# Why doesn't economy of scale bring down prices of food?

I have little to no experience in economics and would enjoy a simple answer, if possible. Additionally, I base this question on subjective data, so I might be completely wrong in my assumptions.

EDIT: The title was deemed confusing. What I mean by "food" is any ready-to- or close to ready-to-eat meal. Restaurant meals definitely qualify, but so do frozen meals that might need a microwave/oven. I'm unsure about instant ramen, since I can hardly imagine enough people consuming enough ramen to create economic pressure on the rest of the food industry. Anything requiring attentive cooking disqualifies, so e.g. pasta is out.

Having some experience in preparing food for groups of people of up to 50, I could easily observe economies of scale working, driving the price per meal down as the number of participants (and thereby meals) increased. Roughly speaking, I'd spend about 3\$on a meal for myself, 2\$/meal for 2-3 people, 1\$/meal for 10 people, and so on. EDIT: I should emphasize I'm not asking about a specific price, but rather use them to show the difference between expectation and reality. So I would expect companies preparing hundreds or thousands of meals per day (i.e. restaurants) to sell meals at comparably low prices. Now most restaurants don't work like that and prepare every meal when it's ordered and I'd assume customers pay because they value the experience more than the food itself. But why aren't there any places selling decent meals for .5\$? My explanations don't quite satisfy me:

• They do exist, it's called McDonalds. The prices aren't that low because there is an organizational overhead, at some point the number of people required rises linearly with the food that can be distributed. I'm not quite satisfied by this, because if it were driven by economics of scale, I'd expect similar concepts for better quality meals.
• They do exist, they are called soup kitchens. At some point, the prices are just so low that demanding the actual price causes people to question it's quality. I.e. when selling food for .1\$/meal, people start wondering what's wrong with it. The only way people accept these prices is by acting as a charity, giving the meals away for free and generating money through donations, rather than meals sold. But wouldn't that mean there should be something like for-profit soup kitchens? I know a pay-as-you wish restaurant in my city, they rely heavily on economics of scale, and still invest about 4\$/meal.
• Rent is the essential problem. A restaurant can only seat so many people, and prices would drop drastically enough only at higher numbers. In that case, wouldn't bigger restaurants or restaurants owning their venue offer cheaper food?
• In the thought of all of the above, the solution are frozen foods. Prepared in huge quantities at industrial scale, they may be shipped anywhere and are storable, even selling in stores is possible. Then again, the cheapest frozen food I know still costs around 1\$/serving (and is by no means a full meal). There is actually a company sponsored by the red cross delivering frozen meals to elderly people, which has prices starting at 3\$/meal.
• People just don't accept cheap food. Though possible, there is a much stronger social component to eating, driving people to avoid low priced food as to avoid a status-penalty. But there are cheaper places (e.g. cafeterias) in existence, already associated with a status-penalty, so why would even cheaper food result in unbearable status penalties?
• You forgot labor. Getting served even fast food involves people heating and serving it, even if just in line. Which (European) country are you in? It looks like one can eat some meals for $1 in Bulgaria: globalprice.info/en/?p=bulgaria/prices-in-bulgaria – SX welcomes ageist gossip Mar 10 '19 at 1:17 • Well, yes and no. I don't know how to price labor correctly, so I just ignored it. However, since man-hours/meal are drastically decreasing even when going from 1 to 10 people served, I'd expect them to go down similarly when going from 10 to 100 and so on. And if I understood economics of scale correctly, the price of labor should go down as well, since big companies have better bargaining position against their workers. So I wouldn't expect labor to be the driving cost factor. – GammaSQ Mar 11 '19 at 9:25 ## 2 Answers In the US at least, purchases and wages cost more than rent for a fast-food type business: Purchases include some other hidden labor costs (drivers for transportation etc.) I'm not sure what's in the "other" category, perhaps insurance, lawyers etc. And I'm guessing in Europe (where you are) "value menus" might not be as common as in the US. These are loss leaders in the US by the way, i.e. the restaurants lose money on$1 double cheeseburgers (but they are required to sell them in order to keep the franchise.) Or so the story went around 2014. And you're not the only price-sensitive customer. A lot of McDonalds' US customers apparently were:

