Lecture 2 Marketing Yesterday and Today

Food Product Marketing

1

Overview

1. What is food marketing?

2. The History of Marketing

3. Relationship Marketing: The Current Paradigm

4. Marketing Environment

5. Price Elasticities

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Who cares about food marketing?

• Business all along the food chain

– farmers, producers, wholesalers, distributors, retailers

• Consumers

– Consumers are eager to learn “tricks” and language of food marketers so they can make better decisions for themselves

– Information is key to functioning in the foodscape

3

Who cares about food marketing?

Policy makers (government) & medical community

• Food marketing science is being applied to get people to eat healthier

• Marketing scientist Brian Wansink, Executive Director of USDA's Center for Nutrition Policy and Promotion, 2007-2009, the Federal agency in charge of developing 2010 Dietary Guidelines and promoting the Food Guide Pyramid (MyPyramid.gov).

4

How bad is it?

• 1 in 3 children will develop diabetes in their lifetime and that number goes up to 1 in 2 for underprivileged urban youths (CDC, 2010).

• For the first time in American history, the life-expectancy of children is less than that of their parents, primarily due to food choices.

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Food Marketing Defined

• The activities needed at all stages in the food system to facilitate the exchange of food products and services which satisfy the needs and wants of individual consumers and organizations.

• Because all exchanges are voluntary, for the food chain to exist, all parties must be satisfied.

• Food marketing then is concerned with the satisfaction of all the links in the food value added chain.

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Needs vs. Desires

• Need – the difference between customers’ actual conditions and their desired conditions.

• Desire – a particular choice that people make to satisfy their needs.

– Types of products and brands

• Satisfying customer needs gives rise to…

• Demand – an aggregate measure of the desire that potential customers have for a particular product and their willingness to pay for it.

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Needs and Desires: Examples • You want to

1. do something interesting

2. make a decent wage

3. be taken seriously

4. work really hard ;)

so you take AG BM 302 as part of your degree.

• You are hungry for something but nothing too filling and you don’t want to spend time preparing food, so you grab a banana.

• You want to reward yourself for your hard work with a hedonic binge, so you buy Oreos (and eat 2 sleeves).

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Avoid Market Myopia

• Marketing Myopia is management’s failure to recognize the scope of their business.

• Occurs when a company identifies with their product or past structure instead of customer needs.

– If you sell oatmeal cookies, you might start to think your job is to satisfy the desire for your oatmeal cookies.

– This will limit growth

– This will lead to serious trouble if

• tastes change

• demographics change

• competition cuts in

• To avoid marketing myopia, companies must broadly define organizational goals toward consumer needs

• Focus on consumer benefits!

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Marketing Myopia Is a Perspective

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Company /

Brand

Myopic Description Consumer-Oriented

Description

Slogan / Mission

Dannon We produce yogurt and probiotic

fermented milk

Pringles We sell a snack made with less

than 50% of dried potato powder

Wal-Mart Our chain offers food and

general merchandise at low

prices

Campbell We produce soups

Our products deliver health Bringing health through food

to as many people as possible

We offer a one-stop shopping

experience at lower prices than

most of our competitors

Save money live better

Save time and eat a

home-style soup

Nourishing people’s lives

everywhere, every day

We sell a fun snack with a kick,

stackable and easy to consume

Everything pops with Pringles

Avoiding Myopia – More than just lip service

Dannon’s Nutrica

• “Nutricia is a specialized healthcare division of the food company Danone, focused exclusively on research-based scientifically-proven nutrition, developed to meet the needs of patients and individuals for whom a normal diet is not sufficient or possible.”

• Products target people with malnutrition, Alzheimer’s, dysphagia, tube fed nutrition, metabolic disorders, allergies, pediatric dietary/metabolic problems

• Most of their products require a prescription or should be taken under the supervision of a clinician.

• What factors led/allowed Dannon to take this market on? 12

Price = $139 Lasts 1 week

• How has Wal-Mart’s market-oriented description manifested itself?

• What has allowed/led Wal-Mart to expand/change its scope?

