Suit Seeks to Crack Case of Region’s Higher Egg Prices
Just in time for Easter egg decorating, Vons is offering a dozen large eggs free with a $10 purchase. That’s good news for consumers, but the fine print tells the real story: “Save up to $2.19,” the Vons coupon reads.
At a regular price of $2.09 to $2.19 a dozen at major Los Angeles-area chains, eggs are far from an everyday bargain. In fact, the price here is more than double the price typically charged outside California.
A few years ago, the lofty Southland prices got the attention of Cash J. Bonas, a fledgling lawyer who had just moved back to San Diego from Idaho. Bonas helped his sister and a friend file suit in 1996 against Lucky Stores Inc., Ralphs Grocery Co. and Vons Cos., alleging that the chains monitored one another’s egg cases and conspired to fix prices. The supermarkets deny the allegations.
After many delays, the class-action suit is scheduled to go to trial July 9.
If it does, jurors will get a hen’s-eye view of Southern California’s rough-and-tumble egg business, with its jumbo egos, its cutthroat competition and murky pricing practices that even longtime observers say defy the laws of economics.
“The whole thing mystifies me,” acknowledged Francine Bradley, a poultry specialist for the UC Cooperative Extension in Davis.
It is a system that enables chains to make a killing on eggs, even as many California egg farmers and distributors are squeaking by.
This is a high-volume, cyclical industry in which a penny a dozen at wholesale can sometimes mean the difference between bankruptcy and survival. The exact profit margins for processor-distributors and retailers are closely guarded secrets.
Consider these numbers.
As of March 1, farmers were selling large eggs for 51 cents a dozen. It costs processor-dealers 15 to 20 cents a dozen to clean and grade the eggs, put them into cartons and deliver them--and still retain a profit.
Assuming a retail price of $2.19 a dozen, that would mean a retail markup of at least $1.48 a dozen in Southern California.
Nationwide in February, the retail markup was 35 cents a dozen for all eggs, primarily large eggs, according to U.S. Department of Agriculture data.
Given that the high California levels are included in the nation’s figures, the markup throughout the rest of the country is actually lower than 35 cents, noted Lee Schrader, a professor emeritus of agricultural economics at Purdue University.
The price of eggs fluctuates wildly. In early March, for example, the market moved up by 10 cents a dozen, as it usually does at Easter time. Similarly, after Easter it is expected to plunge at least 20 cents a dozen.
Eggs clearly contribute more than most other items to a big grocery chain’s bottom line.
Because of the class-action lawsuit, Vons, Lucky and Ralphs would not respond to questions about their pricing policies.
Economists say it’s simplistic to chalk up the egg prices in the Southland to “the high cost of living,” which tends to get blamed for everything from housing to milk.
“Egg prices don’t seem to follow any pattern, even though they’re considered a commodity,” said Jim Sinegal, president and chief executive of Costco Cos., a membership warehouse club based in Issaquah, Wash.
Many factors appear to be at play. For starters, supermarkets set their prices guided by that hoary catch phrase: whatever the market will bear. Still, the consistently high markup in Southern California disturbs Schrader.
“It amounts to an implicit agreement on the part of the retailers to take that margin,” Schrader said. “I wouldn’t say they get together and say, ‘Let’s put it to ‘em on eggs,’ but nobody has upset the apple cart. All it would take is one chain breaking out and advertising a reasonable price.”
To be sure, the major retailers have contended in court that they often sell eggs at special discounts.
“Vons routinely puts eggs on sale at low prices--on occasion, the price of eggs is as low as 39 cents a dozen,” said Gregory P. Stone, an attorney for Vons, in a statement.
But four years ago the high regular price of eggs prompted Carrie O’Husky, an Oceanside schoolteacher, and Sheri McCampbell of Hermosa Beach to serve as plaintiffs in the suit against the three chains. O’Husky is lawyer Bonas’ sister; McCampbell is a friend.
In the suit, they allege that the chains use employees or contractors to monitor retail egg prices in the region. The price-monitoring system, the complaint says, enables the chains “to refrain from competing . . . and to raise egg prices to unreasonable and artificially high levels throughout Southern California.”
Economist Lewis C. Solmon, an expert witness and former dean of the UCLA Graduate School of Education, concluded, “The Ralphs policy for eggs is to match the retail prices at Vons, and Vons’ policy is to price products within 2-3 cents of Lucky and not higher than Ralphs.”
Many other documents related to the case have been sealed in San Diego Superior Court.
Given the contentiousness of this debate, it helps to understand how the egg industry has evolved and consolidated, giving power to a few players.
After World War II, hundreds of returning servicemen founded small farms in Orange County, the San Fernando Valley, Petaluma and Rio Linda, near Sacramento. At one time, the state was home to more than 10,000 mom-and-pop operations, including 2,000 in the San Fernando Valley. Each raised a few thousand laying hens.
Over the years, these producers retired or were pushed out by urban growth. Now, California has just 83 producers, some with millions of hens. A handful of those producers also process and distribute eggs.
