Food Marketing

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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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To the extent these services can be added in a cost effective manner, that is a good thing. Ironically, however, what frequently happens is that "room" now opens up for a "bare bones" chain to come in and fill the void that the original store was supposed to have filled! New stores can now come in and offer lower prices before additional, costly services "creep" in.  Note that upscaling over time may be an appropriate strategy and that the owner of the "rising" chain may itself want to start another, lower-service division (e.g., Ralph’s may want to own another chain such as Food 4 Less).

 

Retailing polarity. A number of retailers have tended to go to one extreme or the other—either toward a great emphasis on price or a move toward higher service. Rapid economic growth has made high service retailers more attractive to a growing number of affluent consumers, and less affluent consumers have become more accustomed to intense price competition between different retailers.

 

Scanner Data.  Retailers and manufacturers today are able to make strategic decisions based on information from price scannings at checkout counters.  Wal-Mart, for example, has looked at which products tend to be purchased together.  At Wal-Mart supercenters which carry both food and traditional products, it was decided to put bananas both in the produce and the cereal sections.  Many consumers would get to cereal and realize that they needed bananas.  Not all were willing to go back and get them, but bananas will be bought if located next to cereal.

 

 

 

In some cities, a group of consumers agree to participate in a scanner data “panel.”  These consumers receive a card much like the loyalty cards available to members of Vons Club.  Their purchases are tracked and correlated with media exposure and demographics.  This makes certain analyses possible:

 

•By comparing purchases to television exposure, it is possible to see whether and how many times an ad has been seen.  Split cable allows testing whereby half of the cable subscribers see an ad while the other half does not.  Sales to those who have and those who have not seen an ad can be compared, or two different advertising themes can be tested.

•The impact of promotional situations—such as whether the brand of interest or a competitor was on sale, whether a coupon was redeemed, or whether any category brand received special display space—can be considered.

•Purchases can be compared to past purchases.  This allows for tests of brand loyalty and switching behavior.

•Timing of purchases can be examined.  Does a particular product sell higher volumes on certain days?

•How do a particular store’s sales compare to those in other chains?  For example, neighborhoods with high concentrations of specific ethnic groups may sell more of certain brands or product categories.

 

 

 

International Food Markets

Background.  The United States exports much of its food supply and in turn imports certain goods that are (1) more economical to grow in other countries, (2) serve niche markets, or (3) perceived to be better if made in certain countries (e.g., Irish whiskey or Belgian chocolate).

 

Exchange rates come in two forms:

 

•“Floating”—here, currencies are set on the open market based on the supply of and demand for each currency.  For example, all other things being equal, if the U.S. imports more from Japan than it exports there, there will be less demand for U.S. dollars (they are not desired for purchasing goods) and more demand for Japanese yen—thus, the price of the yen, in dollars, will increase, so you will get fewer yen for a dollar.

•“Fixed”—currencies may be “pegged” to another currency (e.g., the Argentinian currency is guaranteed in terms of a to a composite of currencies (i.e., to avoid making the currency dependent entirely on the U.S. dollar, the value might be 0.25*U.S. dollar+4*Mexican peso+50*Japanese yen+0.2*Euro), or to some other valuable such as gold.  Note that it is very difficult to maintain these fixed exchange rates—governments must buy or sell currency on the open market when currencies go outside the accepted ranges.  Fixed exchange rates, although they produce stability and predictability, tend to get in the way of market forces—if a currency is kept artificially low, a country will tend to export too much and import too little.

Measuring country wealth.  There are two ways to measure the wealth of a country.  The nominal per capita gross domestic product (GDP) refers to the value of goods and services produced per person in a country if this value in local currency were to be exchanged into dollars.  Suppose, for example, that the per capita GDP of Japan is 3,500,000 yen and the dollar exchanges for 100 yen, so that the per capita GDP is (3,500,000/100)=$35,000.  However, that $35,000 will not buy as much in Japan—food and housing are much more expensive there.  Therefore, we introduce the idea of purchase parity adjusted  per capita GDP, which reflects what this money can buy in the country.  This is typically based on the relative costs of a weighted “basket” of goods in a country (e.g., 35% of the cost of housing, 40% the cost of food, 10% the cost of clothing, and 15% cost of other items).  If it turns out that this measure of cost of living is 30% higher in Japan, the purchase parity adjusted GPD in Japan would then be ($35,000/(130%) = $26,923. (The Gross Domestic Product (GPD) and Gross National Product (GNP) are almost identical figures.  The GNP, for example, includes income made by citizens working abroad, and does not include the income of foreigners working in the country.  Traditionally, the GNP was more prevalent; today the GPD is more commonly used—in practice, the two measures fall within a few percent of each other.)

