Do consumers invest in paper towels as well as stocks?

Rebecca Stropoli | Jun 15, 2021

Sections Economics

There’s an important asset that calculations of household wealth rarely take into account: each family’s inventory of paper towels, canned foods, light bulbs, eggs, produce, and a thousand other everyday consumer goods.

These stockpiles represent another measure of US household wealth, alongside real estate, retirement savings, and brokerage accounts, according to Northwestern’s Scott R. Baker, Rice University’s Stephanie G. Johnson, and University of Lugano’s Lorenz Kueng. Proper inventory management, including strategic shopping and saving practices, can result in returns that beat the stock market and even justify some high-cost borrowing, they find.

“Our findings are highly relevant for understanding the ability of households to support consumption smoothing after shocks to income and spending,” the researchers write. 

US households at any given time have about $1,100 in consumer goods inventory—items typically purchased at grocery stores and pharmacies—the researchers estimate. These stockpiles plus any cash on hand amount to each household’s working capital, the researchers say. While all households benefit from strategic shopping and inventory management, the returns tend to be more significant for households with lower amounts of working capital, which are most often poor households.

The researchers mined the Nielsen Datasets at Chicago Booth’s Kilts Center for Marketing, including the Nielsen Consumer Panel, which measures shopping behavior of US households, and the Nielsen Retail Scanner Panel of store-level price and quantity information, both from 2013 to 2014. They also tapped the Federal Reserve’s Survey of Consumer Finances for data on US household income and assets, focusing on the years 2010, 2013, and 2016.

There are two main approaches households tend to use to shop strategically and manage inventories, the researchers say. One is to take fewer shopping trips and get discounts through bulk buying. The other is to make more frequent trips and take advantage of daily or weekly retailer deals. Any liquid savings can be allocated specifically to managing these trips.

A household may prefer one strategy over another according to individual circumstances. For instance, in the researchers’ model, when households face an increase in fixed shopping costs—which include the opportunity cost of time and convenience—they decrease trip frequency and increase bulk buying. This pattern was evident in the early days of the COVID-19 pandemic, when the number of trips to stores decreased while amounts purchased per trip increased.

Whatever the strategy, the less money a household had, the more significant the returns. A family that went from having zero dollars allocated toward shopping strategies to having $100 allocated to them saw large returns on this allocation, Baker says. For households with little in the way of cash savings, inventory management yielded returns of well above 20 percent, the research suggests.

Once a family had about $1,000 set aside for shopping and inventory management, the returns on additional funds for this purpose declined sharply and would most likely have been better put toward traditional investments, the researchers find. 

While borrowing is often deemed reckless for lower-income households, they can responsibly use credit to their advantage, the researchers find. If there’s a steep discount available, borrowing on even a high-interest credit card and paying it off over a few months rather than missing out on a deal can pay off in the long run.

“Not all borrowing is inconsistent with achieving superior financial returns,” Baker says. 

Poorer households that use strategic shopping may build up savings over time by putting away the money they save through discounts, or they may simply support a higher standard of living—say, getting the “fancy cheese” at half off—even if their income remains low, Baker says. 

Policy makers focused on wealth inequality should recognize that, particularly for low-income households, consumer goods are an appreciable component of overall wealth, Baker says. High returns, the research suggests, provide a rationale for poorer households to avoid risky assets such as stocks and instead earmark their funds for optimal household inventory management.