What’s the Matter With Retail? Hidden Forces Behind Rising Prices

Let’s just say I pay attention to all things customer-related. In a store, I am likely to wonder about product placement. End caps have been known to draw my ire when I can’t see around them to confidently stroll into the main aisle. I am in perpetual amazement over sales, especially loss leaders. Can my occasional interest in a new tube of toothpaste really drive the price of steak or vice versa?

Beginning in the later part of the pandemic, I watched, perplexed by pricing decisions that seemed to be driven by everyone’s knowledge that the federal government had put trillions of dollars into people’s pockets to offset the most egregious impacts of 15% unemployment. It felt like some retailers saw it as a solemn duty to capture as much of that money as possible and as quickly as possible, and it presented itself in weird ways.

EV Buying Experience

I tried to buy an electric car. Why not? If you know me, you know I wrote a book about sustainability, and I’ve been champing at the bit to do my part to bring down atmospheric CO2.

Understand, I am under no illusions and realize, and I hope you do too, that reducing the threat of climate change will take active efforts, not just to reduce emissions but also to reabsorb much of the carbon that we extract from deep underground every year and let into the air.

Forget cows and methane; they just recirculate atmospheric carbon. Our cars liberate carbon that’s been underground for 300 million years. I could go on, but this is about customers and corporate relationships with them.

My point about the car is that all the dealers I dealt with across multiple brands wanted thousands of dollars above the manufacturer’s suggested retail price (MSRP). One dealer demanded $20,000 above the price of a roughly $50,000 car. Another demanded more money after I signed all the papers. For a while, telling dealers off in the most courteous ways became a hobby until I realized there are so many of them, and life is short.

From a technical perspective, those additional costs add no value to the product or the economy. The excess payment adds no value to the car and evaporates when you drive the car off the lot. Excess payments, what David Ricardo called rents, simply drive inflation.

Cars are interesting, but grocery retailers are my focus.

Grocery Inflation Observations

We recently rented a beach house and had to buy provisions, but which store would be our home base? Like most Americans, even at home, I saw grocery inflation, and the beach wasn’t so far away that I had to get up to speed on new vendors. They were the same vendors I had at home, except for the one I usually patronize.

I observed that the bigger vendors, let’s say, were doing their bit to drive inflation. A tub of yogurt that I use was one or two dollars more at the big store. It’s the same brand but at a very different price. The same is true for almost everything. One store seemed to price everything beginning with a five, forgetting that lower numbers exist.

Even at this late date, it’s entirely possible that supply chain issues are to blame for the inflation we see. But not for everything. The fact that prices could be higher and different from one retailer to the next for the same product suggests that the supply chain isn’t the factor. But before you reflexively blame greed, you might first want to consider competition as the key.

Retail Oligopoly Problem

For years, really decades, retailers have competed on price as if nothing else mattered. With 2% or less inflation and many goods imported from places with deficient wage structures, it was easy to maintain price levels. Many markets turned into oligopolies, with a small number of vendors controlling their markets and thus prices.

This situation doesn’t exactly apply to food prices because food is more locally grown, though if you like apples in March, they probably came from South America. You’ve heard of food deserts, places with so few retailers that the ones left standing have real pricing power, and they use it. That’s a key point.

Inflation and the Middleman

So, when I look at inflation today, what I see isn’t inflation from the producer; it’s coming from the middleman jacking up the retail price, just like the car dealers wanting more than MSRP, whom I’ve told off. What to do about this is a relatively easy fix. It doesn’t require spinning up new retailers, fines, or congressional hearings. It simply requires some accountability from the oligopoly.

EV price gouging began to lessen when the EV supply improved; more cars and brands came onto the market. That process continues. That won’t be the case in the grocery store. Supplies are already adequate and have been for a long time, which means that the problem is at the retailer level.

In this oligopoly, it’s easy to know what your competitor charges; all you need to do is shop the other guy’s store. It’s a flaw in our system that we can’t allege collusion between vendors because of this. Still, it achieves the same purpose. I think of this as the opposite of good CRM. Let’s call it customer hostility.

What To Do?

In the bad old days, consumers would most likely pay more or eat beans instead of steak. But today, thanks to AI, more can be done. Since every vendor publishes prices weekly and it’s in digital format, it should be straightforward to make an AI app that does the hard comparison shopping for the consumer.

This type of AI would go far beyond the weekly specials into the heart of a price structure. Imagine if you could submit your grocery list (yes, a real list; you need to do your part) to an AI app, which could then tell you where your dollar would go furthest. It would drive the thing that’s missing in the food supply, which is real competition.

With inflation stuck a shade above 3% and a target of 2%, a small innovation like the one I suggest could make a difference.

Revisiting Vendor Relationship Management

Many years ago, there was an idea afloat called vendor relationship management, or VRM. It went nowhere, principally because no one could afford to pay for the development, maintenance, and upkeep of a VRM system. Buyers thought they could manage vendors just fine, thank you very much.

The truth is different; we live in a sea of data, and the information we need to glean from it is often surprisingly hard to find. Hiding in plain sight makes it useless. So now, with AI, perhaps it’s time to reconsider the VRM model. It is quite possible that a whole new category is sitting there, ready for the taking.

All of this has nothing to do with housing inflation. I’ll be back.