13

Wal-Mart Our chain offers food and

general merchandise at low

prices

We offer a one-stop shopping

experience at lower prices than

most of our competitors

Save money live better

Company /

Brand

Myopic Description Marketing-Oriented

Description

Slogan / Mission

Market Myopia: Traditional Grocers

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Market Myopia: Traditional Grocers Supermarkets emerge in the 1930s

• Traditional grocers:

– Fetched virtually all groceries from the back

– Had to measure out quantities from bulk bins

– Were small, numerous, and local

• Supermarkets

– Low prices

– Self serve

– Large, few, and required consumers to travel further than to traditional “corner store” grocers

• Traditional grocers attributed supermarkets’ rapid rise to novelty and appeal to a very narrow price sensitive segment.

• Traditional grocers identified themselves with their location, size, and folksiness instead of with customer needs.

• Only those that responded to the newly revealed customer needs survived (e.g. Safeway, Kroger)

• A similar change seems to be occurring today with supercenters and club stores

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• “Hard to believe that people will drive for miles to shop for foods and sacrifice the personal service chains have perfected and to which [the consumer] is accustomed.”

- Executive of one big grocery chain, circa 1935

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17

Hindsight is 20/20

Supermarkets cater to the Dude’s needs

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How to Create Customers 1. Identify customer NEEDS

– Different people have different needs, so choose a target.

2. Design products that meet those needs

3. Promote products to prospective buyers by communicating information about attributes, prices, availability, etc., that address those needs

4. Distribute products so they are available at times and places that meet customers’ needs

5. Price products to reflect costs, competition, and customers’ ability to buy

6. Provide the necessary service and follow-up to ensure customer satisfaction after the purchase

• Customers ≠ Consumers

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Marketing Mix

• Target Market - Group of people toward whom the firm decides to direct its marketing efforts

• All marketing efforts should have a target market in mind

– Whose needs are you trying to satisfy?

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Product Distribution

Promotion Price

Target Market

Four P’s of Marketing

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• The marketing variables that together provide customer satisfaction are

1. Product – goods and services, package design, the idea of the goods, customer service, brand names, product lifecycle, warranties, etc.

2. Price – set to maximize long-term profit (typically). Other considerations: production capacity, competition, relationships with suppliers and buyers, etc.

3. Promotion – ads, sales, coupons, flyers, tweets, give-a-ways, product bundles, etc.

4. Distribution (Place) – making sure customers find products at the right time and place. Involves transport, inventory management, marketing channel choices, order processing, warehousing, etc.

• Creating customers that want to stay with you is all about identifying needs, providing goods and services that meet those needs, pricing, and follow-up service.

• Consumers ≠ Customers

What is a product made of?

• Ingredients

• Packaging

• Services

• Credence attributes – not observed by consumer (like what?) – nutrients, health, production practices,…

– require labels

Coke Commercial

• Associated feelings and ideas are part of the Product

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Do the non-physical aspects of a product add value?

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Cola Wars: Pepsi Vs. Coke

Blind Taste Test

55% prefer Pepsi

45% prefer Coke

Non-Blind Taste Test

The percentages flip

Market Shares

Coke 20%

Pepsi 10%

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Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

Sales Prior to

1950/60s

Marketing Since

1950/60s

Relationship Began in

1990s

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Four Eras of Marketing

1. Production Era assumed the customer would find the product.

– Many great ideas lost

– Product focused

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Learn from the mistakes of this marketing eras

Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

“A good product will sell itself.”

Sales Prior to

1950/60s

Marketing Since

1950/60s

Relationship Began in

1990s

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Four Eras of Marketing

2. Sales Era assumed customers simply needed to be found and/or persuaded.

– Marketing and sales were thought of as the same.

– Product/Desire focused

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Learn from the mistakes of this marketing eras

Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

“A good product will sell itself.”

Sales Prior to

1950/60s

“Simple marketing (advertising) and

selling will overcome consumers’

resistance and convince them to buy.”

Marketing Since

1950/60s

Relationship Began in

1990s

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Four Eras of Marketing

3. Marketing Era geared all aspects of the business to customer focused marketing concepts

– Marketing Concept: A company-wide (not just product) orientation with the objective of achieving long-term success. • Focuses not on products, but rather on specific customer NEEDS

that the company aims to fulfill.

• Market-oriented descriptions of the firm are used and taken seriously

• Forming a marketing concept helps avoid market myopia

• Encourages smarter strategic positioning

• Ex: anticipating growing needs for socially responsible purchasing allows a brand to gain a first mover advantage in those markets

• Incorporates all 4 P’s of the marketing mix in a unified effort 30

Marketing Era cont…

– Sales and marketing are separated

• The scope of the marketer now is higher up in the decision process

• Salespersons have less flexibility – they must stick to the marketing plan to avoid sending mixed signals to customers or undermining broader objectives

– Marketers play leading roles in product development

– Companies represent ideas and specific customer needs (recall Birds Eye’s brand personality)

– Consumer focused

• “The Customer is always right.”

