and the premiums they obtained for stamps. As more and more of the industry adopted stamps and competing forms of promotion, however, it was no longer possible for retailers as a whole to obtain additional volume by using trading stamp_promotion. As a result, the cost of the stamps represented an additional cost of retailing, and prices rose. All too often consumers buying food also were required, in effect, to make tie-in purchases of premiums being offered for trading stamps.

Increased promotional costs pushed costs and prices of chains above those of smaller retailers. On the basis of in-depth studies of costs and prices in Portland, Maine, and Topeka, Kans., the Food Commission concluded:

In the two markets, small local chains and affiliated independents had lower retail prices, lower margins, and lower operating expenses than large chains. Only in procurement costs did the larger chains have an advantage.

Increased gross profit margins of chains have an important impact on the size of consumer expenditures in food stores. An increase of even 1 percentage point in the gross margins of food retailers involves $600 million. Hence, if all food retailers had increased their margins by as much since 1955 as did the largest chains-about 5 percentage points-it would have involved $3 billion." This $3 billion would have been paid for by consumers in higher prices or by food store suppliers in lower prices, or would have been shared by the two groups.

PROFIT TRENDS

The trend in profit performance for the period 1948 to 1965 of the three branches of the food business with which we are concerned in this study is shown in table 1. The data on profits after taxes as a percent of net worth are given for bakeries, dairies, and leading food manufacturers. The table also contains separate profit data for the four largest and other large companies in the bakery and dairy industries.

There has been a steady downward trend in bakery profits over the past decade, with the drop most pronounced for the "other large" group. The top four earned 21.2 percent after taxes on net worth in 1948, averaged between 11 and 14 percent in the 1950's but by 1965 fell to 7.5 percent. The other large bakeries did worse, declining to below 10 percent return in every year since 1950 and consistently below 5 percent in the 1960's. Actual losses were registered in the 3 years 1962-64 and only a 2-percent return was secured in 1965. Large dairies, particularly the big four, have fared better over the years than the bakeries. The four largest dairies in 1965 earned 12.4 percent after taxes on net worth, a rate of return exceeded only once since 1950. Because the overall profits of large dairies are influenced heavily by their nondairy operations, they probably overstate the rate of return earned on the fluid milk portion of their business. The other large dairies earned 9.4 percent in 1965-about the average for the 1960's, but below the 11-percent rate earned in the late 1950's. Leading food chains in 1965 earned 12.1 percent after taxes, which happened to be the same profit rate for leading food manufacturers.

Ibid., p. 77.

Ibid., p. 79.

In 1965 total food store sales came to $67 billion.

8

7 Preliminary findings of our in-depth studies show that even leading dairies are earning very low rates of return on their fluid milk operations in some cities.

The cutoff point in the definition of leading food chains is annual sales exceeding $100 million; for food manufacturers, $100 million or more of assets.

The earning rates of the leading food chains as a group have averaged 11.5 percent during the 1960's, as compared with 13.1 percent during the 1950's. Since 1960 profit rates of large wholesale bakers were well below those of either large food chains or large food manufacturing corporations as a group. Although large dairy processors enjoyed somewhat higher profit rates than did bakers, they very probably earned a lower rate of return on the fluid milk portion of their business than the average rate of return of large chains and food manufacturing corporations.

TABLE 1.-Profits after taxes as a percent of net worth, large bakeries, dairies, food chains, and food manufacturing companies, 1948-65

All food chains with annual sales exceeding $100,000,000.

All food manufacturing companies with assets of $100,000,000 or more.

Sources: Federal Trade Commission, "Rates of Return for Identical Companies in Selected Manufacturing Industries," 1940-61 and 1955-64; leading food chains, National Commission on Food Marketing, "Organization and Competition in Food Marketing," June 1966, pp. 292-293; food manufacturing companies, "Moody's Industrial Manual."

