Download Food Product Marketing

Food Product Marketing
Lecture 2
Marketing Yesterday and Today
1
Overview
1. What is food marketing?
2. The History of Marketing
3. Relationship Marketing: The Current
Paradigm
4. Marketing Environment
5. Price Elasticities
2
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, 20072009, 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.
5
6
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.
7
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.
8
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).
9
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!
10
Marketing Myopia Is a Perspective
Company /
Brand
Myopic Description
Consumer-Oriented
Description
Dannon
We produce yogurt and probiotic
fermented milk
Our products deliver health
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
Campbell
We produce soups
Pringles
We sell a snack made with less
than 50% of dried potato powder
Save time and eat a
home-style soup
We sell a fun snack with a kick,
stackable and easy to consume
Slogan / Mission
Bringing health through food
to as many people as possible
Save money live better
Nourishing people’s lives
everywhere, every day
Everything pops with Pringles
11
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.
Price = $139
Lasts 1 week
• What factors led/allowed Dannon to take this market on?
12
Company /
Brand
Wal-Mart
Myopic Description
Our chain offers food and
general merchandise at low
prices
Marketing-Oriented
Description
We offer a one-stop shopping
experience at lower prices than
most of our competitors
Slogan / Mission
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?
13
Market Myopia: Traditional Grocers
14
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
15
• “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
16
Hindsight is 20/20
17
Supermarkets cater to the Dude’s needs
18
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
19
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?
Product
Distribution
Target Market
Promotion
Price
20
Four P’s of Marketing
•
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
21
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
22
Do the non-physical aspects of a
product add value?
23
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%
24
Four Eras of Marketing
Era
Production
Sales
Approximate
Time Period
Prior to 1920s
Prevailing
Attitude
Prior to
1950/60s
Marketing
Since
1950/60s
Relationship Began in
1990s
25
Four Eras of Marketing
1. Production Era assumed the customer
would find the product.
– Many great ideas lost
– Product focused
Learn from the mistakes of this marketing eras
26
Four Eras of Marketing
Era
Production
Sales
Approximate
Prevailing
Time Period
Attitude
Prior to 1920s “A good product will sell itself.”
Prior to
1950/60s
Marketing
Since
1950/60s
Relationship Began in
1990s
27
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
Learn from the mistakes of this marketing eras
28
Four Eras of Marketing
Era
Production
Sales
Approximate
Prevailing
Time Period
Attitude
Prior to 1920s “A good product will sell itself.”
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
29
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.”
31
Four Eras of Marketing
Era
Production
Sales
Marketing
Approximate
Prevailing
Time Period
Attitude
Prior to 1920s “A good product will sell itself.”
Prior to
1950/60s
Since
1950/60s
Relationship Began in
1990s
“Simple marketing (advertising) and
selling will overcome consumers’
resistance and convince them to buy.”
“The consumer is king! Find a need
and fill it.”
32
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
33
“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
34
How Does Satisfaction Affect
Loyalty?
Loyalty
1
2
3
4
Satisfaction Rating
5
35
Four Eras of Marketing
Era
Production
Sales
Marketing
Approximate
Prevailing
Time Period
Attitude
Prior to 1920s “A good product will sell itself.”
Prior to
1950/60s
Since
1950/60s
Relationship Began in
1990s
“Simple marketing (advertising) and
selling will overcome consumers’
resistance and convince them to buy.”
“The consumer is king! Find a need
and fill it.”
“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
37
Cobranding
• Why would they do this?
38
More Cobranding
39
Mad Men clip
40
This is what our product is
This is what our product means to you
41
3 Levels of Marketing Relationships
Characteristic (Generally)
Level 1
Level 2
Level 3
Primary Bond
Financial – Focused on Price
Social
Degree of Customization
Low
Medium
Structural – Interdependent
Interaction
Medium to High
Potential for Sustained
Competitive Advantage
Low
Medium
High
Interactions
Purchases, Temporary Sales
Chats with customers, follow-ups,
Tweets, Facebook, emails
Awareness of Customer
Characteristics and Needs
Low
Medium
High levels of customer service,
partnership-like relationships,
customer dependence
High
Example
McDonalds
Farmer’s Markets
Local diner
Consumer Supported Agricultural
(CSA) groups,
Soda Stream
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?
42
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?”
 YX
 Y 
 Y1  Y0 




