Food Marketing

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FOOD MARKETING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lars Perner, Ph.D.

Assistant Professor of Clinical Marketing

Department of Marketing

Marshall School of Business

University of Southern California

Los Angeles, CA 90089-0443, USA

(213) 740-7127

 

 

 

FOOD MARKETING

 

 

Food Marketing, Consumption, and Manufacturing

Food Marketing. Food products often involve the general marketing approaches and techniques applied the marketing of other kinds of products and services. In food marketing, topics such as test marketing, segmentation, positioning, branding, targeting, consumer research, and market entry strategy, for example, are highly relevant. In addition, food marketing involves other kinds of challenges--such as dealing with a perishable product whose quality and availability varies as a function of current harvest conditions. The value chain--the extent to which sequential parties in the marketing channel add value to the product--is particularly important. Today, processing and new distribution options provide increasing increasing opportunities available to food marketers to provide the consumer with convenience. Markting, services, and processing added do, however, result in significantly higher costs. In the old days, for example, consumers might have baked their own bread from locally grown flour. Today, most households buy pre-manufactured bread, and it is estimated that the farmer receives only some 5% of the price paid by the consumer for the wheat.

 

Demographics and Food Marketing. The study of demographics involves understanding statistical characteristics of a population.  For food marketing purposes, this may help firms (1)  understand the current market place (e.g., a firm interested in entering the market for sports drinks in a given country, or worldwide, might investigate the number of people between the ages of fifteen and thirty-five, who would constitute a particularly significant market) or (2) predict future trends.  In the United States and Germany, for example, birth rates are relatively low, so it can be predicted that the demand for school lunch boxes will probably decline.  Therefore, firms marketing such products might see if they, instead, can shift their resources toward products consumed by a growing population (e.g., bait boxes for a growing population of retired individuals who want to go fishing).

 

Food marketers must consider several issues affect the structure of a population.  For example, in some rapidly growing countries, a large percentage of the population is concentrated among younger generations.  In countries such as Korea, China, and Taiwan, this has helped stimulate economic growth, while in certain poorer countries, it puts pressures on society to accommodate an increasing number of people on a fixed amount of land.  Other countries such as Japan and Germany, in contrast, experience problems with a “graying” society, where fewer non-retired people are around to support an increasing number of aging seniors.  Because Germany actually hovers around negative population growth, the German government has issued large financial incentives, in the forms of subsidies, for women who have children.  In the United States, population growth occurs both through births and immigration.  Since the number of births is not growing, problems occur for firms that are dependent on population growth (e.g., Gerber, a manufacturer of baby food).

 

Social class can be used in the positioning of food products.  One strategy, upward pull marketing, involves positioning a product for mainstream consumers, but portraying the product as being consumed by upper class consumers.  For example, Haagen-Dazs takes care in the selection of clothing, jewelry, and surroundings in its advertisements to portray upscale living, as do the makers of Grey Poupon mustard.  Another strategy, however, takes a diametrically opposite approach.  In at level positioning, blue collar families are portrayed as such, emphasizing the working class lifestyle.  Many members of this demographic group associate strongly with this setting and are proud of their lifestyles, making this sometimes a viable strategy.  An advertisement for Almond Joy, for example, features a struggling high school student being quizzed by his teacher remarking, “Sometimes you feel like a nut, sometimes you don’t!”  Nowadays, by the way, social class is often satirized in advertising, as evident in the Palanna All-Fruit commercials while the matron faints because the police officer refers to the fruit preserves as “jelly.”

 

Demographics in the U.S. have significantly affected demand for certain food products.  With declining birth rates, there is less demand for baby foods in general, a trend that will continue.  Immigration has contributed to a demand for more diverse foods.  Long working hours have fueled a demand for prepared foods, a category that has experienced significant growth in supermarkets since the 1980s.

 

Food Marketing and Consumption Patterns.  Certain foods—such as chicken, cheese, and soft drinks—have experienced significant growth in consumption in recent years.  For some foods, total market consumption has increased, but this increase may be primarily because of choices of a subgroup.  For example, while many Americans have reduced their intake of pork due to concerns about fat, overall per capita consumption of pork has increased in the U.S.  This  increase probably results in large part from immigration from Asia, where pork is a favored dish.  Consumption of certain other products has decreased.  Many consumers have replaced whole milk with leaner varieties, and substitutes have become available to reduce sugar consumption.  Beef and egg consumption have been declining, but this may be reversing as high protein diets gain increasing favor. Some food categories have seen increasing consumption in large part because of heavy promotional campaigns to stimulate demand.

