1 Food Product MarketingLecture 2 Marketing Yesterday and Today

2 Overview Who cares about food marketing? What is food marketing?Marketing Eras Relationship Marketing: The Current Paradigm Marketing Environment Price Elasticities

3 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

4 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, , the Federal agency in charge of developing 2010 Dietary Guidelines and promoting the Food Guide Pyramid (MyPyramid.gov).

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6 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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8 Food Marketing DefinedThe 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. Recall Birds Eye discounting for big important retail customers.

9 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.

10 Needs and Desires: ExamplesYou want to do something interesting make a decent wage be taken seriously 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). Ask what the needs and the desires are. Ask for other examples.

11 Needs and Desires: ExamplesYou feel disconnected from your food source, and are skeptical of preservatives and “big” manufacturers… you buy

12 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!

13 Marketing Myopia Is a PerspectiveCompany / Brand Myopic Description (Product Based) Consumer-Oriented Description (Need Based) Slogan / Mission Dannon We produce yogurt and probiotic fermented milk Our products deliver health Bringing health through food to as many people as possible 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 Campbell We produce soups Save time and eat a home-style soup Nourishing people’s lives everywhere, every day Pringles We sell a snack made with less than 50% of dried potato powder We sell a fun snack with a kick, stackable and easy to consume Everything pops with Pringles

14 Common Consumer Needs Security Social connection Nostalgia Self-esteemBelonging Feeling part of something bigger Adventure / Excitement Sense of strength Energy / Zest Control Prosperity Purpose Caring for others (esp. children) Personal Identity Feel unique Make the world better Superiority / Prestige Personal ability Connect to the past – Tradition Authentic Indulgence / reward Celebrate Rebellion / Freedom

15 Avoiding Myopia – More than just lip serviceDannon’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? Factors include: greater demand for these sort of products, technical expertise, established distribution system, company size Price = $139 Lasts 1 week

16 Marketing-Oriented DescriptionCompany / Brand Myopic Description Marketing-Oriented Description Slogan / Mission 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 How has Wal-Mart’s market-oriented description manifested itself? What has allowed/led Wal-Mart to expand/change its scope? In store pharmacies, restaurants, nail salons, post office, huge product selection, 2. Less consumer time, ubiquitous automobiles allows traveling to the edge of town, bigger cars allows for more products to be transported, low prices from market power, economies of scale, superior distribution and Is Wal-Mart more efficient at giving pedicures than salons? No. Then why do they do that and how do they do it at competitively low prices?

17 Market Myopia: Traditional Grocers

18 Market Myopia: Traditional GrocersSupermarkets 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 Supermarkets rise was meteoric The executive of one big chain announced at the time that he found it “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.” How did traditional grocers myopically define themselves? What would their market-oriented definition be?

19 “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

20 Hindsight is 20/20

21 Supermarkets cater to the Dude’s needs

22 How to Create CustomersIdentify customer NEEDS Different people have different needs, so choose a target. Design products that meet those needs Promote products to prospective buyers by communicating information about attributes, prices, availability, etc., that address those needs Distribute products so they are available at times and places that meet customers’ needs Price products to reflect costs, competition, and customers’ ability to buy Provide the necessary service and follow-up to ensure customer satisfaction after the purchase Customers ≠ Consumers Relate to Birds Eye

23 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? Target Market Product Distribution Promotion Price

24 Four P’s of Marketing The marketing variables that together provide customer satisfaction are Product – goods and services, package design, the idea of the goods, customer service, brand names, product lifecycle, warranties, etc. Price – set to maximize long-term profit (typically). Other considerations: production capacity, competition, relationships with suppliers and buyers, etc. Promotion – ads, sales, coupons, flyers, tweets, give-a-ways, product bundles, etc. 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

25 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

26 Do the non-physical aspects of a product add value?Argument for: They enhance the experience, even making foods taste better. Resonate with self identify – makes you feel good. Argument Against: Non-physical aspects are often false-signals that cause harm. When you consume Coke you are not having a communal experience as their commercials suggest. You are drinking sugar water that is very bad for you. Coke is worth drinking to many people in moderation because it tastes good, but the non-physical aspects of Coke as created by its commercials results in overconsumption.

27 Cola Wars: Pepsi Vs. CokeBlind Taste Test 55% prefer Pepsi 45% prefer Coke Non-Blind Taste Test The percentages flip Market Shares Coke  20% Pepsi  10%

28 Approximate Time PeriodFour 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 Production Era: Henry Ford said, “They can have any color they want, as long as it’s black.” Is there any reason these eras would progress in this order? I.e., are the changes in marketing over the years the result of other factors? Information, distribution, wage increases Where does Mad Men fall in here?