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Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

“A good product will sell itself.”

Sales Prior to

1950/60s

“Simple marketing (advertising) and

selling will overcome consumers’

resistance and convince them to buy.”

Marketing Since

1950/60s

“The consumer is king! Find a need

and fill it.”

Relationship Began in

1990s

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4. Relationship Marketing

• Marketing concept plays an increasingly important role – Firms are willing to go even further afield from their original

products to fulfill customer needs (see Dannon’s Nutricia)

• A shift away from transaction-based marketing that thinks of a market exchange as a conflict.

• Thinks of market exchanges as cooperative arrangements that benefit a long-term broad marketing concept.

• Motivated by the realization that it is easier to retain customers than it is to attract new ones

• Results in a greater grasp of consumer NEEDS.

• Business decisions are made with a longer time horizon

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“We used to say that we did everything ourselves, for ourselves. Now we understand that we are only as good as the strength of our partnerships.”

- Joe Tripodi, Chief Marketing and Commercial Officer of The Coca-Cola Company

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How Does Satisfaction Affect Loyalty?

35

1 2 3 4 5

Satisfaction Rating

Loyalty

Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

“A good product will sell itself.”

Sales Prior to

1950/60s

“Simple marketing (advertising) and

selling will overcome consumers’

resistance and convince them to buy.”

Marketing Since

1950/60s

“The consumer is king! Find a need

and fill it.”

Relationship Began in

1990s

“Long-term relationship with

customers and other partners lead to

success.” 36

Relationship Marketing • Firms gather large amounts of data about their customers

– Ex: loyalty cards, e.g. Weiss card

• They analyze the data and create customized marketing programs

– Ex: Weiss gives you tailor-made coupons printed at check-out

• Continued monitoring of customer satisfaction and cost-benefit analysis of attracting new customers

• Use of events, social media, and other channels to connect with customers and build loyalty based on a positive relationship

• The same approach is applied to employees

– By being understanding of employee needs and being accommodating, the employee is more likely to reciprocate with hard work

• Cobranding and Comarketing: when two or more business may jointly sell or market their products

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Cobranding

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• Why would they do this?

More Cobranding

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Mad Men clip

40

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This is what our product is This is what our product means to you

3 Levels of Marketing Relationships

Source: From Boone and Kurtz’s “Contemporary Marketing,” adapted from Leonard Berry, “Relationship Marketing of Services—Growing Internet, Emerging Perspectives” Journal of Marketing Science, 1995 p.240.

• Marketers want to move up levels

• Is relationship building feasible in food industries?

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Characteristic (Generally) Level 1 Level 2 Level 3

Primary Bond Financial – Focused on Price Social Structural – Interdependent

Interaction

Degree of Customization Low Medium Medium to High

Potential for Sustained

Competitive Advantage

Low Medium High

Interactions Purchases, Temporary Sales Chats with customers, follow-ups,

Tweets, Facebook, emails

High levels of customer service,

partnership-like relationships,

customer dependence

Awareness of Customer

Characteristics and Needs

Low Medium High

Example McDonalds Farmer’s Markets

Local diner

Consumer Supported Agricultural

(CSA) groups,

Soda Stream

Elasticities

• “____X_____ elasticity of _____Y______”

• Measures h0w sensitive Y is to a change in X

• Answers questions like, “If I increase the price by 1%, how much will demand go down?”

• Start by thinking of X changing, and Y changing because of the change in X

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1 0

0 0

1 0

0 0

percent change in Y %

percent change in X %YX

Y YY

Y YY

X X XX

X X

Elasticities

Ex: Own-Price Elasticity of Demand (aka “own price elasticity”)

• What % does demand change when its price increases 1%?

• Suppose you change the price from $3 to $5 and as a result demand decreases from 1000 to 500.

• With own price elasticities, the negative is usually taken for granted

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500 1000.5

.510001.25

$5 $3 .4.4

$5

Yp

Y

Y

p

p

Elasticities

Ex: Income Elasticity of Demand (aka “income elasticity”)

• What % does demand change when incomes increase 1%?

• Suppose incomes go up by 10% and the demand for your product goes up by 2%.

