Supermarket Characteristics

and Operating Costs in

Low-Income Areas

Robert P. King, Ephraim S. Leibtag, and Ajay S. Behl

Economic

Research

Service

Agricultural

Economic

Report

Number 839

United States

Department of

Agriculture
United States

Department

of Agriculture

www.ers.usda.gov

A Report from the Economic Research Service

December 2004

Agricultural

Economic

Report 

No. 839

Supermarket Characteristics

and Operating Costs in LowIncome Areas

Robert P. King, Ephraim S. Leibtag, and

Ajay S. Behl 

Abstract

Whether the poor pay more for food than other income groups is an 

important question in food price policy research. Stores serving low-income

shoppers differ in important ways from stores that receive less of their

revenues from Food Stamp redemptions. Stores with more revenues from

Food Stamps are generally smaller and older, and offer relatively fewer

convenience services for shoppers. They also offer a different mix of 

products, with a relatively high portion of sales coming from meat and

private-label products. Metro stores with high Food Stamp redemption rates

lag behind other stores in the adoption of progressive supply chain and

human resource practices. Finally, stores with the highest Food Stamp

redemption rates have lower sales margins relative to other stores, but have

significantly lower payroll costs as a percentage of sales. Overall, operating

costs for stores with high Food Stamp redemption rates are not significantly

different from those for stores with moderate Food Stamp redemption rates.

If the poor do pay more, factors other than operating costs are likely to be

the reason. 

Keywords: Food prices, supermarkets, low-income consumers, Food

Stamps, metro, nonmetro

Robert P. King is professor and Head and Ajay S. Behl is a research 

assistant in the Department of Applied Economics at the University of

Minnesota. Ephraim S. Leibtag is an economist with USDA's Economic

Research Service.
Contents

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iii

Do the Poor Pay More? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

A Descriptive Profile of Supermarkets Grouped 

by Food Stamp Redemption Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Store and Organizational Characteristics . . . . . . . . . . . . . . . . . . . . . . . .4

Market Characteristics and Competitive Situation . . . . . . . . . . . . . . . .6

Service Offerings and Product Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Operating Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Operating Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

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Summary

Whether the poor pay more for food than other income groups is an important question in food price policy research. Much of the evidence indicates

that shopping opportunities for the poor are more limited than they are for

higher income consumers and that prices are slightly higher in stores where

low-income consumers shop.

Higher prices are often attributed to higher operating costs for stores that

serve low-income households. Higher costs could be due to older, less efficient store designs, outdated operating practices, weak organizational linkages with suppliers, high rates of labor turnover, and/or greater losses due to

theft. If store operating costs are higher in low-income areas, and if the

reasons for these higher costs can be better understood, it may be possible

to improve operating efficiency.

This analysis shows that stores serving low-income shoppers—stores with

high Food Stamp redemption rates—differ in important ways from other

stores. Stores with a greater share of revenues derived from Food Stamps

are generally smaller and older than stores serving moderate-income

consumers, and are less likely to offer conveniences for shoppers such as

bagging, carryout, or pharmacy services. Stores serving low-income

customers generally have a higher rate of employee turnover, pay lower

wages, are less likely to have a unionized workforce, are open for fewer

hours, and are more likely to face competition from supercenters. 

There are similarities, however. Nonmetro stores serving the poor do not

differ significantly from other stores in the adoption of progressive supply

chain and human resource practices. In metro locations, stores serving the

lowest and highest income customers are more likely than other stores to be

wholesaler supplied and less likely to be part of a large chain. Finally, stores

with the highest Food Stamp redemption rates have a higher median cost of

goods sold (lower sales margin) than stores serving higher income

customers, but also have significantly lower payroll costs as a percentage of

sales. Sales margins and payroll account for a major share of total store

operating costs.