29 Four Eras of Marketing Production Era assumed the customer would find the product. Many great ideas lost Product focused Learn from the mistakes of this marketing eras

30 Approximate Time PeriodFour 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 Production Era: Henry Ford said, “They can have any color they want, as long as it’s black.” Is there any reason these eras would progress in this order? I.e., are the changes in marketing over the years the result of other factors? Information, distribution, wage increases Where does Mad Men fall in here?

31 Four Eras of Marketing Sales Era assumed customers simply needed to be found and/or persuaded. Marketing and sales were thought of as the same. Product/Desire focused Learn from the mistakes of this marketing eras

32 Approximate Time PeriodFour 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 Production Era: Henry Ford said, “They can have any color they want, as long as it’s black.” Is there any reason these eras would progress in this order? I.e., are the changes in marketing over the years the result of other factors? Information, distribution, wage increases Where does Mad Men fall in here?

33 Four Eras of Marketing 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

34 Marketing Era cont… Sales and marketing are separatedThe 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.”

35 Approximate Time PeriodFour 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 Production Era: Henry Ford said, “They can have any color they want, as long as it’s black.” Is there any reason these eras would progress in this order? I.e., are the changes in marketing over the years the result of other factors? Information, distribution, wage increases Where does Mad Men fall in here?

36 Relationship Marketing“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

37 Relationship MarketingMarketing 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 “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

38 How Does Satisfaction Affect Loyalty?1 2 3 4 5 Satisfaction Rating

39 Approximate Time PeriodFour 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.” Production Era: Henry Ford said, “They can have any color they want, as long as it’s black.” Is there any reason these eras would progress in this order? I.e., are the changes in marketing over the years the result of other factors? Information, distribution, wage increases Where does Mad Men fall in here?

40 Relationship MarketingFirms 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 Continued monitoring: Calculations of Lifetime Value of a Customer includes expected number of referrals, customer feedback,

41 Cobranding Why would they do this?Families are heterogenous; not everyone wants chicken. Also, they share the same parent company. Same reason Wall-Mart and K-Mart are often near each other. Home Depot and Lowes

42 More Cobranding

43 Mad Men clip Emphasize how Don focuses on consumer needs while Kodak, a producer, is focused on the product--the mechanics. This is during a transition period between marketing eras.

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

45 3 Levels of Marketing RelationshipsSource: 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? 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 High Interactions Purchases, Temporary Sales Chats with customers, follow-ups, Tweets, Facebook, s High levels of customer service, partnership-like relationships, customer dependence Awareness of Customer Characteristics and Needs Example McDonalds Farmer’s Markets Local diner Consumer Supported Agricultural (CSA) groups, Soda Stream Answer: Not much with consumers because food purchases are made with unusually high frequency allowing for rapid relationship building and home food processing generally does not require specialized equipment. Is important with processor, distributors, and retailer because in those settings switching may be costly. Soda Stream is an example of another level 3, and DOES depend on sustained competitive advantage.

46 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 If you lived 20% further from campus, by what percentage would your attendance drop? If food prices decreased by 10%, by what percentage would the obesity rate change?

47 Elasticities What % does demand change when its price increases 1%?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

48 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%.

49 Elasticities Ex: Cross-Price ElasticityWhat % 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?

50 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

51 “Elastic demand” means people ARE sensitive to price changesCan’t jack the price up on them

52 “Inelastic demand” means people are NOT sensitive to price changesBleed ‘em through the nose!

53 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%.

54 Marketing EnvironmentA series of EXOGENOUS factors and elements impacting how a business designs its marketing strategy (to reach its target market) Competitive Environment Social-Cultural Environment Technological Environment Economic Environment Political-legal environment

55 Marketing Mix within an Environmental FrameworkIncludes the biological environment What about biological environment with respect to food?

56 1 – The Competitive EnvironmentCompetitive 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 Discuss how a retailer can be a de facto monopoly if it’s the only one in town. Apple has some monopoly power because some of their consumers are so loyal that they don’t see PC’s as an alternative. LHS numerators are the part of the price that goes to profit. Formulas are for nondifferentiated goods. Market Power

57 Market Power by Food ManufacturersObservations Non-perishables have higher markup and increasing returns to scale. Markup and returns to scale are highly correlated (= .86). List some of the industries that have the most and least market power and ask why they think they do. The markets with high degrees of oligopoly are ones that are most non-perishable. They also have increasing returns to scale (epsilon > 1). The correlation between market power (script-L) and returns to scale (epsilon) is .86!

