Observations Observations

January 13, 2001

Generic profits

Grocery retailers compete fiercely by advertising low prices on popular name-brand items like Tropicana orange juice or Ritz crackers, sometimes even pricing a popular item below its wholesale cost (and absorbing a net loss) to attract customers.

How, then, do supermarkets make any profit? They only earn pennies on nationally branded items, and the store-brand products sell at even lower prices. Well, maybe those inconspicuous shelf-mates bearing the store’s logo and an appealing price tag are not as humble as they look. On average, retailers reap a profit margin 27 percent greater on these “private-label” items than on national brands, according to a recent study by the marketing research firm Datamonitor.

Private-label goods have been on store shelves since the 1860s when A&P introduced store-brand bulk commodity staples like Our Own tea and Eight O’Clock coffee. But only recently have store-brand products shaken their image as poor-quality, “generic” items and extended into categories such as health foods, gourmet items, baby food, and health and beauty products. As a result, private-label sales accounted for $48 billion of the roughly $315 billion U.S. food and beverage market in 1999, marking a 23 percent increase from 1995.

What A&P discovered long ago is that private-label manufacturers carry very low advertising and research and development costs, so retailers face lower wholesale prices on these goods than on national brands. The grocer can substantially mark up the price of even “premium” store-brand cookies while still keeping them cheaper than the barely marked-up Chips Ahoy brand.

Professors Robert Barsky, Mark Bergen, Shantanu Dutta, and Daniel Levy measured markups on nationally branded products and private-label goods comparable in size, quality, and packaging using supermarket scanner data from a Chicago-area supermarket chain. By the authors’ calculations, Tylenol Tablets, for instance, were priced an average of only 2 percent over wholesale cost, while the store-brand equivalent was marked up 30 percent. Surprisingly, the supermarket made the largest gains on toothbrushes: While a shopper might have paid an average of 14 percent over the wholesale price for a #5 Soft Crest Tooth Brush, the lower-priced store-brand version was available at 603 percent over its wholesale cost.

In addition to yielding high profit margins, private-label goods also help differentiate competing grocery stores, since private-label items are unique to each store. So don’t be ashamed to take advantage of those bargains; penny-pinchers are more than welcome in supermarkets these days. - Leslie Mann


Home tie$

A few decades ago, a worker leaving his or her native country would likely be ignored by the home country’s government or, in some cases, might even have been frowned upon. These days, the money this worker sends back home represents such a substantial inflow of capital - up to almost 10 percent of GDP in some developing nations - that receiving countries can hardly afford to be critical. On the contrary, the governments of many countries go to great lengths to show their gratitude. In the Philippines, for instance, the first Sunday of Lent is celebrated as National Migrants Day to honor Filipino men and women who are referred to as “modern day heroes,” “economic saviors,” and “future saints of our dear Motherland.”

Click on chart to enlarge
Top Remittance Receiving Countries in 1999.
Click on chart to enlarge.

Now, many countries actively try to encourage remittances from migrant workers and to channel some of the money through the domestic banking system. Some regulate the money transfer firms, in an attempt to lower costs and ensure the safety of transfers. Others, like Egypt, Turkey, and Poland, give preferential exchange rates. And Sri Lanka, Bangladesh, and India offer dollar-denominated accounts with higher interest rates.

Countries are also seeking to strengthen economic ties with citizens who have permanently settled abroad by adopting dual citizenship legislation. A study of 17 Latin American countries by the Tomas Rivera Policy Institute found that between 1996 and 2000 the number of countries that allowed dual citizenship grew from four to 14. Similar laws are now being considered by the Philippines, South Korea, and India, and 15 African nations had dual citizenship laws in 2000.

In addition to benefiting from the incentives to facilitate remittances, dual citizens are exempt from restrictions on foreign investors in their countries of origin. In Mexico, for instance, dual nationals can now invest in such “strategic” industries as telecommunications and petrochemicals, or can own property in coastal areas or near the national border, privileges not ordinarily open to foreigners. Mexican emigrants can also return home upon retirement and take advantage of domestic health care and retirement plans, should they choose to do so. Nonetheless, since 1998 only about 26,000 Mexican-Americans have reclaimed the Mexican nationality they gave up when they became U.S. citizens.

While countries may have turned from criticizing migrants to wooing them, some migrants are now beginning to criticize their governments’ actions - feeling empowered by their growing economic importance. Though the governments may not always appreciate it, this meddling in domestic matters could end up benefiting their countries in the long run. - Oksana Nagayets