Overall, our results do not support the hypothesis that it costs more to

operate supermarkets that serve low-income consumers. While stores with

different rates of Food Stamp redemption have significantly different cost

structures, their overall operating costs are essentially the same. If the poor

do pay more, factors other than operating costs are likely to be the reason.
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Do the Poor Pay More?

Whether the poor pay more than higher income groups for food has been a

focus of research for more than three decades. Findings have been mixed,

but much of the available evidence indicates that shopping opportunities for

the poor are more limited than for higher income consumers and that prices

are slightly higher in stores whose patrons are chiefly low-income

consumers.

Store or household survey data can be used to determine whether the poor

pay more for food (Kaufman et al.). Store surveys indicate whether prices

for a particular market basket of items differ from store to store. Household

surveys offer insight into how households with different characteristics

spend food dollars and into the strategies they use in making tradeoffs

among cost, quality, and convenience.

A review of 14 store surveys conducted between 1966 and 1996 indicates

that food prices are generally higher in smaller grocery stores than in larger

supermarkets and also higher in inner city and rural locations than in

suburban locations. Since the poor are more likely to shop in small grocery

stores and to live in inner city or rural locations, they often face higher food

prices. After controlling for store type and location, however, there is little

evidence of a significant relationship between neighborhood income and

food prices (Kaufman et al.).

Results from research by Chung and Myers—using data on store availability, price disparities, and item availability in the Minneapolis-St. Paul

metropolitan area—are similar. They report that chain stores are much

more likely to be located in ZIP Codes where fewer than 10 percent of

households have incomes below the poverty level, that prices are significantly lower in chain stores than in nonchain grocery stores, and that individual items in the USDA Thrifty Food Plan market basket are much less

likely to be available in inner city and nonchain grocery stores. After

controlling for store type and item availability, however, they found no

statistically significant relationship between food prices and the percentage

of households below the poverty level. In another recent study, Hayes

found that food prices are significantly lower in poor neighborhoods.

However, this analysis is based on only five homogeneous products and

fails to account for item availability, which may bias price differentials

upward (Hayes, p. 2).

Kaufman et al. present findings related to low-income household food costs

from two large household surveys conducted by the Federal Government:

the Bureau of Labor and Statistics' Consumer Expenditure Survey (CES)

and the U.S. Department of Agriculture's Nationwide Food Consumption

Survey (NFCS). The CES data show that food expenditure patterns differ

significantly with household income, but it is not possible to determine unit

costs from these data. The NFCS data can be used to calculate unit costs

for a wide range of food categories, and Kaufman et al. (pp. 12-13) report

that low-income households have lower unit costs for almost every major

food group. They attribute this to economizing strategies that low-income

households use to keep food costs low.
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A recent study by Leibtag and Kaufman using ACNielsen Homescan data

for a national sample of 40,000 households confirms the importance of

these economizing strategies. 

... the poor economize on their food purchases to limit spending.

They accomplish this by purchasing random-weight products on

sale, purchasing a greater proportion of private-label (fixed-weight)

products, and purchasing less expensive meats, fruits, and vegetables. By selecting less expensive meat, poultry, and fresh fruits and

vegetables, low-income households are able to spend less for food,

despite facing the slightly higher prices that other studies have

shown to exist.

(Leibtag and Kaufman, p. 7)

These positive findings are offset somewhat by conclusions from a 1997

study by Finke et al. that used NFCS data to analyze differences in unit food

costs for households categorized by income, location, and race. They report

that Black households have significantly higher unit costs than White households and that unit costs are significantly higher for urban households than

for suburban households. This suggests that economizing strategies cannot

always offset the effect of higher prices charged in stores where many lowincome households purchase their food.
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Data

The Supermarket Panel is an annual survey of randomly selected supermarkets drawn from the population of approximately 32,000 supermarkets that

accept Food Stamps in the United States. In 2002, the study year for this

analysis, 866 stores participated in the Supermarket Panel. These stores—

located in 49 States—are generally representative of the diversity of formats

and ownership structures found in the overall population of U.S. supermarkets.

