Producer Price Index Manual: Theory and Practice ... - METAC

10. Treatment of Specific Products
are able to make unit purchases of items (that is, not
required to buy in bulk) that are generally packaged
in some manner. Basic functions involved in retailing
include standardization or grading of goods,
storage and transportation, buying, risk bearing, financing,
selling, and product planning. The selling
function is probably the most obvious one seen by
the consumer. Selling includes the pricing of the
product and the presentation, which includes activities
such as tagging, packaging, display, space allocation,
advertising, and promotion.
10.168 The U.S. PPI program has developed a
method of constructing the retail trade services provided
by grocery and department stores. Major service
lines are defined by type of store within each
industry, as shown below in the examples for grocery
stores and department stores.
Grocery Stores
(a) Supermarkets
(b) Convenience stores
Department stores
(a) Discount or mass-merchandise department
stores
(b) National chain department stores
(c) Conventional department stores
Within each of these, there may be further disaggregation
according to the services provided. For
example, in the case of supermarkets, disaggregation
is by department: meat, bakery, fresh produce,
and so on. Such disaggregation of activities are determined
by the organizational unit and are taken to
be homogeneous units of activity.
10.169 Once the products are selected, pricedetermining
characteristics associated with the
product are identified. These include the type of
product, size or weight, and, often, material composition.
In addition, store characteristics associated
with providing the service also are collected or assigned
based on secondary source data. Store characteristics
include area, number of available product
choices, hours of operation, and the existence and
age of scanners and software for processing customers.
10.170 In most cases the price collected is a margin
price (with the exception noted below). The
margin price captures the intermediary nature of the
retail service and is calculated by taking the selling
price and subtracting the purchase price of the last
shipment received (less all rebates and allowances)
for a specific good. Furthermore, it is consistent
with national income accounting conventions that
define the output of retail trade as the margin.
However, the U.S. Bureau of Economic Analysis
defines the margin as the selling price of a good in
the retail market less the cost of replacing the good
in the store's stock. This definition is difficult to
implement because it requires collecting the replacement
cost of the item. It is far easier to use a
last in first out (LIFO) accounting methodology,
that is, using the last shipment received for pricing
the acquisition cost of the sold item.
10.171 For a limited number of cases, the selling
price of the good is used instead of the margin
price. These cases occur when the value added by
the retailer in preparation of the product for sale is
large, or when there is a fee for a service where the
customer is clearly paying for something incidental
to the sale of goods. Examples include sales from
in-store restaurants run by the retail establishment,
alterations of purchased goods, and delivery
charges incidental to the purchase of a good.
10.172 Two approaches have been used in implementing
the margin pricing methodology. The first
looks at the margin price of a unique product. This
"sample of goods" approach is used to represent the
output of the entire store. One concern with this approach
is that the marketing of the selected sample
of goods may not always be representative of the
marketing of other goods sold in the store. Using
this approach, changes in store characteristics may
not explain changes in margin for the selected sample
of products. The second approach looks at the
average margin value of a relatively homogeneous
grouping of products. Though this approach may allow
store characteristics to better explain the margin,
the average margin might be overly affected by
differences among the products in the group.
10.173 There are three potential problems with using
a margin price: setting the base price, negative
margins, and weighting.
10.174 Base prices are established as the price received
in the first month before to index calculation.
Sale prices are common in retail trade industries,
and if a sale price is used as a base price then
a permanent bias is introduced in the indices. However,
if sale prices are not used in the base period,
the price movement from the base month to the next
month is incorrect because the index methodology
requires that the base be the first month's price. To
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