 

International Comparisons.  Americans generally spend a significantly smaller portion of their income  on food than do people in most other countries.  Part of this is due to American affluence—in India and the Philippines, families are estimated to spend 51% and 56% of their incomes on food, respectively, in large part because of low average incomes.  Food prices also tend to be lower in the U.S. than they are in most industrialized countries, leaving more money for other purposes.  Americans, on the average, are estimated to spend 7-11% of their income on food, compared to 18% in Japan where food tends to be very expensive.  This is because food prices are relatively low, compared to other products, here.

 

Food outlets.  Food, in the United States, is sold in a diversity of outlets.  Supermarkets carry a broad assortment of goods and generally offer lower prices.  Certain convenience products—e.g., beverages and snacks—are provided in more outlets where consumers may be willing to pay higher prices for convenience.  Distinctions between retail formats are increasingly blurred—e.g., supermarkets, convenience stores, and restaurants all sell prepared foods to go.  A small number of online retailers now sell food that can be delivered to consumers’ homes.  This is usually not a way to reduce costs—with delivery, costs are usually higher than in supermarkets—but rather a way to provide convenience to time-pressed consumers.

 

Internationally, there are large variations.  In developing countries, food is often sold in open markets or in small stores, typically with more locally produced and fewer branded products available.  Even in many industrialized countries, supermarkets are less common than they are in the U.S.  In Japan, for example, many people show in local neighborhood stores because it is impractical to drive to a large supermarket.  In some European countries, many people do not own cars, and thus smaller local shops may be visited frequently.

 

Food is increasingly being consumed away from the home—in restaurants, cafeterias, or at food stands.  Here, a large part of the cost is for preparation and other services such as ambiance.  Consumers are often quite willing to pay these costs, however, in return for convenience and enjoyment.

 

Government Food Programs.  Government food programs, in addition to helping low income households, do increase demand for food to some extent.  In fact, increasing demand for farm products was a greater motivation than helping poor people for the formation of the U.S. food stamp program.  The actual impact on food stamps on actual consumer demand is limited, however, due to the fungibility of money.  It is estimated that one dollar in food stamps increases the demand for food by 20 cents, but when food stamps are available to cover some food costs, recipients are likely to divert much of the money they would otherwise have spent to other necessities.

 

Food Marketing Issues.  The food industry faces numerous marketing decisions.  Money can be invested in brand building (through advertising and other forms of promotion) to increase either quantities demanded or the price consumers are willing to pay for a product.  Coca Cola, for example, spends a great deal of money both on perfecting its formula and on promoting the brand.  This allows Coke to charge more for its product than can makers of regional and smaller brands. 

 

Manufacturers may be able to leverage their existing brand names by developing new product lines.  For example, Heinz started out as a brand for pickles but branched out into ketchup.  Some brand extensions may involve a risk of damage to the original brand if the quality is not good enough.  Coca Cola, for example, refused to apply the Coke name to a diet drink back when artificial sweeteners had a significantly less attractive taste.  Coke created Tab Cola, but only when aspartame (NutraSweet) was approved for use in soft drinks did Coca Cola come out with a Diet Coke.

 

Manufacturers that have invested a great deal of money in brands may have developed a certain level of consumer brand loyalty—that is, a tendency for consumers to continue to buy a preferred brand even when an attractive offer is made by competitors.  For loyalty to be present, it is not enough to merely observe that the consumer buys the same brand consistently.  The consumer, to be brand loyal, must be able to actively resist promotional efforts by competitors.  A brand loyal consumer will continue to buy the preferred brand even if a competing product is improved, offers a price promotion or premium, or receives preferred display space.  Some consumers how multi-brand loyalty.  Here, a consumer switches between a few preferred brands.  The consumer may either alternate for variety or may, as a rule of thumb, buy whichever one of the preferred brands are on sale.  This consumer, however, would not switch to other brands on sale.  Brand loyalty is, of course, a matter of degree.  Some consumers will not switch for a moderate discount, but would switch for a large one or will occasionally buy another brand for convenience or variety.

 

The “Four Ps” of Marketing.  Marketers often refer to the “Four Ps,” or the marketing portfolio, as a way to describe resources available to market a product:

 

•Product.  Firms can invest in the product by using high quality ingredients or doing extensive research and development to improve it.  Both McDonald’s and Burger King, for example, literally spend millions of dollars to perfect their French fries!  In today’s Western markets with varying tastes and preferences, it has generally been found that products that offer a specific benefit—e.g., a very tart taste in jam—tend to fare better than “me, too” products that merely imitate a competitor’s products.  Less is known about Eastern and developing countries.

•Price.  Different strategies may be taken with respect to price.  Generically, there are two ways to make a profit—sell a lot and make a small margin on each unit or make a large margin on each unit and settle for lesser volumes.  Firms in most markets are better off if the market is balanced—where some firms compete on price and others on other features (such as different taste preferences for different segments).  The same idea applies at the retail level where some retailers compete on price (e.g., Food-4-Less and Wal-Mart) while others (such as Vons Pavillion) compete on service while charging higher prices.

