The decision supermarkets face with perishable food

Many federal programs in the U.S. seek to help low-income people obtain food. In addition, in many communities there is a network of food banks and pantries that also assist with the same task. Even so, approximately 50 million people in our nation experience food insecurity. This food insecurity problem is well-known in Rochester. A recent study by Foodlink showed that in a 10-county study area that includes Rochester and the Finger Lakes region, the food insecurity rate climbed from 9.3 percent in 2021 to 12 percent in 2022.

The sad reality is that even though millions of American households struggle to put food on the table, as food moves from producers to factories, to retailers, and ultimately to consumers, approximately 40 percent of it is thrown out. This is not entirely a matter of carelessness. There are many logistical challenges to confront because food, being perishable, is difficult to transport and distribute safely.

Given that many foods are perishable and hence must be consumed by a certain expiration date, grocery stores and supermarkets face a key decision. What should they do with the unsold food on their shelves that is near the expiration date? There are three choices. A store can discard the food, donate it, or offer price discounts to consumers. Since most grocery stores and supermarket chains such as Tops and Wegmans are profit-maximizing entities, we can ask which of the above three strategies makes most sense from the standpoint of profit maximization. If goals other than profit maximization are important to a store, then we can also ask which strategy makes most sense from the perspective of these other objectives.

Profit is defined as the difference between total revenue and total cost. So, if a grocery store discards food, there is certainly no revenue received and there may be an associated cost such as landfill disposal fees. This means that discarding food typically results in a loss.

What about price discounts? It makes economic sense to sell food near expiration at a discount because the resulting sales generate revenue and, clearly, getting some money is better than getting no money. That said, adopting this strategy means keeping discounted food on scarce store shelves when these shelves could be used to stock fresher inventory. In addition, stocking supermarket shelves with both full-price and discounted food at the same time may raise questions among consumers about a supermarket’s commitment to food quality, particularly when the discounted food has visible blemishes. This tells us that offering discounts on food may make economic sense, but it is a risky strategy because of the potential loss in reputation that a supermarket may suffer.

This brings us to food donations. Although it may cost a grocery store a small amount to donate food, the act of donation does wonders for this store’s public image. Also, donating food is considered to be a charitable act and it entitles the donor to tax breaks. Therefore, donations enhance profits by reducing costs. Moreover, by donating food, supermarkets can stock their limited shelf space with fresher inventory. New research demonstrates that this can result in average food prices going up by 1 percent. More generally, in terms of price markups, food bank donations increase retail markups substantially relative to the no-donation case. Specifically, gross markups average 283 percent for non-donating stores, and 376 percent for donating stores, a 33 percent premium.

In sum, donating food makes most sense for grocery stores and supermarkets from both profit maximization and “good corporate citizen” standpoints. (On its website, Wegmans says it is “committed to increasing access to wholesome food” and notes, “We proudly support area food banks, donating over 30 million pounds of perishable and non-perishable items each year to our neighbors in need.”)

The effects on consumers of food, however, are mixed. On the one hand, low-income consumers who get their food from food pantries gain and, in the process, the twin problems of hunger and food insecurity are attenuated. On the other, consumers who purchase their food in grocery stores and supermarkets face higher food prices and therefore, somewhat counterintuitively, lose from food donations.

Amitrajeet A. Batabyal is a Distinguished Professor, the Arthur J. Gosnell professor of economics, and the Interim Head of the Sustainability Department, all at RIT, but these views are his own.

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