King et al. describe data collection for the 2002 Supermarket Panel in

Appendix A of The 2002 Supermarket Panel Annual Report. They also

explain how statistical weights were constructed to adjust for imbalances in

sampling intensities and for differences in response rates by region and

ownership group size.1 In effect, these weights indicate the number of stores

in the overall population represented by each store in the sample. 

For this study, data from the 2002 Supermarket Panel were merged with

ZIP-Code-specific data from the U.S. Census, including data on population,

spatial area, median household income, and the racial composition of the

population. We also merged the Supermarket Panel data with store-level

data on Food Stamp redemptions from the STARS database maintained by

the Benefits Redemption Division of the U.S. Department of Agriculture's

Food and Nutrition Service. This made it possible to assess the degree to

which each store in the Supermarket Panel serves low-income consumers.

1 A store's ownership group size is the

number of stores owned and operated

by its parent company. Not all stores

in an ownership group have the same

name. For example, many of the

largest food retailers own and operate

stores under several distinct names.
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A Descriptive Profile of

Supermarkets Grouped by Food

Stamp Redemption Rates

In this study, the percentage of store sales attributable to Food Stamp

redemptions is used as a measure of the degree to which a store serves lowincome shoppers. Average weekly store sales data are part of the Supermarket Panel database. Store-level data on Food Stamp redemptions in

2001, the reference period for respondents to the 2002 Supermarket Panel,

were extracted from the STARS database and converted to a weekly basis.

The share of sales from Food Stamp redemptions ranged from 0 in about 5

percent of stores to over 30 percent, with a weighted mean of 3.4 percent

and a weighted median of 2.1 percent.

Census-based measures for the ZIP Code where a store is located, such as

median household income or the percentage of households below the

poverty level, could also have been used to identify stores that serve lowincome shoppers. A store's market area often extends beyond a single ZIP

Code, however, especially in urban areas. This makes the Food Stamp

redemption rate a better indicator of poverty among a store's customers.

Most recent studies of food prices paid by low-income consumers have been

conducted in major metropolitan areas, but a significant segment of the

Nation's poor live in nonmetropolitan areas. Therefore, throughout this

report we present descriptive information on store characteristics and

performance for stores located within and outside of a Metropolitan Statistical Area (metro area).2 For descriptive purposes, metro and nonmetro

stores were assigned to groups defined by the Food Stamp redemption rate.

Group 1 includes the 10 percent of stores with the highest Food Stamp

redemption rates. Group 2 includes the remaining stores in the highest

Food Stamp redemption quartile. Stores in these two groups have the

greatest concentrations of low-income shoppers. Group 3 stores are in the

two middle Food Stamp redemption quartiles. This large group of stores

can be characterized as serving moderate-income consumers. Finally,

Groups 5 and 4 include, respectively, the 10 percent of stores with the

lowest Food Stamp redemption rates and the remaining stores in the lowest

Food Stamp redemption quartile; stores in these two groups can be characterized as serving higher income

consumers. For each store group,

the Food Stamp redemption rate

range is higher for nonmetro stores

than for metro stores (table 1).

Store and

Organizational

Characteristics

Stores serving the poor, particularly

stores in nonmetro areas, typically

are smaller and older than other

stores and are more likely to be

2 Under U.S. Census Bureau standards

(p. 892), an MSA (metro area)

"...must include at least: one city with

50,000 or more inhabitants, or a

Census Bureau-defined urbanized area

(of at least 50,000 inhabitants) and a

total metropolitan population of at

least 100,000 (75,000 in New

England). Under the standards, the

county (or counties) that contains the

largest city becomes the 'central county' (counties), along with any adjacent

counties that have at least 50 percent

of their population in the urbanized

area surrounding the largest city." Table 1—Food Stamp redemption

rate ranges for metro and nonmetro store groups

Group Metro Nonmetro

Percent

1 ≥7.994 ≥9.576

2 3.519-7.993 4.736-9.575

3 0.550-3.518 1.648-4.735

4 0.136-0.549 0.721-1.647

5 <0.549 <0.720

Source: Economic Research

Service/USDA.
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independently operated rather than part of a larger self-distributing chain

(table 2).

