Grocery stores are a free-market success story

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Food prices are a political flashpoint. In America’s most recent presidential election, Democratic nominee Kamala Harris promised to ban “price gouging” on groceries, while Republican nominee Donald Trump said he would reduce prices by fixing supply chain issues. More recently, as food prices have risen 3% in the past year, Trump has promised to address higher consumer costs for beef by waiving tariffs on up to 300,000 metric tons of imported ground beef.

But amid talk of price gouging and lack of affordability, what’s often overlooked is that profit margins for American grocery stores are actually slim: between 1% and 3% as of 2026. The reason for this is simple—the average American has access to multiple grocery stores and is always on the lookout for better deals. In 2024, consumers shopped at an average of two different grocery stores per week. This year, 42% said they planned to switch to a less expensive store.

“Food is something we have to buy every week,” said Mike von Massow, a professor of food, agricultural, and resource economics at the University of Guelph’s Ontario Agricultural College. “It’s an expenditure we’re going to make no matter what, so we’re more sensitive about it. The other thing that is a factor here is that we have a stronger understanding of what we expect to pay for food because we buy it every week.”

Massow explained that the economics term for what a consumer expects to pay for something is the “reference price.” Shoppers develop a strong reference price for food items because they shop at grocery stores so regularly. They’re more likely to notice a price increase on a grocery item than they would on something they purchase less often, like an iPhone or a pair of sneakers, and the most-discussed price hikes are usually on groceries people purchase the most. Politicians often talk about the price of eggs, milk, or beef; they talk less frequently about the price of artisanal hand-roasted peanut butter or gluten-free bagels.

Grocery stores can operate in this highly price-competitive world because they’re volume businesses. A 1%-3% profit margin still translates to billions of dollars when the company is as large as Walmart, and the fact that the profit is spread over millions of daily transactions decreases the risks associated with low profit margins. (This means that a local grocery store is an especially tough business to operate; most have even lower profit margins than the large chains, and survive by becoming members of buying cooperatives and developing strong relationships with their communities.)

Grocery stores use two major pricing strategies. One, called high-low pricing, involves attracting consumers with promoted sales on items priced lower than competitors and then hoping to make a profit from the non-discounted items consumers purchase while they’re there. The goods that bring consumers into the store are called “loss leaders,” and they’re often staple items in high demand. (The textbook example of a loss leader is the Thanksgiving turkey, which is usually sold near wholesale cost to attract shoppers who will then purchase other ingredients for their holiday meals.)

High-low pricing was once the dominant business model for grocery stores, but with inflation making consumers even more sensitive to price increases, another business model is steadily gaining market share, especially with younger consumers: everyday low pricing. Everyday low pricing models, like those used by stores such as Walmart and Aldi, focus on having consistently low prices for every item in the store. Such stores make money in different ways: Walmart, for example, keeps prices low through its massive scale—nearly 1 in every 4 dollars spent on groceries in the U.S. is spent at a Walmart—while Aldi limits its selection, offering roughly 3% of the products a traditional grocery store has on its shelves.

But under either pricing model, what influences prices are the costs of food manufacturing and distribution. Though food prices rose steeply at the end of the COVID-19 pandemic, and in fact outpaced general inflation during the initial lockdown, economists say the price increases resulted from the unique strain the pandemic put on grocery stores’ supply chains.

For example, meatpacking plants were early hot spots for the spread of COVID-19 due to their low temperatures and cramped working conditions, and many plants implemented social distancing, which slowed production. Illness and risk of exposure decreased labor supply for both grocery stores and food manufacturers, further increasing the cost of getting groceries on store shelves. Increased demand was also part of the picture; shuttered restaurants meant that people cooked more food at home, and therefore grocery stores gained some market power. But overall, the picture the evidence paints is far from one in which grocery stores took advantage of a crisis to hike prices.

Likewise, the spike in egg prices that became one of Trump’s talking points on the 2024 campaign trail wasn’t a result of grocery store price gouging. It was the result of an avian influenza outbreak that began in 2022 and killed millions of chickens, severely reducing the supply of eggs. (An alleged price-fixing scheme by several egg producers may have also played a role, although the companies settled a federal lawsuit without any admission of guilt.)

