or Puerto Rico. These added expenses
have forced merchants to meet such local cost additions by passing some of
the added cost burden on to the consumers. The discussions further
indicated that these cost differentials are not so often encountered in
other locales. For example, no taxes at any level apply to retail market
food sales in other jurisdictions.
7.5 Structural Characteristics
Certain structural characteristics of the USVI economy and attendant
features must also be accommodated such as the frequency of interruption of
basic infrastructural services, in particular, electricity and telephone
services. The frequent interruptions, brown-outs, low voltages, and so on,
and the inadequate or disrupted telephone services (all prt lugo) have all
added to costs. Businesses are forced to do large volumes uf business via
telephone. This mode of doing business adds to the normal costs of the
firms; to accommodate some of their costs, the business leaders agreed (in
meetings with members of the team) that they must pass some of the
increased costs on to the consumers in terms of higher prices, if they are
to maintain a reasonable level of profits--a level which the team was told
was "low," but which could not be demonstrated conclusively.
The business leaders concurred that, while they do not pass on all of
these additional costs to their customers, the structural rigidities and
inadequacies of doing business in the USVI force them to constantly
reappraise their cost positions and, in turn, their pricing position. This
reappraisal is independent of the accommodation of pricing changes that
occur when retail food market sources change prices.
One of the main issues discussed was the need for stand-by
generators. Condensers burn out more than is the norm in the food
industry. In fact, one focus group member said stand-by generators are not
needed in the USA since the local power authority is more reliable than in
the USVI. Therefore, abnormally high levels of spoilage of foods from
unreliable power sources add a significant factor to the costs of foods.
Some of the merchants felt too that local technical help is not
always available to repair generators or fix condensers. The importation
of skilled personnel, normally at premium prices, is thus required. This
expense also increases the cost of doing business, and, in turn, these
added costs are reflected in food prices.
7.6 Social Impediments
In the category of social impediments, one factor-- namely, theft--
sometimes called shrinkage or pilferage, was often mentioned. Universally,
the business leaders attribute an increase above the ordinary cost of doing
business in the USVI of about four to six percent from the effects of
people misusing privileges of trust when they enter or work in retail food
markets.
The view persists among some that many persons "open tins of food
(peanuts, for example), sample items (like fruits, biscuits, for example),
and then replace the items on the shelves". Since these items are no
longer saleable under normal considerations, this is a cost to the business
and ultimately to the consumer. No business executive openly accused any
employees of stealing. Moreover, no hard evidence was obtained to-indicate
that pilferage was higher in the USVI than elsewhere.
7.7 Profit Margin
Net profit, in retail food outlets in the USVI, because of the varied
factors inherent in its calculation, cannot be stated as a 'given'. The
inability of the team to require a submission of financial records
handicapped the team in its efforts to analyze costs. Only these financial
records which include internal documents such as invoice records, product
pricing records; and cost allocation procedures would enable a
determination of the extent, if any, of price gouging. Those records were
not publicly available. These limitations imposed on this study by the
unavailability of empirical data do not permit a conclusive analysis by the
team of true 'net profit'.
However, management of the chain supermarkets in the Territory both
referred to the one-percent net profit used as a national norm on a semi-
annual basis by the National Grocers Association for the goal of the bottom
line for a successful operation. Since neither chain appears to be leaving
the Territory, nor to be permanently closing any of their outlets, the
assumption may be safely made that, at the very least, this goal is
attained.
These six explanatory factors, namely, market structure, distance
from sourcing, "cost" of doing business in the USVI, structural
characteristics of the USVI economy, social impediments in the economy, and
profit margin, must all be weighed to arrive at some conclusion about the
significantly higher price levels in the USVI as compared to economic
locales similarly circumstanced.
7.8 Summary
The U.S. Virgin Islands food price study team has surveyed, for
comparison, current food prices, general characteristics, features, and
services of food markets within the Territory, as well as related those
prices to selected off-island areas. This comparative survey permitted a
broad perspective on food prices in the USVI as stacked up against food
prices elsewhere. Recognition of the common 'rumor' that prices are higher
in the USVI than other American jurisdictions must also include the
knowledge that much of the 'rumor' about high food prices is non-
scientific. Application of empirical tests puts this perception in proper
perspective.
Food market pricing has been determined to be a function of a series
of inter-related factors: Product Cost (invoice prices); Promotion Fees
(advertising, display and discount promotion); Place/Distribution Costs
(sea, air, and land transport, wholesale brokerage fees); Politics (local
and national legislative taxes, fees, duties and tariffs); Positioning
(market/competitive forces); Performance (operational cost, property, plant
and equipment, labor, utilities); and Profitability (as determined by
product group/department and/or store total operational objectives).
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