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% 2%.2

% 10%

Y

I

Elasticities

Ex: Cross-Price Elasticity

• What % does your demand change when someone else changes their price by 1%?

• Defines “markets”

• Ex1: If Pepsi increases their price by 1%, what will happen to the demand for Coke?

• Ex2: If the price of the tea in China increases by 100%, what will happen to the demand for U.S. blenders?

• Ex3: If the price of hot dogs decreased by 10%, what will happen to the demand for hot dog buns?

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Elasticities

• Elastic- when the absolute value of an elasticity is > 1.

– More price sensitive

• Inelastic - when the absolute value of an elasticity is < 1.

– Less price sensitive

– If there is no response, then ε = 0 and this is a case of something being perfectly inelastic.

– Flat demand curve

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“Elastic demand” means people ARE sensitive to price changes

• Can’t jack the price up on them

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“Inelastic demand” means people are NOT sensitive to price changes

• Bleed ‘em through the nose!

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Elasticity Practice

• Del Monte gains market power by merging with a competitor and increase their price for canned vegetables by 10%. – Demand drops by 15%.

– Is demand elastic or inelastic?

– What is the own-price elasticity?

• An increase in the cost of aluminum increases the cost of producing canned vegetables. As a result, producers increase their price by 5%. – Demand drops by 2%.

– Is demand elastic or inelastic?

– What is the own-price elasticity?

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Marketing Environment

• A series of EXOGENOUS factors and elements impacting how a business designs its marketing strategy (to reach its target market)

1. Competitive Environment

2. Social-Cultural Environment

3. Technological Environment

4. Economic Environment

5. Political-legal environment

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Marketing Mix within an Environmental Framework

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Includes the biological environment

1 – The Competitive Environment Competitive Environment - The interactive process that occurs in the marketplace among marketers of directly competitive products, marketers of products that can be substituted for one another, and marketers competing for the consumer’s purchasing power.

• Monopoly/Monopsony

– One seller/buyer

– Monopoly prices set according to a simple rule

– High barriers to entry

p = price, c = unit cost, = price elasticity of demand

• Oligopoly/Oligopsony

– Few sellers/buyers

– Oligopoly prices set strategically; approximately

i = firm index, = market share

• Perfect Competition

– Many sellers/buyers

– Prices accepted by the market

– 0 profits

– no barriers to entry

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Mark

et Po

wer

1p c

p

i i

i

p c s

p

is

0 i

i

i

p cp c

p

Market Power by Food Manufacturers

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markup

= market power

elasticity of demand

economies of scale

1 increasing returns

= constant returns

< decreasing returns

p cL

p

Observations Non-perishables have higher markup and increasing returns to scale. Markup and returns to scale are highly correlated (= .86).

1 – Competitive Environment • Regulatory environment can limit market power (e.g.

Sherman Act)

– Too much market power results in social welfare loss (deadweight loss) from high prices

– This is especially the case in food economics because food is a necessity

• Food taxes are “regressive”

– Ex: Supermarkets in the 1970s were forced to divest because they had too much market power

• Prices were too high which resulted in a loss of consumer welfare (esp. the poor)

– Ex: Cereal industry was under scrutiny for being too concentrated

• Price margins are unusually high. Why?

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Types of Competition • Time-based competition is a strategy of developing and distributing

goods and services more quickly than competitors

– First Mover Advantage – The often large advantage that the first firm to market a product, service, or address a customer need has over subsequent entrants

• consumers tend to buy the same foods repeatedly…why?

– Second Mover Advantage – The advantage gained when another firm enters a market first

• allows the second firm to avoid the mistakes the first

• can simply adopt the innovations of the first

• Types of Competition

– Direct – battle of the brands – usually hurts both brands

– Indirect – product-type competition among substitutes;

• e.g. competition between milk and juice

– All Consumer Purchases – competition for disposable income; competing against the decision not make a purchase whatsoever

• Less relevant in food economics as manufacturers compete for “stomach share”

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Who are DiGiorno’s direct and indirect competitors?

• Direct: Tombstone, Tony’s, California Pizza Kitchen

• Indirect: take-out/delivery/restaurants

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Something From my Kitchen

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Developing a Competitive Strategy

1. Should we compete?

– depends on resources, objectives, and expected profit

– requires a marketing plan

2. If so, in what markets should we compete in?

– depends on competitive advantages, market opportunities, expected competitor response, and available resources (scope)

– requires a marketing plan

3. How should we compete?

– The four P’s

– requires a marketing plan

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2 – The Social-Cultural Environment • The relationship between marketing and society

and its culture

• Very important in international marketing decisions

– Ex: KFC’s buckets were not well received in Japan.