The typical Group 1 store in a metro area is significantly smaller and open

fewer hours than stores in Groups 2, 3, and 4.3 The median Group 1 store is

also older and has fewer checkout lanes and fewer parking spaces than

stores in all other groups. The distribution of store formats within Groups 1

and 5 is similar, with approximately three-quarters of stores in the conventional/superstore format in both groups. In contrast, Group 2 stores, which

also serve low-income consumers, have a relatively high percentage of

stores in the warehouse/supercenter/hypermarket format, and stores in

Groups 3 and 4 have higher percentages of Food/Drug combination stores.

This pattern continues for the organizational characteristics of metro stores.

Stores in Groups 1 and 5, with the highest and lowest concentrations of

low-income consumers, are significantly more likely than stores serving

3 Throughout this report we use a onetailed significance level of 0.05 as the

cutoff point for statistical significance.

Details on statistical significance tests

are available on request from the

authors.

Table 2—Store and organizational characteristics for stores grouped by Food Stamp redemption rate and

location

Metro group Nonmetro group

123 45 123 4 5

Store characteristiscs

Median selling area (sq. ft.) 17,000 33,000 35,000 34,000 23,000 12,000 28,000 22,000 21,000 13,000

Median store age (years) 37 22 18 17 27 31 23 23 24 24

Median remodeling-adjusted 10 6 6 5 5 7 8 7 5 5

store age (years)

Median hours open per week 98 126 119 126 103 98 112 112 105 105

Median number of checkout lanes 5 8 9 10 10 4 6 7 6 6

Median number of 140 200 300 250 300 100 200 150 100 120

parking spaces

Percent of store by format

Conventional/superstore 77 58 51 42 75 99 75 75 58 81

Food/drug combination 12 23 40 55 19 1 19 21 34 19

Warehouse/supercenter/ 11 19 9 3 6 0 6 4 8 0

hypermarket

Organizational characteristics

Percent wholesaler supplied 64 51 34 38 72 79 56 55 58 57

Median ownership group size 5 26 187 140 6 12 44 15 4 2

(number of stores)

Percent of stores by ownership group size

Single store 34 10 11 11 16 23 15 26 35 48

2-10 stores 26 18 11 11 37 21 25 15 16 13

11-50 stores 11 32 14 10 17 36 24 16 7 9

51-750 stores 18 26 29 40 19 11 14 10 20 18

More than 750 stores 12 14 35 28 11 10 23 33 22 11

Source: Economic Research Service/USDA.
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moderate-income consumers to be wholesaler supplied and to be operated

by a company that owns fewer than 10 stores.

As expected then, stores serving low-income consumers in urban areas are

physically smaller and are owned and operated by smaller, less vertically

integrated companies than stores serving moderate-income consumers.

Surprisingly, however, store and organizational characteristics for the Group

1 stores are remarkably similar to those for Group 5 stores.

In nonmetro areas, stores in all five Food Stamp redemption groups are

smaller than stores in metro areas, more likely to have a conventional

format, and more likely to be operated by a small company without its own

distribution system. Differences across groups are generally less

pronounced for nonmetro stores. Once again, stores in Groups 1 and 5 are

similar in size, but Group 1 stores are significantly older and much more

likely to be wholesaler supplied than stores in the other groups. For

nonmetro stores, then, stores with the highest concentration of low-income

consumers are older and are operated by smaller companies.