Y
percent change in Y Y %  Y0 



  0 
percent change in X X %  X   X 1  X 0 

 

X
X
0
 0 

• Start by thinking of X changing, and Y
changing because of the change in X
43
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.
Y 500  1000


 .5
.5
Y
1000

  Yp   1.25

p $5  $3
.4


 .4
p
$5

• With own price elasticities, the negative is usually taken for
granted
44
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%.
%Y 2%

 .2
%I 10%
45
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?
46
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
47
“Elastic demand” means
people ARE sensitive to price
changes
• Can’t jack the price up on them
48
“Inelastic demand” means
people are NOT sensitive to
price changes
• Bleed ‘em through the nose!
49
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?
50
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
51
Marketing Mix within an
Environmental Framework
Includes the biological
environment
52
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
•
Oligopoly/Oligopsony
–
Few sellers/buyers
–
Oligopoly prices set strategically; approximately
i = firm index, si = market share
•
pi  c si

pi

Perfect Competition
–
Many sellers/buyers
–
Prices accepted by the market
–
0 profits
–
no barriers to entry
pi  c 0

pi

 pi  c
Market Power
p = price, c = unit cost,  = price elasticity of demand
pc 1

p

53
Market Power by Food Manufacturers
pc
 markup
p
= market power
  elasticity of demand
  economies of scale
 1 increasing returns
= constant returns
< decreasing returns
L
Observations
Non-perishables
have higher markup
and increasing
returns to scale.
Markup and returns
to scale are highly
correlated (= .86).
54
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?
55
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”
56
Who are DiGiorno’s direct and indirect
competitors?
• Direct: Tombstone, Tony’s, California Pizza
Kitchen
• Indirect: take-out/delivery/restaurants
57
Something From my Kitchen
58
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
59
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
60
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
61
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
62
Rising Hispanic Population
63
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
64
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
65
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)
66
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.
Chill Can – press button,
gets 30° F cooler in 3 min.
$3.95/can starting in March
Wikipearls
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.”
67
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)
68
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
69
70
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
71
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.
72
Business Cycle
Civilian Unemployment Rate
12.0
10.0
Percent
8.0
6.0
4.0
2.0
0.0
Jan-48
Jul-57
Jan-67
Jul-76
Jan-86
Jul-95
Jan-05
Jul-14
Source: U.S. Department of Labor: Bureau of Labor Statistics/FRED
73
Civilian Labor Force Participation Rate
68.0
66.0
64.0
Percent
62.0
60.0
58.0
56.0
54.0
52.0
Jan-48
Jul-57
Jan-67
Jul-76
Jan-86
Jul-95
Jan-05
Jul-14
Source: U.S. Department of Labor: Bureau of Labor Statistics/FRED
74
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/)
75
Ex: MKTG Response to Econ Environment
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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Canned Veggies
Pasta
Size Before
Recession
16 oz
16 oz
Size After
Recession
14.5 oz
13.25 oz
Tuna Fish
Tostitos/Fritos
6 oz
X
5 oz
.8 X
Saltines/Graham
Crackers
Edy’s Ice Cream
Tropicana OJ
X
.85 X
2L
1.5 L
64 oz
59 oz
Read “Food Inflation Kept Hidden in Tinier Bags” http://www.nytimes.com/2011/03/29/business/29shrink.html?pagewanted=all
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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.
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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.
Source: http://www.herrs.com/AboutHerrs/History.html
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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/McGrawHill, 1998. Print.
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