Grocery stores that donate expiring food make higher profits

All major supermarkets and retailers that sell groceries, such as Kroger, Walmart, and Costco, give large amounts of food to food banks and pantries. In 2022, retailers donated close to 2 billion pounds of food across the United States, which amounted to $3.5 billion that year. The estimated value of donated food was a little less than $2 per pound in 2022.

Retailers donate products that are typically packaged, palatable, and safe for consumption, yet unsuitable for sale due to quality concerns, such as minor blemishes. Since these items can go a long way to feeding hungry people, donations represent one of the best uses of leftover or surplus food.

Donations are also technically acts of charity, and the companies responsible for them get tax breaks. This means that donations boost profits by lowering costs. There’s a second effect of donations on a store’s bottom line: They improve the quality of food on the store’s shelves and increase revenue from food sales.

As a supply chain scholar who studies food banks, I worked with a team of economists to estimate the effects of retail food donations. We used sales data for five perishable food categories sold by two competing retail chains, with stores located in a large Midwestern metropolitan area. We found that stores that remove items on the brink of expiration, donate them to food banks, and fill up the emptied shelf space with fresher inventory get more revenue from sales and earn higher profits.

Retailers donate 30% of what food banks give their clients

U.S. food banks, which have been operating for more than 50 years, give away over 6 billion pounds of food annually.

They get about 30% of that food for free from supermarkets and big-box retailers that sell groceries. Prior to the start of the COVID-19 pandemic, retailers supplied more than twice as much food to food banks than the federal government did. The volume of food supplied by federal programs administered by the United States Department of Agriculture, such as the Emergency Food Assistance Program, have steadily increased since 2020, to now almost match the volume of food donated by retailers.

In 2022, for example, the network of more than 200 Feeding America member food banks procured about 2 billion pounds from retailers and almost 1.5 billion pounds from government programs.

The remaining 2.88 billion pounds of food were either purchased directly, provided by farmers, donated by food processing companies, or donated by people and organizations in local communities.

Despite several federal programs that help low-income people get food and the nation’s robust network of food banks and food pantries, nearly 50 million Americans are experiencing food insecurity. That means they can’t get enough nutritious food to eat at least some of the time.

Retail donation routines are established but inconsistent

When food on a store’s shelves is on the verge of expiration, store managers have three options. They can donate or discard it, or sell it at a discount.

Stores that regularly donate food have established routines for when they set aside about-to-expire food to give away. However, these routines are often inconsistent.

Many stores donate only on a seasonal basis or just give away certain kinds of food. For example, they might donate only meat, baked goods, or fruits and vegetables. In many cases, donations take a back seat to more immediate priorities, such as customer service.

Those realities can increase the likelihood that food will land at the dump instead of on somebody’s table.

Although millions of Americans struggle to find their next meal, close to 40% of food gets thrown out along the supply chain, as food moves between agricultural producers, factories, retailers, and consumers. This is largely due to logistical challenges: It’s hard to transport and distribute highly perishable food.

Discounts on food can undercut sales

Stores often prefer to sell food on the brink of expiration at a discount rather than donate it or throw it out due to the money they recoup that way. This option, however, also keeps the discounted food on the shelf, where it takes up valuable space that could otherwise hold fresher inventory.

Shelf space dedicated to the sale and promotion of full-priced products competes with that for price-discounted food. Stocking perishable foods that are starting to look iffy—such as bananas with brown spots sold alongside unblemished yellow bananas—could harm a retailer’s image if shoppers start to question the store’s quality.

In other words, if consumers make judgments based on all the produce that’s on display, then it may be better for stores if they don’t sell sad-looking bananas and instead just give them away.

My research team calls this practice “preemptive removal.” Increasing the average quality level of food on display does more than improve a store’s appearance. We used panel data with more than 20,000 observations, and we included 21 retail stores that compete in a similar market geography. The five fresh food categories were bakery, dairy, deli, meat, and produce.

Stores that donated food, instead of discounting it, may have made better use of the limited room to display fresher inventory. My research team found that food donations can increase average food prices by up to 1%, which corresponds to a 33% increase in profit margins. Profit margins for supermarkets and other food retailers are quite low and typically hover below 3%.

That means even a small increment in food prices, even a 1% bump up, can translate into significantly higher profits for retailers. At the same time, increasing the volume of retail food donations would get more food to people who need it, limit hunger, and reduce food insecurity.

John Lowrey is an assistant professor of supply chain and health sciences at Northeastern University.

This article is republished from The Conversation under a Creative Commons license. Read the original article.