Online grocery retailers have hidden price markups, MIT study finds: How to save money on your food budget

Stocking your shelves with fresh groceries shouldn’t be a financial burden. But with the rise of online grocery shopping, prices are becoming less predictable, according to a study from MIT.  (iStock)

Online grocery shopping gained popularity as Americans quarantined during the COVID-19 pandemic. But while shopping from the comfort of your home is convenient, emerging pricing technology has made it harder to manage costs, according to a study by MIT economists.

The prices set by online grocery retailers like Amazon Fresh and Instacart are likely to change quickly — sometimes multiple times in a week or even just one day. Nearly half (48%) of grocery products listed on Amazon have experienced at least one price change in a week, the study found. 

Grocery bills also vary based on zip code, thanks to advances in pricing algorithms. Economists attributed this to higher shipping costs since some areas are farther away from warehouses or fulfillment centers than others. But they also found that there's a relatively small price differentiation based on an area's median home values and household income.

However, price differentiation in online grocery shopping does offer consumers the opportunity to price match among multiple competitors with little effort. But as online shopping continues to take up a larger share of the grocery market, shoppers should be aware that prices may spike unpredictably.

Keep reading for tips on how to manage your food budget, from tracking your spending to utilizing rewards credit cards. If you decide to open a grocery rewards card, visit Credible to compare card offers across multiple issuers without impacting your credit score.

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3 ways to stretch your grocery budget

Your food budget comprises an important part of your monthly spending, but online shopping makes it easier to overspend. Two in five Americans say online shopping makes it harder to stick to a monthly budget, according to research from the American Institute of CPAs (AICPA). Thankfully, there are ways to scrimp and save if you're regularly overspending on food:

By building better spending habits, you may be able to offset unpredictable price changes when it comes to online grocery shopping.

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1. Make a grocery list and stick to it

Just like you would do if you were shopping at the grocery store, take inventory of what's in your pantry and freezer, and come up with a list of the items you need. Write down any staples and ingredients you might need for recipes that are a regular part of your meal plan, as well as low-cost snacks.

When buying fresh chicken, steak, salads and veggies, be careful not to buy more than you can use before they expire. And be sure to freeze leftovers.

You might also consider buying non-perishables in bulk, such as rice, beans and pasta, as well as shampoo, toiletries and cleaning supplies. Research coupons for the items in your virtual cart and you may be able to save even more.

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2. Download a free budgeting app

There are plenty of free budgeting apps that connect with your bank accounts to give you detailed insights into your spending habits. You can compartmentalize spending into categories, like housing costs, entertainment and groceries.

Most budgeting apps let you set up alerts when you're close to meeting your food budget or if you've already overspent. It's also helpful to look back at recent months' transactions to estimate your past grocery bills and find areas where you can cut spending.

You can use a grocery budget calculator like this one from Iowa State University to help set your monthly food costs.

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3. Utilize a rewards credit card with cash back on groceries

If you pay for your groceries with a debit card, you may be missing out on a lucrative opportunity to earn cashback on your grocery spending. Here's how it works:

  • Research rewards cards that offer benefits for grocery shopping
  • Look up the minimum credit score requirements to see if you’ll qualify
  • Open a card and use it to fund your grocery purchases
  • Buy only what you can afford to pay off in full each month
  • Use your cashback rewards toward future grocery purchases.

You may be able to score up to 5% cashback, depending on the rewards card. You can browse offers from multiple credit card companies in one place on Credible's online marketplace.

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Consider debt consolidation if you struggle with credit card spending

Although rewards credit cards can come with worthwhile benefits, they're not for everyone — especially if you struggle with overspending. If you don't repay your statement balance in full every month, you could be left paying heaps of interest on top of your monthly grocery budget.

The average interest rate for credit cards assessed interest is 17.13%, according to the Federal Reserve. You don't want to add unnecessary interest to the necessary cost of food.

If you're already struggling to keep your credit card spending under control, consider paying off the balance at a lower interest rate with a personal loan for debt consolidation. Personal loans are lump-sum loans that you repay in fixed monthly payments over a set period of time. 

Compared with credit cards, personal loans tend to come with lower interest rates: 9.39% for a two-year personal loan, the Fed reports. Paying off credit card debt with a personal loan may be able to lower your monthly payments and even save you more than $2,000 in interest over time, according to Credible estimates.

Personal loan interest rates vary from lender to lender, which is why it's important to shop around with multiple financial institutions to find the best rate for your financial situation. Compare personal loan interest rates for free on Credible so you can see if credit card consolidation is worthwhile.

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Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.

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