In January 2018 McDonald’s finally brought back its dollar menu after a five-year hiatus, marking the return of a deal structure that had been displaced by alternative — and less popular — offers, like the McPick $2. The removal of the dollar menu coincided with the company’s initial decline, and its return makes it competitive among other chains with similar value menus, such as Taco Bell and Wendy’s. If you want even lower prices in the short run, your best bet might be that Amazon buys a fast food chain. They're known to sell entire categories of products at a loss. And depending whom you choose to believe, McDonalds did or din't envisage labor cost savings when rolling out kiosks to replace cashiers. Their statements on that have been somewhat vague and thus interpretable insofar. I find it a bit hard to believe that a company which pioneered low food costs by cutting on labor didn't consider that as a factor; flashback to the 50s: The [McDonalds] burgers sold for 15-cents, about half of what a burger cost at regular diners of the time. And I think you might have some misconception about the level of scale needed to cut costs substantially (say by half). You expect to pay half as much per meal by ordering 10, but you are hardly in a position of bargaining power here given the scale of a large food chain. In contrast, the actual economies of scale achievable have long been realised when nation-wide (and later world-wide) franchise chains appeared: The predominance of fast food restaurants changed the food supply chain all the way down to the farmer. McDonald's quickly became the single largest buyer of beef, pork, potatoes and apples in the U.S. That gave them tremendous economic clout. The fast food system is all about standardization, and so when the companies went looking for someone to supply their meat, they choose to deal with their large, corporate counterparts in the packing industry. IBP began to produce "boxed beef," where the final cuts of beef, including hamburger, were produced at the processing plant rather than the local grocery. IBP became the largest supplier of hamburger meat to the fast food industry. Kentucky Fried Chicken buys all of its chickens from huge suppliers like Perdue, Tyson and Pilgrim's Pride. McDonald's gets its fish products from the giant supplier Gorton's of Gloucester. Because consumers with busy lifestyles needed food fast, the chains needed raw materials in standardized packages. So, meat packers needed a consistent supply of standardized animals to produce their meat. They couldn't afford to deal with the uncertainty of many, small family farms. So, livestock producers became bigger and bigger. McDonald's and other chains have also been accused of using their huge buying power to keep farm produce prices artificially low. What you really want is technological progress at any of these levels, because the foreseeable economies of scale are already there. And (being focused on restaurants), you might not know that Chicken is America's favorite meat today, surpassing beef and pork. Chicken consumption per capita has nearly doubled in recent decades, whereas consumption of beef and pork has declined or stagnated. [...] Far from being automatic, these changes are the consequence of technological and organizational innovations that have made chicken products cheaper, abundant, and more diverse over the last century. This transformation is directly related to the rise of new lead firms and governance structures in the chicken value chain. The increased sophistication of processed chicken has given rise to a set of firms known as integrators, which vertically integrate through ownership a wide range of activities from breeding to processing and distribution. The shift to away-from-home consumption favored fast food giants like KFC and McDonald's, whose mass demand for processed chicken required higher levels of explicit coordination by the integrators. [...] The chicken value chain is characterized by a hierarchical governance structure made up of a few large integrators and tight coordination between them and large food retailers and fast food chains. The integrators have become highly concentrated as well. Two leading integrators, Pilgrim's Pride and Tyson Food, accounted for 48% of the US market in 2006, up from 30% in 1996. They exert great power over the entire value chain by connecting a wide array of activities from inputs to distribution. [...] Their linkages with thousands of contract growers, mostly small farm owners, can be portrayed as a captive relationship, where the growers heavily depend on the integrators for market access and resources. Meanwhile, the integrators have relational or modular linkages with large food retailers and fast food chains, which are now highly concentrated. The latter paper goes into some detail into what the captive relationship consists of, but I'd be digressing too much detailing all that here; the high-level definition is that it is "a means to maintain control over the growing process with minimal ownership" (compare this with franchise model). How far vertical integration goes (and thus economies of scope) is limited by some legal issues like antitrust legislation. • To see if I understood correctly: you are saying franchises do what they can, but at 1$/meal we are pretty much at what technology allows today. In that case, I'd still be wondering where these costs come from. Is it a specific sector (transportation, bureaucracy, advertising, ...), or is it taxes or the simple fact of too many people involved? – GammaSQ Mar 11 '19 at 8:57