 

In general, the nominal per capita GPD is more useful for determining local consumers’ ability to buy imported goods, the cost of which are determined in large measure by the costs in the home market, while the purchase parity adjusted measure is more useful when products are produced, at local costs, in the country of purchase.  For example, the ability of Argentinians to purchase micro computer chips, which are produced mostly in the U.S. and Japan, is better predicted by nominal income, while the ability to purchase toothpaste made by a U.S. firm in a factory in Argentina is better predicted by purchase parity adjusted income.

 

It should be noted that, in some countries, income is quite unevenly distributed so that these average measures may not be very meaningful.  In Brazil, for example, there is a very large underclass making significantly less than the national average, and thus, the national figure is not a good indicator of the purchase power of the mass market.  Similarly, great regional differences exist within some countries—income is much higher in northern Germany than it is in the former East Germany, and income in southern Italy is much lower than in northern Italy.

 

Protectionism:  Although trade generally benefits a country as a whole, powerful interests within countries frequently put obstacles—i.e., they seek to inhibit free trade.   There are several ways this can be done:

 

•Tariff barriers:  A duty, or tax or fee, is put on products imported.  This is usually a percentage of the cost of the good.

•Quotas:  A country can export only a certain number of goods to the importing country.  For example, Mexico can export only a certain quantity of tomatoes to the United States.

• “Voluntary” export restraints:  These are not official quotas, but involve agreements made by countries to limit the amount of goods they export to an importing country.  Outright quotas are more common than “voluntary” agreements for food products.

•Subsidies to domestic products:  If the government supports domestic producers of a product, these may end up with a cost advantage relative to foreign producers who do not get this subsidy. Some U.S. chicken farmers have received subsidies for chickens exported.

• Non-tariff barriers, such as differential standards in testing foreign and domestic products for safety, disclosure of less information to foreign manufacturers needed to get products approved, slow processing of imports at ports of entry, or arbitrary laws which favor domestic manufacturers.  For perishable food products, a significant danger is having a shipment held up waiting for customs clearance.

Justifications for protectionism:  Several justifications have been made for the practice of protectionism.  Some appear to hold more merit than others:

 

•Protection of an “infant” industry:  This is usually not applicable to food products.

• Resistance to unfair foreign competition:  The U.S. sugar industry contends that most foreign manufacturers subsidize their sugar production, so the U.S. must follow to remain competitive.  This argument will hold little merit with the dispute resolution mechanism available through the World Trade Organization.

• Preservation of a vital domestic industry:  The U.S. wants to be able to produce its own defense products, even if foreign imports would be cheaper, since the U.S. does not want to be dependent on foreign manufacturers with whose countries conflicts may arise.  Similarly, Japan would prefer to be able to produce its own food supply despite its exorbitant costs.  For an industry essential to national security, this may be a compelling argument, but it is often used for less compelling ones (e.g., manufactures of funeral caskets or honey).

•Intervention into a temporary trade balance:  A country may want to try to reverse a temporary decline in trade balances by limiting imports.  In practice, this does not work since such moves are typically met by retaliation.

•Maintenance of domestic living standards and preservation of jobs.  Import restrictions can temporarily protect domestic jobs, and can in the long run protect specific jobs (e.g., chicken farmers).  This is less of an accepted argument—these workers should instead by retrained to work in jobs where their country has a relative advantage.

•Retaliation:  The proper way to address trade disputes is now through the World Trade Organization.  In the past, where enforcement was less available, this might have been a reasonable argument.

Variations in Food Taste Preferences.  Our food preferences tend to be “learned” early in life.  It is likely that we will continue to prefer the kind of food we ate growing up.  U.S. agricultural interests lobbied successfully to have wheat included in food aid to Japan after World War II.  The intent was to develop a taste for this product among the next generation—a very forward looking strategy!  Chinese people today do not generally like the taste of U.S. fast food.  The younger generation can “endure” this while the taste is very unpleasant for older Chinese.  Children now growing up and being exposed to this food may appreciate the taste more.

