Grocers get revenue boost from penny rounding, says prize-winning UBC paper
With many grocery prices ending in 9 and 8, penny rounding can generate profit for grocers
A University of British Columbia student's research paper has revealed that for some grocers, penny rounding can be lucrative.
Christina Cheung, 19, a third-year undergraduate economics student, started thinking about penny rounding when she noticed most grocery stores had prices ending in an 8 or 9.
In Canada, retailers have rounded out these price figures for the last four years, ever since the penny was phased out. An item priced at $9.99 for example goes for $10 for consumers paying cash.
But Cheung wondered if retailers were gaining an unfair advantage over consumers in these transactions.
"I hypothesized that it's possible when we buy things in cash, that there's an unfair skew in rounding," Cheung said.
When the Royal Canadian Mint phased out the penny in 2013, it introduced the practice of penny rounding to the nearest nickel for cash transactions.
Penny rounding is supposed to be revenue neutral. This means as every number theoretically has an equal probability of appearing in a transaction, there is an equal probability that a transaction can be rounded up or down.
Any difference in revenue from rounding up or down would be negligible.
But Cheung said because grocery stores like to price things ending in 9 and 8 to attract people to buy their items, prices tend to round up, potentially creating a windfall for grocers.
This price rounding has the potential to affect people with lower incomes because they tend to use cash more often, she noted.
Her prize-winning paper is to be published next March in the Atlantic Economic Journal, a U.S.-based peer reviewed economics journal.
18,000 price points
To test her hypothesis, Cheung spent a year conducting her research. Last year, she hand-collected and photographed 18,000 prices from three different grocery chains over winter break.
"[It took] an average of six [to] seven hours every day the entire December break," she said.
The project was not a school assignment, rather something Cheung pursued on her own time.
She found 60.8 per cent of grocery store prices ended in 8 or 9.
Cheung put those numbers through a computer simulation program that generated hypothetical purchases.
"I simulated [grocery purchases] depending on what province you're in, what tax rate you have, and how many items you buy," she said.
She excluded the volume of credit and debit card transactions, which aren't affected by penny rounding.
She then made a discovery: a typical grocery store would earn an additional $157 of revenue from rounding each year.
All together, she found grocery stores in Canada yield an additional $3.27 million dollars over a year.
Cheung says her research has implications for lower income people.
Many Canadians still use cash to process more than half of all their transactions. People with lower incomes tend to use cash more than others, and they're more vulnerable if store prices are rounded up.
"It's possible that this cost of rounding may not be distributed equally among different segments of society."
Cheung presented her research in October at the International Atlantic Economic Journal's Best Undergraduate Paper Competition and won first place.
Katherine Virgo, the executive vice president of the International Atlantic Economic Society and managing editor of the Atlantic Economic Journal, said the prize is a big deal.
"This is a rare thing for an undergraduate student because normally undergraduates can't publish in professional journals," Virgo said.
"I think her paper stood out."
Cheung already has graduate school in her sights.
"I'm really interested in ... nanoeconomics [which] is how these mini data sets can really accumulate ... like what you do on a daily basis and how that comes down in the aggregate," she said.
She'll have to finish her undergraduate degree first.