Friday, April 25, 2008

Sam's Club and Costco Limit Rice Purchases: Is It Realy About the Global Food Shortage?

NPR "All Things Considered" and various newspapers (see, for example, L.A. Times) are reporting on the decision by Sam's Club and Costco to limit daily purchases of rice to its customers.  At Sam's Club, the limitation only affects bulk purchases of 20 lb. bags or more.  The bags are primarily purchased by the small business customers.  Both Sam's Club and Costco are membership-based organizations that make their money from membership dues mostly.  Very little profit is actually made on the sale of the items in the warehouse.  These are volume-based businesses, meaning low profit on large numbers of sales.  In addition, while there is a global concern about shrinking rice supplies, there is no deficit in the U.S. rice market.  In the NPR story, Greg Mathis, a representative of rice producers in the United States, stated that rice production in California and other areas greatly exceeds the demand for rice in the United States.  He stated that most of the U.S. production is exported.  Specialty rices, like Jasmine and Basmati, are a little different than long grain and short grain.  According to one of the articles, rices is consumed within 100 miles of where it is grown.  So with the exceptions of rices like Jasmine and Basmati (which are grown in Asian countries), most rice consumed in the United States is grown in the United States.

The stories about rice rationing by Costco and Sam's Club run the risk of sending a false impression to the marketplace, i.e., that there is a rice shortage in the United States.  Who benefits from such an impression?  For one, Wal-Mart benefits because it has refused to restrict access to rice in its main stories.  Also, small businesses that patronage these warehouse wholesalers may choose those warehouses that don't restrict access, or those do so in a more limited way.  In addition, the impression that there is a shortage is likely to lead to stockpiling by these very same small businesses so as to avoid higher rice prices in the future.  This last consequence will lead to increased sales for the warehouse wholesaler.  The reaction of Costco and Sam's Club likely leads to a circuitous result -- more sales for the warehouse giants having to no relationship to the actual global food crisis.  The NPR "All Things Considered" story suggests that both Sam's Club and Costco benefit by driving home the point to their loyal customers that both would rather absorb the loss (i.e., increase in cost of rice) than raise prices in the warehouse thereby protecting the profits of their customers.

See links for in depth coverage of the stories.  See related blogs about Global Food Crisis.

AMT

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