A Creaky, Costly System

Notice those peculiar markings that are appearing on all sorts of products on store shelves--the striped codes with ten-digit numbers that have rechristened such items as a giant-size box of Tide as 37000-91220 and a can of Campbell's tomato soup as 51000-00011? They are part of an automated pricing and check-out system that food-industry officials hope will one day yield impressive cost savings (TIME, Dec. 30). Though it is still experimental, consumer groups are already opening fire on the system, which they fear will confuse shoppers by eliminating price markings on the products themselves. Yet a case can be made that the protesters are missing the really distressing significance of the codes: they are the first major innovation in America's creaky food-distributing machinery since supermarkets appeared in the early 1930s.

For years that machinery was widely admired because it supposedly was responsible for steadily shrinking food's share of the typical U.S. family's budget. But since 1973 that trend has been reversed. In 1970 food claimed 33% of the income of a family of four earning $8,100; today the figure is 37%. As a result, experts are taking their first long look at the machinery in years. What they are finding is a costly, cumbersome system that, for example, adds 24.3-c-, or 69%, to the price of a pound of chicken between farm and check-out counter (see chart). Some indicators:

> After years of nearly 6% growth, the average annual increase in farm productivity has leveled off at a bare 0.5% since 1969, a casualty of rising costs of feed, labor, capital and fuel.

> Food warehousing productivity has hardly risen in the past ten years.

> Supermarket sales per man-hour were lower in 1973 than in 1968.

The problem, laments Cornell University Food Economist Daniel Padberg, is that "in general, the food industry is more interested in marketing than in efficiency." One example is packaging. In Europe, produce growers use just four sizes of containers, having agreed on a standardized system years ago. But in the U.S., food packers use 2,500 different sizes of shipping containers.

The consumer end of the food distribution system is becoming more diffuse and fragmented, partly because shoppers seem to want it that way. The fastest-growing phenomenon in food retailing today is not supermarkets but so-called convenience stores, small outlets catering to people who wish to shop at odd hours and do not mind doing so in odd places like gas stations. Sales at these minimarkets increased by more than 22% last year, despite high prices: their pretax profits, as a percentage of sales, average 4.8%, v. a bare 1.1% in supermarkets, which depend on high volume, not high markups, for their healthy 12.4% return on investment.

Much of the inefficiency in the food distributing machinery is beyond the industry's control. Teamsters union regulations mean that many trucks deliver small shipments to stores each week, when a few fully loaded trucks could do the job. The typical supermarket receives 200 trucks every week; each shipment has a wholesale value of about $50, and costs the store $5 to process in paper work alone. Rules imposed by the Interstate Commerce Commission often require vans to return from their destinations empty, rather than let them pick up an available load. The National Commission on Productivity estimates that elimination of these rules could save $250 million per year. Though some of these and other potential savings might go to fatten stores' profits, chances are that because the supermarket business is hotly competitive, a large share would be passed on to consumers.

Crumbling rail service also adds to food costs. In the 1950s a carload of Bartlett pears loaded in Sacramento reached New York in 6 1/2 days; today the journey often takes from nine to eleven days. Another cost fattener: Federal Trade Commission rules on discounting, required by the Robinson-Patman Act, involve so much red tape that they discourage wholesalers from giving price breaks to supermarkets that place large orders. The aim is to help protect small stores, which account for two-thirds of the nation's 200,000 grocery outlets, from price competition.

Gobbling More. Nonetheless, there is room within the industry for self-improvement. Many firms are at work on various technological innovations including, besides the automated checkout system, computerized warehouses, meat cutting by laser or electronic beam to reduce waste and labor costs, and solar energy to power grossly inefficient supermarket frozen-food cases. The problem is that the fragmented industry--there are 1,400 wholesalers in business today--has difficulty amassing the will, much less the capital, to carry through such developments. Says Gordon Bloom, a senior lecturer at M.I.T.'s Sloan School of Management and a leading food expert: "Because the industry operates on such a low profit margin, it won't spend two cents for technological innovation unless you can prove the payoff." Until it does, however, food can only continue gobbling more and more of the American family's budget.

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