Market Characteristics and 

Competitive Situation

For stores located in a metro area, median household income in the store's

ZIP Code increases sharply as the Food Stamp redemption rate falls (table

3). This general pattern also holds for nonmetro stores, but differences in

median household income across groups are less pronounced, and income

levels are considerably lower, than in metro locations. In both metro and

nonmetro locations, Group 1 stores, which have the highest concentration of

low-income shoppers, face the greatest racial diversity. Differences in racial

diversity are relatively small across Groups 3 through 5 in both locations.

In metro locations, Group 1 stores are significantly less likely than stores

with lower Food Stamp redemption rates to have a unionized workforce.

Typical Group 1 and 2 stores also pay significantly lower wages than other

stores in metro locations. These patterns are not evident for stores in

nonmetro locations, where unionization is less prevalent and wage rates are

generally lower than in metro locations. In both metro and nonmetro locations, however, employee turnover rates are significantly higher for stores in

Groups 1 and 2. These stores, which serve low-income consumers, may be

more likely than other stores to hire low-income employees who are transitioning from welfare to work. Jobs in food retailing are often a stepping

stone to higher paid jobs in other sectors, making turnover in supermarkets

high. This, in turn, can lower operating efficiency and increase training

costs.

In both metro and nonmetro locations, stores in Groups 1 and 2, which

serve more low-income consumers, are significantly more likely to face

supercenter competition than stores in Groups 4 and 5, which have the

lowest Food Stamp redemption rates. In addition, in metro areas, Group 1

stores are farthest from their nearest competitor, while in nonmetro areas

stores in Groups 4 and 5 are, on average, farthest from their nearest

competitor.
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Finally, in both metro and nonmetro locations, stores in Group 1, which

derive the greatest portion of their sales from low-income consumers, are

the least likely to be a local market leader in each category. This conclusion

is derived from the competitive position indicators in the lower portion of

table 3, which are based on store managers' identification of the price,

service, quality, and variety leader in their local market. This is consistent

with findings from store surveys and household studies that the poor pay

slightly more for food and that they have more limited shopping opportunities.

Table 3—Store market and competitive characteristics by Food Stamp redemption rate and location

Metro group Nonmetro group

123 45 123 4 5

Market demographics

Median population density 1,587 953 821 1,453 2,014 43 108 74 68 55

(people/sq. mi)

Median household income 41,627 44,200 49,974 59,560 70,788 28,314 35,943 38,242 37,436 45,018

($/year)

Percent of sales from 13.3 5.1 1.4 0.3 0 15.8 6.4 2.9 1.1 0.4

Food Stamps

Percent of population (White) 63 80 88 85 81 63 81 92 96 96

Percent of population (Black) 24 3 3 2 3 23 6 1 0 0

Percent of population (Hispanic) 5 5 3 3 5 1 3 2 2 1

Labor market characteristics

Percent of stores with 16 53 37 45 31 0 18 24 8 2

union workforce

Median hourly wage $9.63 $10.56 $11.60 $12.77 $13.64 $9.34 $8.75 $10.07 $11.03 $9.89

Median percentage 56 53 40 34 32 60 62 33 40 44

employee turnover

Competitive pressure

Median distance to nearest 1.5 1.0 1.0 1.0 1.0 1.0 1.0 1.0 2.0 2.0

competitor (miles)

Percent facing 52 56 47 37 40 53 58 50 38 29

supercenter competition

Competitive position (percent of stores)

Price leader 25 36 32 29 22 19 32 33 26 32

Service leader 45 62 59 79 75 69 75 72 74 80

Quality leader 55 77 68 68 73 73 76 73 90 81

Variety leader 23 46 41 28 34 24 24 31 39 29

Source: Economic Research Service/USDA.
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Service Offerings and Product Mix

Betancourt and Gautschi note that retail firms deliver a mix of explicitly

priced products and services and a set of implicitly priced “distribution services” that reduce the time and effort customers need to devote to shopping.