Food and restaurant meals are not the same thing so perhaps the title is not what you intended. Your text is mostly about restaurants and cafeterias and delivered meals so I will assume the title is wrong. If a new restaurant intends to own the property inside of which it operates it would not make a difference to the price of restaurant meals because they would still have to pay for the property instead of renting the property. Mortgage lending makes renting and ownership similar. If a restaurant pays no rent and has no loan and has lower costs as a result and charges lower meal prices as a result; that restaurant is not a restaurant: it is some kind of hybrid entity that is a charity plus restaurant.

I think the premise of the question is wrong: your own experience shows that larger scale reduces the average cost. The other question: why not 0.50 USD restaurant meals is actually not proper in this forum because you're not supposed to have multiple questions in a single post.

Regardless, I think eventually restaurant meals will seem to cost 0.50 USD but not literally that much. "Seem to" means the price will seem to be less expensive than it is today. If technology improves at a rate of 1% per year and inflation increases the price at 2% per year, the meals will seem cheaper as a percentage of the average wage but they will nominally cost more. In other words even the poorest people living in the poorest parts of the world will be able to eat restaurant meals even when the price per restaurant meal is 100 USD. This is a mathematical certainty when technology improves slower than the rate of inflation. Given that the poorest people do not eat in restaurants often we probably need technology to continue to improve, albeit, I would note that some poor people do not cook for themselves.

The only way to see 0.50 USD restaurant meals is to have no inflation and wait for technology to improve. (I have a broad definition for technology which includes industrial organization as well as science and engineering.) Since major central banks intend there to be 2% inflation and it seems (thus far) to be plausible we will not see 0.50 USD restaurant meals.

Some people might say Japan is the exception when it comes to inflation but other people might say we just haven't waited long enough to say anything. The inflation picture from Japan...

If you think this chart says that perhaps Japan demonstrates that a country might end up with less than 2% inflation that is not the same as saying it is zero inflation. If you suppose some people do think it will be zero percent inflation and that the rest of the world is turning Japanese then in fact there will be 0.50 USD restaurant meals (which is about 56 JPY).

The other possibility is that 0.50 USD restaurant meals will arise when technology improves faster than the inflation rate. Since we would be predicting two rates when one rate is already hard enough to confidently predict it is hard to justify such a prediction.

The bottom line: A large scale does reduce the average cost and you said so yourself. Since you mentioned a target price of 0.5 USD and also 0.1 USD it seems your inquiry is not specific to the price. I doubt if a specific price target for a restaurant meal is your concern. Rather, you are asking why we do not have prices that are lower than they are today. The answer is that as technology improves everything becomes more affordable for even the poorest people. That means prices are not lower than they are today because of the state of technology. This would include the organization of specific enterprises such as restaurants and within the food processing industry, industrial organization, agricultural science, engineering, and other considerations. A limitation on this phenomenon is where technology cannot substitute for the services of people but that probably does not apply to restaurants in the long run. The actual price is not important; only the price as a percentage of the average wage. I am not talking about the average wage in restaurants but the average wage in the entire economy. Central banks have not yet changed their 2% inflation target so it is more important to focus on the rate of technology change. We might take Robert Gordon's forecast productivity growth rate as an estimate of technology change. Robert Gordon's forecast is 1.2%. Given the targeted 2% inflation rate and the forecast productivity growth rate of 1.2% the price of restaurant meals is more likely to increase than to decrease. Of course different parts of the economy will experience different changes in productivity so the price of restaurant meals will not necessarily increase at the rate of 0.8% per year.