Supermarket Food Waste Is a Big Problem. Is Dynamic Pricing the Solution?

This story was originally published on Civil Eats.

Picture yourself grocery shopping. In the bread aisle, you see two loaves identically wrapped; both are perfectly edible, but one is a day older and costs half the price.

In the produce section, you see two baskets of avocados. The ones in the front are ripe, will need to be eaten today, and cost 75 cents less than those in the back, which will last for a few days. Which do you choose?

This is a business practice called dynamic pricing, and it may be coming soon to a supermarket near you.

Dynamic pricing is not new; for decades, the airline, fashion, and hospitality industries have all found that dynamic pricing — the incremental adjustments to prices to reflect inventory, demand, and supply — has helped companies cut waste and save money.

In 1988, American Airlines saw that the proportion of empty seats on its planes fell from 15 percent to 3 percent when it made slight adjustments to ticket prices closer to when flights departed. In the 1990s, Marriott Hotels found that it could sell out rooms on less popular days of the week using strategic pricing that varied with the length of stay and time of year.

Can this strategy also work at grocery stores, where an estimated 119 billion pounds of food gets wasted each year?

A recent study from U.C. San Diego’s Rady School of Management suggests that it might. Robert Sanders, the study’s author, used economic models to show that if grocery retailers used dynamic pricing to adjust prices for perishable foods based on how long they’ve been on the shelves, retailers would likely dramatically curb food waste.

Sanders says this isn’t to be confused with simple last-minute clearance sales. “It’s gradual discounts throughout the shelf life of the product,” he adds. “You don’t do discounts just at the end of the last day. The price is changing throughout the [time] horizon.”

The study zeros in on the question: What does more to stop food from being wasted from grocery stores — food waste diversion systems or smart pricing strategies?

The results point to the fact that stopping waste at the source is more effective — environmentally and economically. In this case, that means finding a home for food before it reaches its “sell by” date.

The big downsides to grocery store food waste

Having static prices for foods that vary in freshness across their shelf lives not only doesn’t make sense, Sanders says, but is a market failure that largely contributes to food waste and therefore climate change, through the release of methane in the atmosphere. “Prices serve a very important role,” he says.

The study found that dynamic pricing could reduce food waste from grocery retailers by 21 percent. And with the high costs of groceries, especially for fresh food, lower prices can also do a lot to meet peoples’ economic needs.

Every year, about 130 billion meals, or $408 billion in food, are thrown away in the U.S., according to Feeding America. Meanwhile, roughly 25 percent of adults reported food insecurity in 2022. All of this food waste — 35 percent of the U.S. food supply — results in “annual greenhouse gas emissions equivalent to those of 42 coal-fired power plants,” according to a report released by the EPA in November 2021.

Across the country, states have begun to implement strategies to divert food waste from their landfills. Vermont established a universal recycling law that requires separation and diversion of food scraps from the waste stream. Several states, including Minnesota, Texas, Pennsylvania, and Massachusetts have food recovery systems to collect and donate edible food to food banks.

California, which has a reputation for leading on environmental issues, has a goal to divert 75 percent of food waste from landfills by 2025 by mandating residential and commercial organic waste collection systems and edible food recovery programs across the state.

While creating such systems, especially the infrastructure to separate food waste to turn into compost, are critical to the fight against climate change, there is also a growing emphasis on prevention. For example, legislators have introduced bills such as AB 660 to mandate clear labeling and better education around how shoppers should be interpreting “sell by,” “use by,” and “best by” dates — which have been widely shown to confuse people and lead to edible food getting discarded.

Sanders sees all of these efforts as necessary to effectively reduce waste. “They’re complements; I don’t think they’re substitutes,” he says. “Even if dynamic pricing reduces waste 50 percent, there’s still going to be 50 percent of the waste that’s there.”

Some think asking large retailers to change their pricing structures in such a significant way, however, is too large of a task. Nick Lapis, director of advocacy for Californians Against Waste, says that although it could be a helpful strategy, the average retailer doesn’t want to be seen as selling anything but fresh food.

“Most stores are really concerned about their brand image and want to be seen as selling premium products,” Lapis says. “Selling produce is not the same as selling airline tickets.”

But with proper education, Sanders thinks that dynamic pricing could be used as an opportunity to help more customers understand the meaning of these discounts. “It can be done in a really classy way, if you actually frame it as a sustainable discount [and] you put signage indicating this is for the benefit of waste reduction,” he says.

The role of technology in dynamic pricing

Successfully implementing dynamic pricing means tracking what’s on the shelf in real time — and that will require coordination between grocery retailers, manufacturers, and point-of-sales systems. Technology can and does play a significant role in managing inventory data, which can also be labor intensive and inconsistent.

Barcodes, one of the bigger barriers to implementing dynamic pricing, could be used to communicate to grocery retailers not only when to mark down their food items, but how often.

“The standard UPC barcode doesn’t track physical items and doesn’t track expiration dates,” says Sanders. “They may know the total number of SKUs, how much they have on the shelves, but there is nothing in that barcode that tells them when it’s going to expire. But this technology actually exists — GS1 extended barcodes — you often see it used for expensive things.”

At the grocery store level, technology varies with each retailer, making a transition to a more nuanced system to track individual items a challenging task. Errol Schweizer, an industry expert who led the national grocery program at Whole Foods for almost a decade, says that what this study points to is the pitfalls of inventory management, notoriously a weakness amongst grocery stores in terms of forecasting and holding on to the right amount of inventory.

“There are a lot of hurdles to [implementing dynamic pricing],” Schweizer says. “I think it’s theoretically possible, but it’s another one of those things—do they have the right enterprise system? Do they have the labor? What’s their financing?” Yet, he added, those are all decisions a retailer can choose to make if it was committed to cutting out waste. “This isn’t rocket science.”

For a grocery store to be able to change prices throughout the day means either paying someone to apply markdown stickers in real time, or investing in the technology to automatically adjust the price displayed.

Companies like Wasteless, a startup based in Israel and the Netherlands, have helped stores in Europe and soon, in the U.S., integrate a technology that uses artificial intelligence to help capture data to study how products move within stores. Using an algorithm, the technology is able to understand how fresh products move and take into account how customers react to freshness and respond to discounts.

“We see a lot of differences between store locations,” says Tomas Pasqualini, Wasteless’ vice president of global operations. He explains that in residential areas where people shop once a week, they might look for products that have a longer shelf life than stores where people shop daily or multiple times a week.

In the store, Wasteless deploys electronic shelf tags that adjust pricing in a way that corresponds to specific expiration dates, which are encoded in the products’ barcodes. Wasteless reports that hundreds of its partner stores have reduced food waste by 39 percent.

But the greatest challenge, Tomas says, is introducing disruptive technologies in an industry that’s a bit more technologically traditional. Wasteless will be put to the test soon when it launches its service at a Midwestern supermarket chain later this year.

Sanders, the study’s author, stresses that reducing waste may be a good reason for disruption. “When prices function properly, they allocate all of the goods and services,” he says. “But when prices don’t work in the right way, when prices can’t adjust flexibly because the item is going to expire, that actually has a social cost.”

Katie Rodriguez is a reporter based in San Francisco focused on climate policy and regulation, as well as food systems and technology. She is a big fan of banana leaf tamales.