For example, bagging and carryout distribution services make checkout easier

for supermarket shoppers. Of course, offering a wider range of distribution

services generally increases a store's labor costs and prices charged. Kaufman

et al. and Leibtag and Kaufman suggest that low-income shoppers adopt

economizing strategies to keep food costs as low as possible. Because lowincome shoppers may be willing to sacrifice service and convenience for

lower prices, stores serving them would be expected to offer fewer distribution services. Similarly, the poor may also purchase a different mix of food

products, and may be more likely to buy lower cost private-label products.

Group 1 stores located in a metro area are generally much less likely than

other stores to offer distribution services that save time and add convenience

for shoppers (table 4). For example, bagging and carryout services are

Table 4—Store service offerings and product mix by Food Stamp redemption rate and location

Metro group Nonmetro group

123 45 123 4 5

Distribution service offerings (percent of stores)

Self-scanning 6 4 12 10 11 0 8 7 7 9

Bagging 62 76 91 98 95 96 88 96 97 100

Carryout 50 72 82 88 81 73 87 88 94 96

Service meat 70 71 76 86 86 84 93 93 95 87

Fax ordering 13 23 30 19 33 4 19 26 34 14

Home delivery 18 12 12 18 34 2 13 24 47 26

Home meal replacement 31 64 66 77 83 38 65 67 63 70

In-store bakery 48 85 88 80 70 46 83 79 86 59

Internet ordering 7 6 8 30 24 11 1 6 20 0

Post office/mailing services 23 20 22 17 0 5 23 36 41 44

In-store banking 16 18 39 28 35 14 24 13 18 5

Pharmacy 12 32 46 58 25 1 19 25 42 19

Product mix

Median percentage of sales 8 8 8 10 10 7 7 8 8 7

from produce

Median percentage of sales 23 15 13 11 10 18 17 15 14 15

from meat

Median percentage of sales from 50 54 49 50 45 62 63 54 45 45

dry groceries

Median percentage of sales from 23 15 15 15 10 35 18 20 19 15

private labels

Median number of 14,000 35,000 30,000 35,000 37,000 26,000 25,000 20,000 20,000 28,000

stock-keeping units (SKUs)

Source: Economic Research Service/USDA.
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offered by 80-90 percent of Group 3 stores versus 50-60 percent of Group 1

stores. Differences in distribution service offerings are less pronounced and

trends across groups are less consistent for stores located in nonmetro areas,

but Group 1 stores are the least likely to offer almost every service. In both

metro and nonmetro areas, low distribution service offerings by Group 1

stores suggest that, with a lower opportunity cost for their time and more

stringent budget constraints, the poor are willing to substitute their own time

and effort for distribution services. Retailers respond accordingly, tailoring

the distribution services they provide in a given store location to customer

characteristics.

Percentages of store sales coming from produce, meat, and dry groceries

exhibit similar patterns across quartiles for stores located in and outside of a

metro area. Group 1 and 2 stores that serve low-income shoppers derive a

greater share of sales from meat and dry groceries. Group 1 stores, both

metro and nonmetro, are much less likely to have a pharmacy with a fulltime pharmacist. These stores also derive a significantly greater share of

sales from private-label products. Group 1 stores in metro areas also offer

much less product variety than other metro stores, as indicated by the lower

number of stock-keeping units (SKUs). This pattern does not hold for

nonmetro areas, where the median number of SKUs is highest for stores in

Groups 1 and 5. While the urban poor shop in stores with the most limited

assortment of products, the poor in nonurban areas shop in stores with a

relatively broad assortment of product offerings.

Operating Practices

Supermarket Panel data on store operating practices are summarized in a

series of management practice indices (table 5).4 The supply chain index

indicates the extent to which a store has adopted new technologies and business practices that support supply chain initiatives in the food industry. The

human resources index measures adoption of progressive training and

compensation practices. The food-handling index measures compliance

with accepted practices for ensuring food safety and quality. The environmental practices index indicates the degree to which a store offers environmentally friendly products and services to its customer and uses

energy-efficient practices and store waste recycling in its own operations.