• Switched to twice as expensive single layer containers that did not absorb grease

• Brand perception and sales improved drastically

• "Kentucky (Fried Chicken) would never have been successful here by following American advice."

– Ex: Wrigley sells cucumber flavored gum in China

– Ex: Oreo became the best selling biscuit item in China, after they made it rectangular

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Marketing Trends in our Social-Cultural Environment

• Green Marketing – Organic

• Nutrition Marketing – “All Natural”, Nutraceuticals, fortification, health

claims galore

• Buy American

• Social Consumer Activism

• Locavore – CSAs, farmers’ markets

• Convenience

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Demographics and Food Marketing

• Staying in touch with demographic and lifestyle changes helps marketers understand consumer needs

– People’s value of time has been increasing

• more convenience food

• How have the 4 P’s responded?

– Ex: Increasing house sizes: 290 sq ft per person (1950) 900 sq ft per person today

• Larger quantities / packages

• more stockpiling

• … enter Costco

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Rising Hispanic Population

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Consumerism • A social force within the environment designed to

protect the consumer by exerting legal, moral, and economic pressures on business and government.

• John F. Kennedy’s Statement of Consumer Rights

1. The right to choose freely

2. The right to be informed

3. The right to be heard

4. The right to be safe

– These provide the conceptual framework for food industry regulation

• Non-government watchdog groups and certification organizations are increasingly influential

• Reflects consumer demand

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3 – Technological Environment • The technological environment represents the application of knowledge

in science, inventions, and innovations to marketing.

• Technology defines the frontier of what is possible

• Marketers monitor new technology to gain competitive edge.

• Examples

– Cell phone tech

• QR code – in upper right corner

• PriceSpotting – put product name in app, lists prices at nearby store

• Fooducate – put food name in app, get a health score

– UPS logistics, advances in packaging materials,…

• Advances in communication technology has allowed for interactive marketing where the consumer gets to control the flow of information

– Websites allow for direct purchasing

– Email allows for customized interactions that recipients can opt out of

– Online ad expenditures are now about equal to TV ad expenditures

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3 – Technological Environment

• What recent innovations have been the most important for the food industry in the last 50 years? – Universal Product Code (UPC) allowed for grocers to order

products just as they were needed thereby improving inventory management.

– Hurdle technologies and other technologies have improved shelf lives

– GMO technologies have allowed for lesser use of pesticides and herbicides and increased yields. Also promise for solving a lot of 3rd world nutritional problems.

– Data collection and statistical analysis know-how

– Food science (artificial sweeteners,…)

– Shipping containers

– Radio Frequency Identification (RFID)

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Chill Can – press button, gets 30° F cooler in 3 min.

$3.95/can starting in March

Dissolvable Pouch “We believe a market exists for dissolvable pouch packaging to address the macro

trends in the food sector such as convenience

delivery, portion control, replacing

primary packaging.”

Innovations In Food Packaging Technology

Canned Food Nicolas Appert wins a prize from the French government for inventing a way to preserve soldiers’ food during war.

Wikipearls

Tech Environment and your Plans

• They probably won’t be high tech

• If you’re product is Mac N Cheese, discuss

– the process of making the product

– relevant processes of making inputs

– equipment needed

– state of the art / cost concerns

– etc. (including the seemingly mundane stuff)

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4 – The Economic Environment

• Factors that influence consumer buying power and marketing strategies, including

– Inflation

– Unemployment

– Resource availability

– Income

– Stages of the Business Cycles

– Prices

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Rising Income

• Most income gains have been at the top end of the distribution

• Luxury Goods: goods whose share of expenditure rises with income.

– If people spend 1% of their income on fish when poor and 2% of income when rich, then it is a luxury good

– Ex: organics, skinless boneless chicken, higher quality foods, restaurants

• Inferior Goods: goods that people purchase more of when incomes decrease

– Ex: beer, lower quality foods, potatoes, canned veggies

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Four Stages of the Business Cycle 1. Prosperity: period of rising output, rising employment, and

decrease of unemployment. Usually, a period of prosperity is accompanied by an increase of prices level or inflation. Consumers purchasing power is high.

