Yesterday I received a phone call from a producer for a major cable news station asking if I'd be willing to come on a show and talk about this story that appeared in Business Insider entitled: "5 Of The Most Overpriced Items In The Grocery Store".
After reading the story, I gave the following response to the producer (slightly edited here for the blog). Although it would have been nice to have a little air time, I'm happy to report that they decided not to run with the story, at least as it was originally premised.
The story equates “overpriced” with the “percent markup”, which is pretty shaky. There are a lot of good reasons why the percent mark-up may vary across products that has little to do with being “overpriced”. For example, differences in demand for convenience and other characteristics, differences in costs of packaging, storage, transportation, etc. will cause differences in the percent markup.
Nonetheless, let’s play along.
1) Bottled water. On the surface, it does seem crazy that there is a 4000% mark-up for bottled water. But, part of the reason for the high percent is that the price of water is REALLY cheap to begin with (so the percent will look very high though the actual dollar mark-up in absolute terms is small). More importantly, how valuable is convenience to you? A lot of people are willing to pay an extra buck to have more convenient water and not have to fiddle with refilling and refrigerating a re-usable water bottle. Who am I to say that an extra $0.50 or $1 isn’t worth it to the person whose paying for it? If it were really the case that bottle water sellers were ripping us off, why doesn’t some entrepreneur enter the market and start selling cheaper bottled water and corner the market? The fact is that most of the cost is in the packaging, transportation, etc. When you buy bottled water, you’re paying for packaging and convenience.
The same arguments apply even more forcefully for pre-cut produce. Who cares if pre-cut carrots and onions are marked up 40%? I’m not having to do the work! That’s an extra $1-$2 I’m definitely willing to pay. And if someone else can figure out a way to do it for less than 40%, you can bet they’d have my business. Competition – in the long run- will eventually drive down prices to their approximate costs.
2) In general, I would characterize something as “overpriced” if people have mis-perceptions; if they believe they’re getting something from a product that they’re not actually receiving. Two of the examples in the story potentially fit that criteria: name-brand spices and brand-name cereal. One way to know whether you’re being fooled by marketing is to do a blind taste test. It is often the case that our brain is more powerful in influencing how we think something tastes than our tongues. So, with a neutral friend, try it out: can you REALLY taste the difference? If not, you may be over-paying.
3) In this light, there are a number of products that many people have “incorrect” beliefs relative to what scientific studies say – thus, they may be paying a premium for characteristics that they’re not actually recieving. One example is food with a "natural" claim. A “natural” label is pretty vacuous, and I've previously touched on those issues here and here. Another example is organic food. People believe a lot of things about organic foods that just aren't true: that they’re pesticide free, that they support small farms, that they are more nutritious, etc. I’m not saying there are NO benefits to organic, only fewer benefits than most believe. A lot of the same arguments apply to local foods. Chapters 5 and 9 in The Food Police have all the details and citations.