Giving begets gain when grocers share still-good perishables

ASU research shows that food retailers who donate perishable items to food banks significantly increase their profit margins.

Contrary to what you might expect, the U.S. food retailer that donates the most usable perishable items to local food banks around the country also enjoys a higher profit margin than most of its competitors. That charitable difference isn’t a small one, either. Although many food chains donate still-good perishables from their storerooms, one retailer beats competitors’ average donations by a factor of 10.

That retailer is Walmart, which now pulls in 25.2% of grocery dollars spent in the U.S. It also has one of the highest profit margins, according to Professor and Morrison Chair of Agribusiness Tim Richards.

Walmart may know something other grocers should know: Being charitable is a more profitable business decision than being stingy. Richards knows this, too. His recent research demonstrates that donating still-good perishable items to food banks can significantly increase a food retailer's profit margin.

Like money in the bank

Richards and his research colleagues chose to investigate this topic because of a convergence of circumstances.

First, there is a lot of food insecurity in the U.S. “One in seven households in the United States visits a food bank at least once in the year,” Richards notes. Data released in February by Dunnhumby, a consumer-focused data science firm, found that 31% of households reported skipping or reducing the size of a meal for financial reasons in the past year. Among consumers in Idaho, Oklahoma, Arkansas, Tennessee, and West Virginia, that number was 40% or more.

Second, there’s a lot of grocery waste, as well. Some estimates have found that more than one-fifth of the food displayed on grocery store shelves never reaches the checkout counter, Richards and his team noted in a recent paper. Other studies have found that the share of unsold, discarded food is closer to one-third of what makes it into the grocery store in the first place.

The good news is that there is plenty of opportunity to address the waste and hunger these statistics reflect. That’s because the grocery business requires over-ordering of perishable items. “Grocers need to over-order to ensure they don’t run out,” Richards says. “If shoppers want Fuji apples they’ve been buying for ages, and the store is out, some of those shoppers will go somewhere else next week. A stock-out of fresh produce is the worst thing a food retailer can do.”

Although all stores overbuy, the data suggest that less than half contribute to food rescue programs such as those run by Feeding America, the nation’s largest domestic hunger relief organization. Feeding America supports more than 200 food banks plus some 60,000 pantries or meal programs nationwide. Those facilities get donations from several sources, including the U.S. government, military surplus, restaurants, and churches.

“The single largest source of donations are retailers,” Richards says. Among Feeding America’s affiliated food banks, about 40% of donations come from grocery rescue programs where retailers give food that’s still good so that it can land on someone’s table rather than in a trash dumpster.

That means there’s plenty of room for retailers to up their contributions, and the research Richards conducted indicates they’d be rewarded financially if they did so.

Food chain reaction

How do perishable food donations help grocers boost profitability?

First, perishables are traffic drivers in grocery stores. “There are all sorts of consumer studies showing what consumers want out of a store and, invariably, the No. 1 item is high-quality fresh produce,” Richards says. “Retailers know that to get the most bodies in the store, they must have that high-quality fresh produce. If they do, consumers are less sensitive to paying higher prices for things like beer and other products where retailers make their money.”

However, when quality drops on those perishable foods, so do the prices. Day-old bread, managers’ specials on meat packages, or discounted browning bananas are all part of the same phenomenon. To move the less appetizing food, retailers give it a more attractive price, and their margins on those items drop even further.

Meanwhile, there may be other losses ahead, as well. “If perishable food doesn't sell, retailers have to throw it away,” Richards explains. When that happens, there are “tipping fees,” the cost of having a waste management company grab that dumpster behind the grocery store and tip its contents into the back of a trash truck.

Richards notes that the option of simply throwing produce away in some jurisdictions is gone. A handful of states have laws on the book requiring food retailers to donate or recycle organic waste through composting or some other process, so what doesn’t get donated may have disposal costs even if it doesn’t wind up in a dumpster.

Moreover, donating food while still good allows retailers to get a tax deduction. That adds to the value of being a donor.

Still, Richards found that the most significant value of being a donor was the price-lifting power of higher-quality food. “By delivering lower-quality items to the food banks, the remaining quality on the shelf is higher, and the store can charge higher prices,” he says.

He likens it to the restaurant scene in a place like San Francisco, where fine dining is expected because there are plenty of superior eateries in the market. He notes that they can all charge high prices because gourmet excellence becomes a way to soften price competition. Likewise, he adds that when grocers have high-quality produce, they can raise prices, affecting prices throughout the store, not just in the produce aisle or at the deli counter.

In computer simulations, the researchers found that prices rise by 0.7% for stores that donate 50% more volume than others. Adding to the reduction in tipping fees and tax benefits, retailers who donate generously can earn 9% higher profit than non-donating stores.

“It makes sense for the retailer to donate perishable foods before they visibly degrade,” Richards concludes. Passing along still-good food isn’t just a charitable act; it’s a strategic one.