2. Recession: output falls, and so does employment, construction activity, etc. During a recession, price level may decrease (deflation) or keep increasing (stagflation: inflation in a stagnating economy). Consumers focus on more basic items.

3. Depression: a recession that continues for a long period (years); consumers’ spending + firms investments sink; wage income decreases as well. During the Great Depression of the 1930s, the unemployment rate reached 25% and real wages fell by 40%. Consumers spending sinks to its lowest level.

4. Recovery: output levels slowly increase; employment slowly raises and unemployment rate decreases. Lack of confidence is at the base of recovery. Consumers purchasing power increases but caution restraints their willingness to buy.

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Business Cycle

73

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan-48 Jul-57 Jan-67 Jul-76 Jan-86 Jul-95 Jan-05 Jul-14

Per

cen

t

Source: U.S. Department of Labor: Bureau of Labor Statistics/FRED

Civilian Unemployment Rate

74

52.0

54.0

56.0

58.0

60.0

62.0

64.0

66.0

68.0

Jan-48 Jul-57 Jan-67 Jul-76 Jan-86 Jul-95 Jan-05 Jul-14

Per

cen

t

Source: U.S. Department of Labor: Bureau of Labor Statistics/FRED

Civilian Labor Force Participation Rate

Economic Indicators

• Discretionary Income — amount of money people have to spend after buying necessities.

• International economic factors: – Exchange rates

– GDP Growth rates

– Import/export structure

• Prices Indexes – Consumer Price Index (CPI) – tracks a composite of prices

faced by consumers

– Producer Price Index (PPI) – tracks a composite of prices faced by producers

– Bureau of Labor Statistics (BLS) price data can be tailored to your needs (go to http://www.bls.gov/data/)

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Ex: MKTG Response to Econ Environment

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Food Manufacturers’ Producer Price Index

Source: Data retrieved from BLS

• Starting in mid-2010, food producer costs rapidly rose; manufacturers had to raise prices

• But wages weren’t rising and unemployment was high resulting in high price elasticities. Why?

• At the brand level consumers are very responsive to price increases (elastic demand). Why?

• To avoid brand switching, manufacturers stealthily reduced packaging sizes without reducing prices

• Marketed as “green” packaging

Read “Food Inflation Kept Hidden in Tinier Bags” http://www.nytimes.com/2011/03/29/business/29shrink.html?pagewanted=all

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Size Before Recession

Size After Recession

Canned Veggies 16 oz 14.5 oz

Pasta 16 oz 13.25 oz

Tuna Fish 6 oz 5 oz

Tostitos/Fritos X .8 X

Saltines/Graham Crackers

X .85 X

Edy’s Ice Cream 2 L 1.5 L

Tropicana OJ 64 oz 59 oz

Read “Food Inflation Kept Hidden in Tinier Bags” http://www.nytimes.com/2011/03/29/business/29shrink.html?pagewanted=all

Econ Env and your Plans

Be specific to your target!

A discussion of U.S. GDP growth is not relevant to the marketing of a restaurant in State College

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5 – The Political-Legal Environment

• Component of the marketing environment consisting of laws and interpretations of laws that require firms to operate under competitive conditions and to protect consumer rights.

79

Why is the regulatory environment very important in food industries?

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Role of Government

• Laws Maintaining a Competitive Environment / Regulating Competition

– Started in the late 19th century and continues for the first part of the 20th century

– The objective was to maintain a competitive environment by reducing the trend toward increasing industry concentration

• What does competition do for society?

• benefits society by driving innovation

• increase consumer welfare

– Meant to protect independent merchants against competition from larger chain stores

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Government Food Agencies - FDA

Food and Drug Administration (FDA) regulates most foods

• food safety

– approves new ingredients

– common ingredients are Generally Recognized as Safe (GRAS) and do not need approval

• food identity

• labels

• nutritional information

– Although the USDA is in charge of the Standard Reference of nutritional information

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Government Food Agencies - USDA United States Department of Agriculture (USDA) regulates livestock and poultry products, raw ag products

• organic labeling

• meat inspection

• food assistance programs

– Supplemental Nutrition Assistance Program (SNAP) – formerly “Food Stamps”

• 1/6 people receive SNAP assistance for a total distribution of $75 billion

– Women, Infants and Children (WIC)

• assists with healthcare and food for poor pregnant and breastfeeding women, and children less than 5 yrs. that are below 185% of the poverty line

• 53% of all newborns are served

• because WIC purchases more than ½ of all baby formula, the USDA can in effect dictate the quality of formula

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WIC and Baby Formula

• WIC money is distributed to states

• States choose vendors

– there are only 3: Abbot (Similac, 43%), Mead Johnson (Emfamil, 40%), Gerber (Good Start, 15%)

– states negotiate a WIC price

• 2/3 of formula is sold through supermarkets and supercenters; the rest through smaller stores

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How Low Would You Go? • Suppose your per unit production costs are 80% of the wholesale price.