•Distribution.  Most supermarkets are offered more products than they have space for.  Thus, many manufacturers will find it difficult to get their products into retail stores.

•Promotion involves the different tools that firms have to get consumers to buy more of their products, possibly at higher prices.  Advertising is what we think of by default, but promotion also includes coupons, in-store price promotions, in-store demonstrations, or premiums (e.g., if you buy a package of Jimmy Dean hotdogs this week, you get a free package of Kraft mustard).

The Value Chain.  A central issue in food marketing is the value chain, the process by which different parties in between the farmer and the consumer add value to the product.  In an extreme case, the farmer only receives about five cents for every dollar ultimately charged for bread in the store.  Part of the added cost results from other ingredients, but much of the value is added from processing (e.g., milling), manufacturing, distribution (transportation, wholesaling, and retailing) and brand building.  The value chain provides an opportunity for many firms to add value to a product.  This, of course, pushes up the ultimate retail prices of foods.  However, these added costs usually result from consumer demand where consumers are willing to pay for additional convenience.  In recent years, for example, there has been a sharp increase in the demand for prepared foods—from supermarkets or from dine-in or take-out from restaurants.

 

It is important to note that the value chain comes about in large part because a sequence of contributors allows each to specialize in what it does best or is most comfortable—and best qualified—to be doing.  Farmers, for example, tend to be most interested in doing actual farming tasks and may be uncomfortable making deals with processors and manufacturers. Agents may specialize in this task.  The costs of learning can be spread across many different farmers.  The farmer may then be better off paying the agent and spend his or her time on farming instead .  For the agent, having a large number of farmers as clients is profitable.  Most farms would not have a sufficient volume to justify setting up milling operations, but large processors can take advantage of economies of scale by servicing many farmers.  Large manufacturers can invest in brand building, and distributors can combine goods from many different suppliers to distribute and sell efficiently.

 

The Food Marketing Environment.  The food market is affected by many different forces—e.g., sociological (fewer children mean less demand for certain products), government regulations, international trade conditions, science and technology, weather and other conditions affecting harvest conditions, economic cycles, and competitive conditions.

 

 

 

Food Markets: Characteristics

Food Marketing Efficiency refers to providing consumers with desired levels of service at the lowest cost possible.  This does not necessarily mean to minimize costs after materials leave the farm.  Services added later in the process may be very valuable to the consumer.  Raw wheat would not be very valuable to most end consumers.  The objective, then, is to add the needed value steps as efficiently as possible.  Wal-Mart is extremely efficient in providing the retail (and effectively wholesale) part of the value chain even though that service ultimately costs money.  Few consumers would want to drive a long distance to a bakery, and even if they did, the baker would then have to provide the retail services.  The baker would probably have to spend more money on hiring people and maintaining the store than Wal-Mart adds to the cost by performing these services.

 

Characteristics of Food Products and Production.  Certain problems are introduced by the characteristics of agricultural production:

 

•Large crop variations.  Weather and other environmental factors greatly influence the size of a crop during any given year.  At the farm level, demand for agricultural products is generally very inelastic.  That means that a small change in the crop size can greatly affect prices.  If the orange harvest is only 5% above normal, orange juice manufacturers have a lot of farmers to buy from.   Since it is difficult to increase consumer demand much in the short run, manufacturers are unlikely to significantly increase the quantities purchased, and prices may go down by much more than the 5%.

•Seasonal effects.  Certain products—such as turkeys, pumpkin pie, and cranberries—are demanded mostly during selected periods of the year.  Other products—such as oranges for orange juice—are demanded more uniformly year-round, but are available in larger quantities during the season.  Fresh peaches, for example, are abundantly available in the U.S. during the summer, but usually need to be imported—at high costs—during the winter season.

•Increasing production levels.  Scientific advances have enabled farmers to produce more crops on a given amount of land.  This has dramatically increased the supply of certain products, often more than the increase in population and export markets.  This has made markets more competitive.

•Geographic concentration and varying production costs.  Certain products are grown most efficiently in certain parts of the country.  Wheat and corn could be grown in the South, but at a higher cost than in colder climates.  Oranges tend to fare better in warmer climates.  This means that many products need to be transported over long distances.

•Derived demand.  Farmers need farm supplies (e.g., fertilizer, seeds) and equipment (e.g., tractors).  Thus, when there is an increase in market demand for a particular crop, this will tend to result in increased demand for products supplied to farmers.

