Grocery stores are moving to digital price tags: are they harming consumers?

A pair of Democratic senators are probing grocery store chain Kroger over the use of digital price tags known as electronic shelving labels (ESLs) citing concerns it could enable "dynamic price gouging."

Sens. Bob Casey, D-Pa., and Elizabeth Warren, D-Mass., wrote a letter to Kroger CEO Rodney McMullen seeking "further information to better understand the justification for and risks of electronic shelving." They warned that, "Dynamic pricing allows corporations to price gouge and suddenly raise the cost of goods without warning."

"Large grocery chains such as Walmart and Kroger have claimed that dynamic pricing through ESLs benefits consumers by freeing up time for employees to assist customers. However, these devices also introduce the potential for grocery giants to abuse their power and surge grocery prices, raising prices suddenly and at times when certain products are in the highest demand," Casey and Warren wrote.

"The increased use of dynamic pricing will drive company profits higher – leaving consumers with the bill," they wrote. "It is outrageous that, as families continue to struggle to pay to put food on the table, grocery giants like Kroger continue to roll out surge pricing and other corporate profiteering schemes."

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Casey and Warren noted that Kroger and Walmart, among other firms, are expanding their use of ESLs, noting that they "appear poised to enable large grocery stores to squeeze consumers to increase profits." The letter didn't cite specific examples of ESLs having been used in that manner, but noted a UCLA study from 2021 that suggested they could be used for "time-based pricing" that "creates value for the stores (through higher prices) [but] offers no benefit to consumers."

Kroger pushed back on allegations that its electronic shelving labels would be used to engage in dynamic pricing.

"Kroger's business model is to lower prices over time so that more customers shop with us, which leads to more revenue that we then invest in lower prices, higher wages, and an even better shopping experience. Everything we do is designed to support this strategy, and customers are shopping more with Kroger now than ever because we are fighting inflation and providing great value. Any test of electronic shelf tags is to lower prices more for customers where it matters most. To suggest otherwise is not true," a Kroger spokesperson told FOX Business.

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Burt Flickinger, III, the founder of the Strategic Resource Group who has worked with companies like Kroger in grocery industry, said that stores aren't engaging in dynamic pricing with the use of ESLs and that the Democratic senators' inquiry appears to be speculative.

"The prices do not go up before floods, hurricanes, blizzards, heat waves, power outages, and they don't go up between Friday and Sunday when the food retailers do 60% to 70% of their weekly volume. The stores get crowded, the [prices] don't go up, they stay the same," Flickinger said. "So this speculation or conjecture is simply projecting into the future something that's not a factual foundation."

He also explained that ESLs can have a consequential impact on grocery stores' labor expenses by allowing them to reallocate the time and labor of stockers who would be manually changing labels to other activities: "If labor in a given store costs about, in round numbers, 20 cents to every dollar of sales, the ESLs can save in terms of labor costs, half a cent to two cents depending on what state it is given its rules and regulations."

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Flickinger said that average supermarkets might have a range of 25,000 to 35,000 items on average, whereas a larger store like a Target or Walmart Supercenter would have over 100,000 items. Some of those items would be carried on a daily basis, while others are seasonal. He noted that the brands that supply those items to grocery stores are primarily responsible for price changes.

"Virtually 100% of the changes are dictated by the brands – Kraft, Kellogg, Coke, ConAgra, etc. Retailers use electronic shelf labels as an analytical way of being able to clearly communicate to the shopper the price per ounce and the price per pound" of a product, he explained.

Flickinger added that "Kroger's not taking the increases with ESLs, nor is Walmart, nor is Costco, nor is WinCo." He said that if there is price gouging, it would be the food manufacturers engaging in "shrinkflation" and that ESLs would make it easier for consumers to track those changes on their trips to the store.

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Companies in the food services industry have relatively tight profit margins. The latest survey of U.S. firms across a variety of industries by the New York University Stern School of Business found that as of Jan. 2024, food and grocery retailers' net profit margins were 1.18%, food wholesalers' were 1.21%, food processors' were 6%, while farming and agriculture firms' were 7.12%.

By way of comparison, the total U.S. market had profit margins of 8.54%, a figure which declined to 7.59% when excluding financial services firms, according to the survey.