What sort of discount (relative to the wholesale price) would you give WIC? Why?

– Will capture all of the WIC market (53% of total market)

– WIC consumers are unlikely to pay a high price premium anyways

– Increased production may reduce per unit costs (economies of scale)

– Guarantees the product will be sold in nearly every store that sells formula • Increased sales from non-WIC consumers

• More shelf space, greater visibility, more promotions

– Hospitals will give WIC samples out so that babies will not have to change formulas as often • post-partum moms will stick with the brand…why?

• Implicit quality endorsement by an influential 3rd party…who?

– WIC consumer may recommend the WIC brand to non-WIC consumers

– WIC consumers will stick with the brand when they no longer qualify for WIC

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Actual WIC Discount = 85%

• The winning producer is willing to take a (5%) loss on WIC consumers. Why?

87

The Political-Legal Environment Other Regulatory Forces

• Consumer interest groups

– increase public awareness, organize grass root campaigns, lobby, petition, sue

– Ex: Penn Public Interest Research Groups (PIRG)

• Special-interest groups

– Can be a group of citizens or a group of firms

– Typically more narrowly focused than a consumer interest group

– Ex: Sugar Cane and Sugar Beets industry’s special interest group gave $4 million in Congressional contributions in 2012

• Self-regulatory groups

– Industry attempts to set guidelines for responsible business practices

– Market power can be used for vertical enforcement but horizontal enforcement is improbable (as in cartels). Why?

– Ex: GLOBALGAP banded retailers (e.g. Wegmans, Safeway) unite to use their market power to influence pre-farmgate production practices for the better

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Why ? • Retailers such as Safeway and Wegmans quality control

inspectors were “running into each other in the field”.

• Across global markets this became very expensive.

– Coordinating reduces redundancy benefits from economies of scale

• Each retailer had different standards and requirements which frustrated producers.

• Avoids food safety disasters (e.g. Mad Cow disease) that are costly to retailers

• Avoids public relations disasters

• Membership improves retailer image

• Higher standards improve employee moral

• To make a better world?

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Controlling the Political-Legal Environment

– Companies fight unjust regulations

– Regulations can present new opportunities

– Working with regulators

• E.g. FDA preapproval

– Political lobbying

– Boycotts

– Political action committees

– Economic studies

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Ex: MKTG Response to Political/Legal Environment

• Late 1970’s - early 1980’s new regulations promoted environmentally friendly practices. The Pennsylvania Department of Environmental Resources started enforcing stricter waste disposal legislation.

• Herr’s ® potato chips had considerably expanded throughout the 1960’s and 1970’s. Due to the expansion and the new regulation, waste disposal from potato chips manufacturing was going to become a serious problem.

• The company owned over 1,000 acres of farmland in the vicinity of the plant. In 1983 Jim Herr negotiated a deal to establish, on this land, the Herr Angus Farm. The cattle were fed potato peelings and rejected food products, mixed with traditional cattle feed.

• Today, the farm produces wheat, soybean, corn and barley. Some of the crops are used as part of the mix in the cattle’s diet; the rest are sold. Starch, removed from the waste water before irrigating, is sold for fine paper manufacturing.

91 Source: http://www.herrs.com/AboutHerrs/History.html

Bibliography

• Bhuyan, S. and Lopez, R., “Oligopoly Power in the Food and Tobacco Industries,” American Journal of Agricultural Economics, Vol. 79, No. 3 (Aug., 1997), pp. 1035-1043.

• http://www.herrs.com/AboutHerrs/History.html

• www.bls.gov

• Kurtz, David L. Boone & Kurtz, Contemporary Marketing, David L. Kurtz. 15th ed. Mason, OH: South-Western Cengage Learning, 2012. Print.

• Schaffner, David J., William R. Schroder, and Mary D. Earle. Food Marketing: An International Perspective. Boston, MA: WCB/McGraw-Hill, 1998. Print.

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