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New York City mayoral candidate Zohran Mamdani was recently interviewed on CNN and spoke to his proposal to open city government-run grocery stores in the city. His emphasis was on the plan for the stores to sell groceries cheaper than what is currently on offer in New York City.
Even the hard-left interviewer (Abby Phillip) expressed skepticism about whether a government that can’t seem to fulfill basic government services could successfully run a grocery store.
Let’s assume for now that the city government can run a grocery store and keep it stocked. How do the economics work? How does Mr. Mamdani plan to enable selling groceries more cheaply than any of the current grocery stores?
Mr. Mamdani noted that currently there are about a thousand grocery stores in New York City. He proposes to add five government-run grocery stores. One government-run store in each of the five boroughs.
I strongly suspect the New York City grocery market is different in many ways from the grocery market in the suburban and semi-rural towns in which I have lived. Personal customer transportation is different (less personal automobile ownership), which affects location selection and product size choices. Customer household storage space is different (small apartments), which affects the frequency of visits and product size selection. Real estate costs likely impact store size. As such, I'm reluctant to compare the New York City grocery marketplace with the grocery stores at which I have shopped.
In most of the United States, groceries are a very low-profit-margin business. Is the New York City grocery market so different that there’s a huge amount of room to cut prices? Do not existing New York City grocery stores already compete for customers on the basis of price, the way grocery stores elsewhere in the United States do?
Has anyone heard or read an explanation from Mr. Mamdani of the economics of HOW he plans to bring prices below the stores operating under this incentive structure?
One explanation from some aides was that the government-run stores would occupy government-owned land and thus would be exempt from the costs of real estate rent and taxes. But how much do rent and taxes figure into the overall costs of running a grocery store in New York City? As compared to factors like wholesale product costs, staff labor costs, utilities, theft losses, and insurance? I’d love to see some financial analyses of the costs, as I have no knowledge of what the large cost categories of running a New York City grocery store are.
If taxes make up such a high portion of the cost of selling groceries in New York City, enough so that a government store exempted from this cost has a significant advantage, might that suggest that taxes are part of the initial cost problem for groceries? And if sales at the government-run store deprive the government of tax revenue that would be collected from private grocery stores, from what other source would the city government get the “lost” revenue?
Speaking of labor, government employee labor is often significantly more expensive than comparable labor in the private sector, factoring in not only direct labor rates, but also work rules (examine government employee union rules). Especially, I suspect, compared to the cost of immigrant labor that has traditionally been heavily involved in New York City’s grocery businesses. How does Mr. Mamdani plan to keep labor costs from swallowing up other cost savings?
Some critics of Mr. Mamdani’s proposal suspect that part of the cost savings might be achieved by significantly limiting the variety of product selections carried in the store, allowing for better quantity-based price negotiations with suppliers. If so, success depends a lot on the store manager correctly choosing product options so that the limited selection the store offers comprises the brands and flavor varieties that the vast majority of customers are willing to buy.
[I am deliberately avoiding the cynical suspicion that any supplier cost savings might evaporate under the weight of bribery and kickbacks from supplier representatives to government employees responsible for product selections.]
Some commentators assume Mr. Mamdani plans for the government to subsidize low grocery prices with the taxes he plans to increase. But the more taxes increase, the more likely the people being taxed might leave New York City. At some point, might the ability to subsidize grocery prices “run out of other people's money”? As many have pointed out, a large percentage of New York City tax revenues comes from a relatively small portion of the population, so it wouldn’t take very many of them moving out to significantly affect overall city tax revenue. So I’m discounting the value of government subsidies for the lower grocery prices.
So I’m still not following how Mr. Mamdani plans to be able to sell groceries more cheaply than the current grocery stores do. There doesn't seem to be a conspicuous category of large costs that government management could reduce. Does anyone have ideas on how the economics of government-run grocery stores are supposed to work?
Discussion (39)
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According to one website Kroger profit margin is:
It would appear that the volume of sales keeps Kroger alive. The only way that Madmani could make a profit on one ribeye steak would be to sell it for $1000 to cover wages, purchasing it from a wholesaler, delivery to the store, and paying for the electricity to keep the lights on in the store. There is no such thing free whether it's groceries or any other product.To read this bio, please join Ricochet.
Perhaps property taxes will help. NYC could also force government employees to provide shadow labor (cops on site).
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My family operated in this industry, growing the business from a roadside ice cream stand into a multi-department grocery store with fresh produce, dairy, meat and poultry, a live lobster tank, canned and other dry goods, a news stand, and all the beer and wine allowed by law. Started by my grandfather in the Depression, and run for about 35 years by my father, I know how tiny those margins are, right around 1% to 1.5%. When I was a kid, he worked the store from 6:30am till 7:00pm, Mon-Thurs, and till 9pm on Fri and Sat. Closed Sundays until several giant supermarkets arrived with their 24/7 hours, so he had to expand the hours to include Sundays. He employed local workers, and even high school students a couple afternoons a week, but the meat-cutters got full union wages and benefits. Etc. He used to say it would be great business if he could just skip paying the overhead for a week or two at a time. All the hard work supported our family, one girl through nursing school, another through business college, and yours truly through university, plus he earned a comfortable retirement after selling the business in the late 1970s, so I guess it was all worth the effort, but my, oh my, what an effort!
All the numbers, except for the margins, are of course much higher these days, but the margins are much the same, and only support large scale operations for long. Mamdani has no blessed clue what he's talking about.
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I have a feeling that security at the stores will be pretty lax, so inventory "shrinkage" will be some multiple of ordinary grocery stores. I can't picture Mamdani having top shelf, effective security confronting shoplifters. After all, the 100% sure fire reason for excusing thieves is to "feed your family." So they might as well skip installing cash registers.
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For the last two years before we moved to Tennessee, I worked for SpartanNash. SpartanNash owns a dozen small supermarket chains, and they wholesale to a bunch of independent grocery stores. Last time I looked up their gross sales and net profit, it divided out to $80+ in sales to clear $1 in profit. Imagine you bought $160 worth of groceries, and some ignorant politician says that groceries ought to be sold at cost. Whoopdedoo, that would knock $2 off your bill! Of course, that is only in Democratic theory. In reality, there would be no reason for a business to continue if government forbade it from making a profit. They would go out of business, and then where do you get your groceries from?
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