With 26 million laying hens, California is the nation’s second-biggest producer, after Ohio. Yet it still falls shy of satisfying the annual needs of its 33 million residents. Meanwhile, per capita consumption has been rebounding--to about 244 eggs last year--since the early 1990s, when changing breakfast routines and cholesterol concerns crimped sales.
To make up the shortfall, the state imports about 1.8 million eggs a day, many of them from mega-farms in the Midwest where feed costs are low. California, on the other hand, must import feed from the Midwest.
The price run-up began in 1983, when an avian flu outbreak decimated flocks. Egg prices soared. Once the hen stocks were replenished, retail prices dropped dramatically. Except in California.
Here, prices stayed stubbornly high, Solmon said, as grocers learned that shoppers would buy eggs no matter what. Eggs in the San Francisco Bay Area tend to sell for slightly less than here.
Consumers do have options. Warehouse stores, smaller chains such as Trader Joe’s and even corner mini-marts charge much less for eggs. Costco, for one, has lately charged $1.55 for an 18-pack of Grade AA extra-large eggs.
Still, about three-quarters of shoppers queried in Los Angeles and Orange counties say they buy eggs at supermarkets, according to the Los Angeles Times Marketing Research department. In those two counties, Ralphs, Lucky and Vons account for 60% of the grocery business.
Behind the scenes, things get mighty aggressive.
George Armstrong, 80, a longtime egg farmer in Valley Center, San Diego County, can attest to the pressure on producers. If they try to raise their price, he noted, they open the way for Midwest rivals. As he sees it, grocery chain mergers are giving Southland supermarkets more control over food distributors and, by extension, shoppers. Meanwhile, major processor-distributors--one in particular--have such a grip on the market that they can squeeze farmers.
Take Harry Eisen, a Polish escapee from Auschwitz who literally rules the roost in much of Southern California.
Bearing his tattoo--No. 144492--Eisen arrived penniless in Los Angeles in 1948 with his wife, Hilda. They saved enough to buy 100 chickens and went into business in Arcadia. In 1950, they moved to western Riverside County and built Norco Ranch Inc. into the state’s leading egg producer, processor and distributor.
Eisen, 82, did not respond to several requests for interviews. But many industry participants shed light on how Eisen controls much of the region’s egg business--perhaps 75% of the inventory at big chains and warehouse club stores, by one estimate.
Eisen “wants to make sure he has as much of the retail business as possible,” said Michael Mills, president of Olson Farms Inc. of Ontario.
Last year, Eisen increased his hold when Embly Ranch in El Cajon, Calif., bailed out of the processing and distribution business. Long known for being hard-nosed with producers, Eisen now needs more eggs and has begun paying them more, they say.
Meanwhile, to win shelf space, Norco Ranch offers big chains millions of dollars in upfront payments known as slotting fees. Decades ago, supermarkets began insisting that manufacturers pay fees to cover the costs of changing shelf labels and shuffling items around. The practice has become ubiquitous.
Why, shoppers might ask, would anyone have to pay slotting fees for a staple like eggs?
Typically, Eisen might pay $3 million upfront to a single chain to lock in a three-year contract. He then charges a premium for each dozen eggs. The grocery chain is happy to pay because it has already received upfront fees. From there, the retailer marks up the eggs to cover costs and still profit handsomely.
“These retailers are really making it on eggs,” said Schrader, the Purdue economist. “You could almost run the store on that.”
As a mother of four with a passion for baking, Nicole Geiger keeps close watch on egg prices.
“I almost never buy them in a grocery store because they’re so expensive,” said Geiger as she shopped at a Lucky supermarket near her Mar Vista home. She typically buys eggs at Trader Joe’s, where she can get extra-large Grade AA eggs for $1.39 a dozen.
Most shoppers, however, “aren’t going to go to three or four different stores to collect milk at one, eggs at another,” said Bonas, the attorney who brought the price-fixing suit. “What these stores have chosen to do is gouge on the essentials.”
The fact that stores sell many eggs on special, he said, “is just not a defense.”
The plaintiffs seek at least $250 million in damages, which would be automatically tripled should they prevail. They also want the court to prohibit supermarkets from fixing the price of eggs.
Proving a conspiracy could be tough, said Daniel Lazaroff, a professor at Loyola Law School in Los Angeles.
“It’s not enough to show they charge the same price or exchange price information,” he said.
But Bonas feels confident.
“The long and the short of it is these grocery stores completely dominate the Southern California market,” he said. “These are commodities that people need. The grocery stores get to squeeze the producers and gouge the consumers. They’re just not competing.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Over Easy
Per capita egg consumption bounced back in 1998, although it remains well below its World War II-era peak. Cholesterol concerns and changing lifestyles in recent years have put a crimp in sales.
Per capita annual U.S. egg consumption:
1945: 403
1998: 244
*
Sources: California Egg Board, U.S. Department of Agriculture