The grocery business is a “very competitive business,” Jayson Lusk, editor of The Oxford Handbook of the Economics of Food Consumption and Policy, told The Dispatch. “I’m not saying [grocery stores] don’t have any control or power, but largely they’re scrambling around trying to figure out whatever they can do to respond to the latest consumer fad and trend.”

One example of this is the rise of private-label brands. In the past, consumers valued brands with established reputations, and grocery store brands, also known as “generic brands,” were considered lower quality. But modern consumers care more about price than brand reputation, and private-label brands, unhampered by advertising costs, tend to be cheaper and offer grocery stores slightly higher profit margins. Research also suggests modern grocery stores have as much brand reputation as food manufacturers themselves.

“Take Costco: They have their Kirkland brand and they’ve cultivated a quality image that is ‘good value for the dollar,’” Lusk said. “Over time, what we’ve seen is some transference of that brand trust and reputation to the grocery store itself.”

Another consumer preference story—albeit a more complicated one—affecting prices has to do with grocery stores’ continued use of human cashiers at checkout, even though self-checkout technology has existed for 40 years. One might assume that autonomous technology would have easily replaced human workers who require salaries, benefits, and breaks, but in fact, the opposite has happened. Large retailers like Walmart have begun to scale back self-checkout machines and replace them with humans. Amazon Go was the first completely automated grocery store, featuring a system of cameras, shelf sensors, and artificial intelligence that tracked when consumers picked up items and charged them when they walked out the door. But technology issues dogged the project, and Amazon pulled the plug on both Amazon Go and Amazon Fresh, another grocery venture that relied solely on self-checkout, earlier this year.

Rates of shoplifting have also increased in every grocery store with a fully automated checkout model. But another part of the story is simply that people value interacting with other people.

“People like other people,” Phil Lempert, founder and CEO of Supermarket Guru, a food and health news website, told The Dispatch. “And when you check out—especially now when you’re ringing up $150, $200, $250 when you go to the grocery store—people like a cashier that says, ‘Thank you.’ … People don’t necessarily like self-checkout.”

The continued use of checkout workers increases labor costs for grocery stores, but it’s unclear whether those costs are passed on to the consumer or offset by reduced shoplifting and increased customer demand.

In many ways, grocery stores are a free-market success story: competitive, low-profit, and extremely sensitive to changes in what consumers want. But that hasn’t stopped politicians like New York Mayor Zohran Mamdani from attempting to improve upon the existing business model. In July, Mamdani announced a plan to open five city-backed grocery stores across New York City’s five boroughs. City officials say the stores, which will operate on city-owned property and be run by third-party entities, will sell “essential staples” at prices 30% lower than private-sector stores. Last month, hundreds of small grocery store and bodega operators sued the mayor over the plan, alleging that the city-owned stores would threaten their livelihood.

While Mamdani’s grocery stores may provide real savings to the New Yorkers who live near them, they will be costly for taxpayers. Without established supply chains and economies of scale, they will likely have higher acquisition costs than private-sector grocery stores. The city government has promised to cover rent, property taxes, and construction; it’s unclear whether it will provide further support once the stores open. But experts like von Massow are skeptical that the stores will be able to operate without significant and continual infusions of taxpayer money.

“Even if [the store] made zero profit and bought just as efficiently,” von Massow said, “you could lower prices by 4%. If you want to lower prices by 30% … you’re going to have to directly subsidize that, and I would argue that, in that circumstance, you’re subsidizing an inefficient system.”

A better use of that money, von Massow argues, would be to subsidize purchases for low-income New Yorkers at already-established grocery stores. That way, eligible residents would pay less for groceries while also benefiting from the flexibility and scale of private stores, which aren’t exactly reaping huge profits. “There’s a reason those grocers are big, and it is about efficiency,” he said.

This story was produced by The Dispatch and reviewed and distributed by Stacker.