Finally, the quality assurance index measures adoption of objective practices

for assessing customer satisfaction.

For stores located in metro areas, there are significant differences across

groups for all except the food-handling index. For the supply chain, human

resources, and quality assurance indices, stores in Groups 1 and 5—those

with the highest and lowest rates of Food Stamp redemptions—have significantly lower scores than other stores. This is not surprising, since operating

practices in these areas are closely related to ownership group size, and

typical stores in these groups are operated by companies that own fewer

than 10 stores. The environmental practices score generally trends upward

across groups, perhaps reflecting greater demand by higher income

consumers for environmentally friendly products, services, and operating

practices.

4 See King et al. (2002) for a complete

definition of each index. All index

scores are on a 100-point scale, with a

score of 100 indicating the highest

level of adoption. 
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For nonmetro stores, differences in the supply chain and human resource

scores are not significant across Food Stamp redemption rate groups. Both

the food-handling and environmental practices scores trend upward,

however, as the Food Stamp redemption rate falls, and there is no clear

trend for the quality assurance score.

Though there are some significant differences in operating practices across

Food Stamp redemption rate groups in both metro and nonmetro locations,

such differences do not seem to indicate that stores serving low-income

consumers consistently lag in adopting progressive operating practices. If

there are significant operating cost differences across groups, they are more

likely due to differences in store and organizational characteristics and

service offerings.

Operating Performance

Weekly sales per square foot of selling area, sales per labor hour, and annual

inventory turns are commonly used measures of operating efficiency. In

metro locations, the typical Group 1 store has significantly lower sales per

labor hour and annual inventory turns than stores with lower Food Stamp

redemption rates, but Group 1 stores only differ significantly from Group 4

stores in weekly sales per square foot of selling area (table 6). The low

level of sales per labor hour for stores that serve low-income consumers is

somewhat surprising. These stores generally provide fewer labor-intensive

services and so are less labor-intensive than stores in moderate- and highincome areas. Poor labor efficiency may be due, in part, to the significantly

higher rate of labor turnover for these stores (discussed earlier). Mean

supply chain and human resource scores for Group 1 stores in metro locations are also low, and this may contribute to inefficiencies in labor use. In

nonmetro locations, stores in Groups 1 and 2 have significantly lower

weekly sales per square foot than stores in Groups 4 and 5 that serve higher

income consumers. Otherwise, there are no clear trends in operating efficiency across Food Stamp redemption rate groups.

The Supermarket Panel provides data on cost of goods sold (COGS) and

payroll costs as a percentage of sales. Together, these account for a major

share of total store operating costs, totaling 85.8 percent of sales for the

median store in the Panel, and they are the only measures of cost available

Table 5—Store management practice index scores, by Food Stamp redemption rate and location

Metro group Nonmetro group

123 45 123 4 5

Operating practices

Mean supply chain score 49 60 66 66 55 52 59 56 48 43

Mean human resource score 33 37 40 46 35 34 39 40 39 40

Mean food-handling score 81 82 81 81 80 65 69 84 83 77

Mean environmental practices 47 69 77 85 78 51 56 66 66 75

score

Mean quality assurance score 62 70 69 72 59 50 60 68 59 58

Source: Economic Research Service/USDA.
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for this analysis.5 The median cost of goods sold differs little for stores in

Groups 1 through 3 in metro locations, but is significantly lower for the

Group 4 and 5 stores that serve higher income consumers. In contrast,

median payroll cost as a percentage of sales is significantly lower in the

Group 1 stores that have the highest Food Stamp redemption rate. The fact

that stores serving higher income consumers offer more distribution services helps to explain both patterns. These services require labor, not

reflected in the cost of goods sold. Therefore, stores in Groups 4 and 5

have higher labor costs, which they pay for by adding higher markups on

the cost of goods for the products they sell. Trends across groups in

nonmetro locations for cost of goods sold and payroll as a percentage of

sales are similar but less pronounced. 