Problems in Agricultural Marketing.  Farmers tend to face serious problems due to their limited control over market conditions.  In the long run, farmers can to some extent control their own production levels, but they have no control over others.  If other farmers increase their production, thus increasing supply and resulting in decreased market prices, there is nothing that the farmer can do about it.  Another problem is that it takes time for the farmer to adjust his or her output.  To increase production of hogs, for example, it is necessary to breed more stock.  This takes time, and by the time the larger stock is available, prices may have reversed—i.e., the farmer decided to raise more hogs when prices went up, but by the time the stock is ready, market prices may have declined (either because of an increasing supply from other farmers or because of a change in consumer tastes).  Farmers have low bargaining power in dealing with buyers.  Processors or manufacturers have many farmers to choose from.  They do not need the product from any one particular farmer since commodities are seen as identical.  Farmers, therefore, end up having to sell at a market price that may or may not be profitable at a given time.  Farmers often face a “cost-squeeze” when market prices change.  When market prices decline (usually due to supply conditions), prices paid to farmers decline.  However, the farmer’s costs are unlikely to decline, leaving the farmer to absorb this loss.  Such price fluctuations may change a crop from being mildly profitable to being causing significant losses.

 

Decisions on Marketing Efforts.  Certain food product producers have decided to collectively promote their crops—e.g., Florida oranges, Washington apples, and beef growers.  For a commodities product, it is generally not worthwhile for the individual farmer to promote.  Thus, promotion efforts are typically undertaken by trade groups such as the Beef Council.  If participation is voluntary, many producers would be likely to free-ride—that is, benefit from others’ efforts without contributing themselves.  In many jurisdictions, participation in various programs in mandatory.  In some cases, farmers can petition for a refund, but must then go through a great deal of effort.

 

Manufacturers frequently engage in brand building—e.g., Kraft promotes Kraft cheese as being of especially high quality.  Here, the manufacturer benefits, and thus may have an incentive to spend money on these promotional efforts.

 

Trends in Food and Agricultural Marketing.  Science has allowed both for significant increases in productivity and for adapting products to market needs.  For example, it is now possible to produce firmer fruits that are less likely to be bruised or spoil in transit.  (This may happen at some cost in taste, however).  Other research may be conducted to optimize tastes and appearances for one or more consumer segments.  This research is often proprietary—sponsored by specific manufacturers and kept secret as a competitive advantage.

 

In order to meet the demands of consumers and manufacturers, there is now an increased need for growers, processors, and manufacturers to work together to create products that meet needed standards.  It is also possible today to produce an increasing number of niche products—products that appeal to one particular segment of the market.

 

Competition is increasingly global, with both suppliers and buyers being spread increasingly across the world.  Because of the increasingly complex marketplace, managers increasingly need more business and interpersonal skills in addition to technical knowledge.  The food industry faces pressures not only in terms of nutritional value and safety, but also from environmental concerns.

 

 

 

Price and Competition in Food Markets

Basic Economics.  The notions of supply and demand are fundamental to economics.  The general logic here is that consumers will be willing to buy a larger quantity of goods at a lower price than they would at a higher price.  As we will see, this assumption is sometimes violated, usually when consumers use price as a cue to quality and assume that a higher priced product is better.  Similarly, sellers are generally willing to sell a larger quantity when a higher price is offered.  Thus, we have the traditional supply and demand curves:

 

 

 

Several things are evident from this chart:

 

•Each curve—supply and demand—indicates the quantity supplied or demanded at the prices offered.  At a price of $4.00, for example, buyers would be willing buy about 85 units.  However, at that price, only about 10 would be supplied. 

•Where the two curves intersect, the equilibrium, or market, price is found.  The quantity supplied at that price is the same as the quantity demanded at that price—about $7.50 in this chart.

•When the market price changes—because of a change in supply—the demand curve is not directly affected.  If the price decreases, there will be an increase in quantity demanded but not a change in overall demand.

•Supply and demand curves often have a curved—as opposed to straight line—shape since there is no reason why the same change in price—say, $1.00—will have the same impact at high or low prices.  For example, if the price of heavy cream were reduced from $3.00 to $2.00 a pint, quantity demanded would increase.  However, if heavy cream sells for an already low price of $1.00 per pint, reducing the price even further would have little effect.  This product simply contains too many calories for consumers to consume more even if it were free.

As we will see in examining research on consumer response to price, real life demand is not always as  smooth as it is portrayed in theoretical demand curves.  For example, sharp changes may occur when certain “critical” price points are reached.  Consider the following hypothetical quantities of cereal boxes demanded:

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Food Marketing. Food products often involve the general marketing approaches and techniques applied the marketing of other kinds of products and services. In food marketing, topics such as test marketing, segmentation, positioning, branding, targeting, consumer research, and market entry strategy, for example, are highly relevant. In addition, food marketing involves other kinds of challenges--such as dealing with a perishable product whose quality and availability varies as a function of current harvest conditions. The value chain--the extent to which sequential parties in the marketing channel add value to the product--is particularly important. Today, processing and new distribution options provide increasing increasing opportunities available to food marketers to provide the consumer with convenience.
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