58 1 – Competitive EnvironmentRegulatory 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? Why high cereal prices? - Nevo (2001) finds that most of the mark up in the cereal industry can be attributed to (i) the high degree of product differentiation and (ii) multi-product firm pricing; NOT price collusion. Cereal is relatively cheap for almost a whole meal. It’s a routine purchase People do not want variation for breakfast. People don’t want to be stimulated with new flavors in the morning. First Mover Advantage example: Birds Eye

59 Time-Based CompetitionTime-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 Who are DiGiorno’s direct

60 Estimates from Nielsen grocery store dataEx: If the 1st mover has a 15 year head start, and you provide a 26% discount, it will take 13 years to reach 50% market share. Compare this to the market share if they entered the market simultaneously: 65% Bronnenberg, B., Dube, J.-P., Gentzkow, M., 2012, “The Evolution of Brand Preference: Evidence from Consumer Migration,” American Economic Review, 102(6):

61 Direct vs. Indirect CompetitionDirect – 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”

62 Who are DiGiorno’s direct and indirect competitors?Direct: Tombstone, Tony’s, California Pizza Kitchen Indirect: take-out/delivery/restaurants

63 Something From my Kitchen

64 Developing a Competitive StrategyShould we compete? depends on resources, objectives, and expected profit requires a marketing plan If so, in what markets should we compete in? depends on competitive advantages, market opportunities, expected competitor response, and available resources (scope) How should we compete? The four P’s

65 2 – The Social-Cultural EnvironmentThe 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 Rise of Hispanic populations provide easy opportunities for companies to create differentiated goods simply by changing labels to Spanish for otherwise undifferentiated goods.

66 Marketing Trends in our Social-Cultural EnvironmentGreen Marketing Organic Nutrition Marketing “All Natural”, Nutraceuticals, fortification, health claims galore Buy American Social Consumer Activism Locavore CSAs, farmers’ markets Convenience

67 Demographics and Food MarketingStaying 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

68 Rising Hispanic Population

69 3 – Technological EnvironmentThe 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 allows for customized interactions that recipients can opt out of Online ad expenditures are now about equal to TV ad expenditures

70 3 – Technological EnvironmentWhat 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) 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.

71 Wikipearls Innovations In Food Packaging Technology Dissolvable PouchCanned Food Nicolas Appert wins a prize from the French government for inventing a way to preserve soldiers’ food during war. 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.” Chill Can – press button, gets 30° F cooler in 3 min. $3.95/can starting in March Wikipearls

72 Tech Environment and your PlansThey 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)

73 4 – The Economic EnvironmentFactors that influence consumer buying power and marketing strategies, including Inflation Unemployment Resource availability Income Stages of the Business Cycles Prices

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75 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

76 Four Stages of the Business CycleProsperity: 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. 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. 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. 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.

77 Business Cycle What kind of changes happened in the food markets when the recession hit? (1) less consumption away from home, (2) more shopping at inexpensive stores (supercenters, club stores, discount stores), (3) greater consumption of private labels. (4) less consumption of luxury foods, (5) greater shopping frequency,

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79 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

80 Ex: MKTG Response to Econ EnvironmentFood 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”

81 Saltines/Graham Crackers .85 X Edy’s Ice Cream 2 L 1.5 L Tropicana OJ Size Before Recession Size After Recession Canned Veggies 16 oz 14.5 oz Pasta 13.25 oz Tuna Fish 6 oz 5 oz Tostitos/Fritos X .8 X Saltines/Graham Crackers .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”

82 Be specific to your target!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

83 5 – The Political-Legal EnvironmentComponent of the marketing environment consisting of laws and interpretations of laws that require firms to operate under competitive conditions and to protect consumer rights.

84 Why is the regulatory environment very important in food industries?

85 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

86 Government Food Agencies - FDAFood 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

87 Government Food Agencies - USDAUnited 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

88 WIC and Baby Formula WIC money is distributed to statesStates 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

89 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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91 Actual WIC Discount = 85% The winning producer is willing to take a (5%) loss on WIC consumers. Why?

92 The Political-Legal EnvironmentOther 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 Sugar Cane and Beets are the agribusiness special interest research group to consistently contribute more to Democrats than Republicans. Why? Because of diabetes, obesity, etc. Other agribusiness SIGs try to influence produce issue policies. But sugar policy is ripe for consumer issue policy. Dems represent places where most consumers live, Reps represent where most ag producers live.

93 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?

94 Controlling the Political-Legal EnvironmentCompanies fight unjust regulations Regulations can present new opportunities Working with regulators E.g. FDA preapproval Political lobbying Boycotts Political action committees Economic studies

95 Ex: MKTG Response to Political/Legal EnvironmentLate 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. Source:

96 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 Kurtz, David L. Boone & Kurtz, Contemporary Marketing, David L. Kurtz. 15th ed. Mason, OH: South-Western Cengage Learning, Print. Schaffner, David J., William R. Schroder, and Mary D. Earle. Food Marketing: An International Perspective. Boston, MA: WCB/McGraw- Hill, Print.