Boosting Sales and Customer Welfare from Premade Foods (Let the Freshest Chicken Fly Off the Shelf First)

This paper examines a grocery retailer’s management of a premade food product. The retailer’s goal is to maximize a weighted sum of direct profit and customer welfare. Multiple items of the product are produced in batches, and immediately displayed for sale. Considering that each item’s quality decreases while it sits on the shelf, the retailer chooses the shelf life, whether to issue items in FIFO or LIFO order, whether or not to timestamp items, and how to price items. In a base model, we find that the retailer should use LIFO issuance and not timestamp items. The intuition is that this increases customer welfare and allows for a longer shelf life, increasing sales and thus reducing waste. By extending the model, we identify features that can make FIFO optimal (such as a holding cost, upper bound on the shelf life, age-dependent disposal cost, or customer risk- or loss-aversion) and we show how customer heterogeneity can favor timestamps. Lastly, we show how a mandate to donate unsold food items (as implemented in France and California) can motivate a retailer to increase the shelf life, thereby reducing the quality and quantity of donated items.