MARKET CHARACTERISTICS

There are a number of major factors in the organizational structure of the markets for bread and milk which influence their price behavior. For both products there are three levels to be considered: the farm, the manufacturer, and the retailer. The relative importance of cost elements at these distribution levels varies significantly between the two products. In the case of bread, the key ingredient, flour, is intermediate between the farmer's product and the baker's product, and the latter is turned out in a variety of sizes, shapes, and types. For milk, the process is in some ways simpler, but in other ways more complex. Raw milk is sold to processors who, in turn, may manufacture several different categories of dairy products: fluid milk, butter, cheese, and so forth. While farm prices of wheat are subject to Government agricultural controls, the relationship between such influences and the ultimate price of bread is more remote than the

relationship between the farmer's price of raw milk and the price the housewife pays for bottled milk at the supermarket.

Industrially, three major groups influence the operations of the respective markets once the raw product has left the farmer's hands: the bakeries (manufacturers), the dairies (processors) and the retailers. The leading bread bakeries serving most local markets are nationally organized. The same may be said for the leading dairies and the supermarket chains, with certain variations in each case in regional influence.

Nevertheless, the markets for both bread and milk are essentially local in character and considerable diversity is found in price behavior from market to market. In the case of both commodities there are processing plants spread throughout the country serving local markets. Consumers also, of course, buy both products at the local level. The ingredients of the two products differ. Wheat and flour are sold on a national basis. Milk is sold on a local basis. In addition, the conditions of supply for milk are not uniform in the various regional markets and there is an overlay of governmental controls that affects the prices received by farmers; and in the so-called "controlled States" the prices of processors and retailers also are regulated."

In view of the local character of the milk and bread industries, overall national averages obscure what is happening in individual markets. The remainder of this report, therefore, will analyze price developments in various metropolitan areas.

The following table from the National Commission on Food Marketing technical study of "Organization and Competition in the Dairy Industry" (p. 43), shows the status of regulatory controls in the various States:

III. RECENT CHANGES IN THE PRICE OF BREAD

GEOGRAPHIC PATTERN OF RETAIL PRICES

The general price increase in bread, as noted earlier (fig. 1), got underway around the first of the year. Prices increased steadily until July when they advanced sharply following wheat price increases in June. Even prior to the first of the year, however, there were bread price increases in certain parts of the country (figs. 5A-5D). For example, in Kansas City, Dallas, Houston, Philadelphia, and Atlanta, store prices increased in the latter months of 1965. In January and February 1966 the increases caught hold in Chicago, Minneapolis, St. Louis, and Cleveland (and had advanced further in Kansas City) among Midwest cities; in Seattle on the west coast; and Boston and Baltimore in the East. These early increases were modest, and some merely represented rebounds from earlier declines. It was not until midsummer that price rises became general enough to cause the average national price to increase sharply. In August, increases were_registered in Chicago, Minneapolis, Milwaukee, Kansas City, St. Louis, Cleveland, Indianapolis, Detroit, Denver (which had caught up with the rising trend in April), Houston, New York, Boston, Philadelphia, Atlanta, Los Angeles, San Francisco, and Seattle. On the other hand, in a few markets retail bread prices declined in August, notably in Pittsburgh and Portland (where the decline had been underway since May). In Honolulu retail bread prices remained fairly stable throughout 1965-66 at levels considerably below those that prevailed early in 1964.

The extent of recent price increases in 39 cities is shown in figure 6. Between August 1965 and August 1966 the price of 1 pound of white bread rose an average of 10.1 percent. This represented an average increase of 2.1 cents per loaf-from 20.7 to 22.8 cents.

The national average price obscures the diverse movements occurring in various cities. In Milwaukee, for example, prices rose by 22.5 percent, whereas in Los Angeles they declined by 3.7 percent (fig. 6).

Although there are exceptions, the greatest price increases occurred in cities with the lowest prices in the beginning of the period. Milwaukee is a prominent example. In August 1965 its prices were the lowest of the 39 cities shown in figure 6. It also experienced one of the greatest increases over the following 12 months. On the other hand, Los Angeles, which had the highest prices in the beginning of the period, had the greatest decreases.

1 This discussion is based on an analysis of Bureau of Labor Statistics (BLS) city average bread prices. The city averages reflect prices charged in all classes of food stores: corporate chains, and small as well as large independents. Prices of both wholesale baker brands and private labels of retailers are included. Later in this section there is an analysis of price data collected independently by the Federal Trade Commission from the largest national corporate food chains and the largest wholesale bakers. Because the data reflect different sources some details show minor variations.