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Table 6 summarizes the association between changes in retailers' margins and changes in the prices which retailers paid for bread. For example, in cities where wholesale prices paid rose 2.0 cents or more per pound, retailers not only passed on the full amount of the increase, but added an additional 0.9 cent to their own margins.

At

the other extreme, in the four cities where there were no wholesale price increases, retailers did not change their margins.

TABLE 6.-Changes in prices paid and gross margins of large grocery chains, wholesale baker brands of white bread, January-August 1966

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Moreover, as shown in table 7, the increase in retailers' gross profit margins was not related to the size of margins at the beginning of the period. Rather, retailers were just as apt to pass on increases in markets where they already had high gross profit margins as in those where the reverse was true. The main determinant of the size of the margin increase was the magnitude of the increase in wholesale prices. This is in sharp contrast to the experience of wholesale bakers, where there was an inverse relation between increases in wholesale baker prices and the level of their prices in January.

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TABLE 7.-Change in gross profit margins for white baker brand bread, 9 large grocery chains, January-August 1966, 25 cities

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Prices of bread sold under the private labels of the largest national grocery chains increased much less than the prices of wholesale baker brands sold by these chains. From January 1 to August 15, 1966, private label bread prices of chains in 17 of 25 cities where comparisons

could be made 13 increased either not at all or by amounts smaller than those of wholesale baker brands (table 8). In five of the remaining eight cities, private label prices and wholesale baker brand prices increased by the same amounts, and in only three cities were the private label price increases greater than the wholesale baker brand increases. The average private label price increase in the 25 cities was 0.8 cent, slightly less than half as great as the average wholesale baker brand price increase. In only two cities did the average private label price increase as much as 2 cents.

TABLE 8.-Private label and baker brand retail price increases of large chains, January-August 1966

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1 Includes 2 cities in which there were no changes in either private label or baker brand prices. Source: Federal Trade Commission.

Private label price increases of different chains tended to occur independently of each other as well as independently of the price increases of wholesale baker brands. This was particularly evident for the period January through June. Since July, the increased frequency of price increases of both wholesale baker brands and private labels has made it more difficult to eliminate the possibility of associated increases.

The lower increase in private label prices is, in part, a result of the period of time for which price data were collected and the tendency of private label price increases to follow wholesale baker price increases. In about two-thirds of the cities, the wholesale baker brand price increases occurred after July 15. By August 15, the end of the period for which data were collected, private label prices may not have had time to adjust fully to the wholesale baker brand increases.

Average private label prices in the cities surveyed were fairly equal. The averages for most cities fell within 1.5 cents of the average for all cities. The price increases from January to August 1966 affected this equality very little. Of all of the cities surveyed, only the large chains in Los Angeles and San Francisco reported significantly higher private label prices. The average private label prices in these cities were about 6 cents higher than the average for all cities.

The relative equality of private label prices among the cities surveyed contrasts with the relative disparity of average wholesale baker brand prices. Table 9 shows average wholesale baker brand

Adequate data were not available to make comparisons in two cities listed in app. B.

*Including two cities where there were no changes in either private label prices or retail prices of wholesale baker brands.

prices and private label prices in 23 cities in which data are available. The cities are arrayed and grouped by level of wholesale baker brand prices. The difference between the average baker brand price of the lowest and highest groups was over 8 cents, whereas in the case of the private label brands prices differed by only 3 cents between the high and low groups.

TABLE 9.-Average retail prices charged by large grocery chains for wholesale baker brands and private labels in 23 large cities

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Cities were arranged in declining order by the average wholesale baker brand price charged by chains on Aug. 15, 1966, and divided into 4 groups of equal numbers of cities except for the bottom group.

22 cities for which the change in price over time of wholesale baker brands and private labels were included in table 8 were not included in this table because of differences in loaf sizes of baker brands and private labels in these cities. This made comparisons of price levels unreliable.

Source: Federal Trade Commission.

SUMMARY OF PRICE INCREASES

Figure 8 summarizes changes between January and August in the retail price of baker brand white bread by four groups of cities, and further subdivides these changes by the amount attributable to increased ingredient costs, baker margins and retailer margins." For the 25 cities studied by the Commission, prices increased an average of 1.7 cents per pound. Increased ingredient costs accounted for 0.6 cent; increased baker margins, 0.7 cent; and increased retailer margins, 0.4 cent.

There was considerable variation among cities, however. In the four cities where wholesaler prices increased most-an average of 2.7 cents-retailers passed on this increase and added an additional 1 cent.

In a second group of nine cities, wholesale bakers raised prices 1.5 cents and retailers added another 0.5 cent. In the third group, the respective amounts were 1.1 cents and 0.3 cent. In the four cities where wholesalers did not raise prices, retailers' prices were unchanged.

Ingredient costs to bakers rose by 0.6 cent over the period. Hence, bakers in the first group of cities increased their prices more than quadruple ingredient costs, and retailers added to their margins as well. As a result, in these cities retail prices rose six times as rapidly as ingredient costs. At the other extreme, in four cities wholesale bakers absorbed the full amount of the increased ingredient costs; retailers did not increase prices in these cities.

Whereas many wholesale bakers used the occasion of increased flour costs in June to increase their prices, we have seen that the

18 The estimates in this figure are based on information as to prices paid and charged by large food chains.

Figure 8

DISTRIBUTION OF RETAIL BREAD PRICE INCREASES TO INGREDIENT COST, WHOLESALE BAKERS' MARGIN, AND RETAILERS' MARGIN,

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Note: Price increases shown are as reported by 9 leading retail food chains.
Source: Federal Trade Commission.

greatest increase occurred in markets where baker margins were abnormally low.18 In some cities at least, past price wars had pushed prices to unusually low levels. Where this was true, recent increases of baker prices may be considered as involving a "catching up" process.

This is not to imply that wholesale bread price differences among cities are due solely to differences in profitability of bakers. Bakers in different cities frequently have different labor and other costs. Bakers on the west coast generally have higher costs, especially distribution costs, than bakers in other parts of the country. See "Organization and Competition in the Milling and Baking Industries," Technical Study No. 5, National Commission on Food Marketing, June 1966, p. 105. The Commission is developing information regarding the impact of changes of noningredient costs in its in-depth studies.

The price markup behavior of food retailers has tended to pyramid the price increases of wholesale bakers. The increases in retail margins depended largely on the size of wholesale price increases, irrespective of the size of the margins already enjoyed by the retailers. Although this resulted largely because of the retailers' practice of charging a fixed markup, retailers also increased their percentage markups slightly. Pyramiding by retailers accounted for about onefourth of the increase in baker brand bread prices. The effects on consumer prices of pyramiding are illustrated by the extreme cases. In four cities where bakers did not raise prices to retailers, retailers left their prices unchanged. In four cities where bakers increased prices by 2.7 cents a loaf, retailers passed on the increase and added an additional 1 cent. In these markets retailer pyramiding alone added 4 percent to consumer bread prices.

The preceding discussion related entirely to wholesale baker brands of white bread. All large chains sell bread under their own brand as well. Analysis indicates that prices of retailer brand bread have risen less rapidly than prices of baker brand bread. This may reflect, in part, the tendency of price increases for retailer brands to lag those of wholesale baker brands. But if prices of retailers' brands do not rise in some markets, they may well erode partially recent increases in the prices of baker brand bread, particularly where wide price gaps have developed between baker brands and retailer brands.

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