For both metro and nonmetro locations, there is no clear trend across

groups in combined operating costs for cost of goods sold and payroll.

While stores with different rates of Food Stamp redemption have significantly different cost structures, their overall operating costs are essentially

the same.

5 According to Food Marketing

Institute (p. 13) estimates, the cost of

sales plus all other operating expenses

averaged 95.08 percent of sales for

supermarket companies in 2000/2001.

These costs were calculated at the

company level and include expenses

for operation of distribution facilities

and corporate offices. Building occupancy costs and energy costs are

important store-level operating

expenses for which data are not available. Results from an energy management study conducted in 2001 (King,

et al., 2003) indicate that energy costs

are 1.1 percent of sales for the median

store. Therefore, energy costs are

small relative to cost of goods sold

and payroll expenses.

Table 6—Store performance measures, by Food Stamp redemption rate and location

Metro group Nonmetro group

123 45 123 4 5

Operating efficiency

Median sales per square foot $7.50 $6.54 $7.75 $9.33 $8.75 $6.88 $6.45 $7.14 $8.06 $7.50

Median sales per labor hour $101.32 $128.57 $123.86 $133.70 $123.60 $100.00 $98.48 $116.95 $92.49 $97.50

Median annual inventory turns 12 16 17 20 20 14 15 16 15 18

Operating costs

Median cost of goods sold 76.0 77.0 75.0 72.5 73.0 78.0 78.1 77.0 76.0 76.0

(COGS) as a percent of sales

Median payroll as a percent 8.5 10.0 10.0 10.5 12.0 9.0 9.2 10.0 11.1 9.8

of sales

Median COGS and payroll 84.5 87.0 85.0 83.0 85.0 87.0 87.3 87.0 87.1 85.8

as a percent of sales

Source: Economic Research Service/USDA.
12

Supermarket Characteristics and Operating Costs in Low-Income Areas/AER-839

Economic Research Service/USDA

Conclusions

This analysis provides evidence that stores serving low-income shoppers

differ in some important ways from other stores that receive less of their

revenues from Food Stamp redemptions. Stores with more revenues from

Food Stamps are generally smaller and older than stores serving moderateincome consumers, but stores with the highest rates of Food Stamp redemption are also remarkably similar to stores with the lowest rates of Food

Stamp redemption. Stores that serve the poor offer relatively few distribution services that save time and add convenience for shoppers. They also

offer a different mix of products, with a relatively high portion of sales

coming from meat and private-label products. In metro locations, stores

with high Food Stamp redemption rates lag behind other stores in the use of

progressive supply chain and human resource practices, but this pattern does

not hold in nonmetro locations. Finally, stores with the highest Food Stamp

redemption rates have high cost of goods sold per dollar of sales relative to

other stores, but stores serving the poor also have significantly lower payroll

costs as a percentage of sales.

Overall, the results do not provide strong evidence that it costs more to

operate supermarkets that serve low-income consumers. Median cost of

goods sold plus payroll as a percentage of sales for stores with high Food

Stamp redemption rates is not significantly different from that for stores

with moderate Food Stamp redemption rates. If the poor do pay more for

food, factors other than operating costs are likely to be the reason.

Finally, our findings raise several questions for future research. As

suburban markets where moderate- and high-income consumers predominate become saturated, some major retail chains are investigating opportunities for new store development in low-income urban areas. If larger chains

do expand into these previously underserved areas, how will they need to

adapt existing store designs to effectively serve low-income consumers?

Will existing stores in low-income areas be able to remain cost-competitive?

Outside of major metropolitan areas, stores are generally smaller and less

efficient in their operations. With supercenter competition growing in these

areas, how can existing stores lower their operating costs and how will

access to shopping opportunities for the poor evolve?
13

Supermarket Characteristics and Operating Costs in Low-Income Areas/AER-839

Economic Research Service/USDA

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