Economic evaluation of grocery store nets in cities - a model approach

The rapid transformation of the grocery business in cities from small to larger units during the last decades has resulted in grocery store nets with fewer nodes. Cost reductions as well as cost increases associated with the structural change are present, with a poorly understood net effect. Earlier research indicates that retail trade is subject to an increasing-returns illusion when increasing consumer participation in performing the service reduces the amount of service actually performed by the firm. This is still to a large extent an unexplored issue of utmost policy relevance. In this paper a total cost model will be presented that focus on this research question. Its components, grocery prices in retailing and consumers transport cost functions are estimated from empirical data and derived from a specific spatial structure respectively. Our conclusion is that the increasing returns are not an illusion but due to external costs somewhat exaggerated. The costs associated with the transport and time use by consumers are more than well compensated by the scale economies related to larger stores. When the transport network is severely congested, however, we have a situation closer to the scenario with an increasing returns illusion. But we can clearly state that the structural change in grocery retailing is welfare enhancing when the capacity utilisation in the transportation system is balanced. From a policy perspective the results of this study clearly suggests that issues regarding local service should be an integral part of strategic urban transport planning. With infrastructure and transportation systems that enable easy and affordable access with cars in the city, a significant number of people will find it optimal to use large stores for grocery shopping. Restrictive policies at the more detailed level, currently applied in many countries, will clearly be ineffective since they are counteracted by forces released by more strategic choices.