manager with over 20 years' experience in the grocery business provided the author with useful insight into the firm's pricing practices. He stated that the "price sensitivity" of an item is the primary consideration in setting margins. Staple products like bread, coffee, ground beef, milk, and soup are highly price sensitive and carry relatively low margins. Products with high margins tend to be less price sensitive.
Note the wide range of margins applied to different items. The 0 percent to 10 percent markup on cost for ground beef, for example, is substantially lower than the 15 percent to 35 percent margin on steak. Hamburger is a relatively low-priced meat with wide appeal to families, college students, and low-income groups whose price sensitivity is high. In contrast, relatively expensive sirloin, T-bone, and porterhouse steaks appeal to higher-income groups with lower price sensitivity.
It is also interesting to see how seasonal factors affect the demand for grocery items like fruits and vegetables. When a fruit or vegetable is in season, spoilage and transportation costs are at their lowest levels, and high product quality translates into enthusiastic consumer demand, which leads to high margins. Consumer demand shifts away from high-cost/low-quality fresh fruits and vegetables when they are out of season, thereby reducing margins on these items.
In addition to seasonal factors that affect margins over the course of a year, some market forces affect margins within a given product class. In breakfast cereals, for example, the markup on cost for highly popular corn flakes averages only 5 percent to 6 percent, with brands offered
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