 

Religion has some impact on food preferences since certain religions do not allow the consumption of certain foods.  There may be significant cultural context to food consumption.  Banquets, for example, are a very important part of the Chinese culture.

 

Food Diffusion.  Food products often spread to other countries.  Often, this a process that takes considerable time.  Chinese food is believed to have become popular in the U.S. because of Chinese immigrants who started restaurants here.  Mexican food has spread to households of other ethnic groups.  Some products are significantly modified in adopting countries—e.g., U.S. pizza is much more elaborate than the traditional Italian dish.

 

 

 

Food Positioning.  A country of origin may affect the image of a food product either favorably or unfavorably.  When an association is favorable (e.g., French cheese or wine), the country of origin may be emphasized.  Sometimes an origin may be implied when it actually does not exist.  In this practice, which raises serious ethical questions, packaging text may be written in French, for example, even though the product is made in the U.S. and is intended for sale here.  A product name may also imply foreign origin—e.g., Häagen-Dazs ice-cream.  An alternative strategy, when the association is not believed to be seen positively, is to obscure national origin.  A wine made in Germany and a beer made in France use this approach.

 

Food may also need a different type of positioning based on usage occasion.   Tang, for example, is positioned as a cheap and convenient drink in the U.S.  In Brazil, real orange juice is cheaper and readily available on the streets.  Thus, such a positioning would not work.  Instead, a pineapple flavored drink was promoted as a special treat.  In China, prepared food is available from street vendors much cheaper than McDonald’s food.  Thus, the American position of convenience and low cost are not viable.  Instead, McDonald’s is positioned on its Western mystique.

 

Food Adaptation.  Food often needs to be adapted to be successful in a new country.  The Japanese tend to like food less sweet than do Americans, so KFC uses less sugar in its potato salad there.  Some McDonald’s sandwiches are much spicier in China.  Serving size may also have to be adjusted.  Americans often eat larger portions than people in many countries.  Packaging is often more important in some countries.  Products exported from the U.S. to Japan often need a significant upgrade to packaging materials where the container is seen a s a reflection of the quality of the product. 

 

Promotional Decisions.  A large part of most U.S. food products’ marketing is accomplished through television.  However, in many countries, ownership of TVs is much less common than in the U.S.  In most of the World, people watch less TV than Americans do, and some countries either do not allow or limit TV advertising.  Other media, then, may have to be used in certain countries.  Billboards are often more common in India, for example.  Certain other promotional tools may also be unsuitable.  There may not exist an adequate infrastructure for coupon redemption.  Free samples may not be cost effective in countries with low incomes.  Low income individuals who cannot afford to buy the products might endure long lines for a free sample.

 

Government Export Assistance.  Both the U.S. government and several states have programs to promote agricultural products abroad.  Some programs involve financial assistance, such as low interest loans.  Others assist in making connections with foreign buyers or paperwork.

 

 

 

Food Market Structure

Background. Several characteristics of a market determine its structure. Usually, no one firm or individual controls the entire value chain, but some firms may decide to integrate horizontally—by buying up competing firms or increasing capacity—or vertically by buying facilities that tend to come earlier or later in the chain. Some industries provide for large economies of scale, potentially resulting in a limited number of firms controlling a large portion of the total market. Where economies of scale are smaller, or where obstacles such as government regulations limit the size of individual firms, the market may be more fragmented.

 

Horizontal Integration. Economies of scale can be important in some industries. Sometimes, it may also be useful to have different brands or businesses that serve different segments. For example, a firm that has experience in the retail industry might want to operate both a full-service retail chain that can charge higher prices and a discount chain that serves a more price sensitive segment.

 

When growth opportunities in existing firms may be limited, there may be significant pressure to find other businesses in which to invest current earnings. Frequently, stockholders do not want to have profits paid back in dividends since this money would be immediatley taxable. Firms may therefore need to find other ways to invest the money to make a satisfactory return, and it may be attractive to buy another firm in an industry the management already understands. In the United States , and to an increasing extent in Europe , governments are concerned about too much market share being controlled by one or a few firms and opportunities to acquire competitors may therefore be limited. There are also some businesses that do not lend themselves well to consolidation. For example, running farms depends a great deal of entrepreneurial drive and willigness to work long hours, so therefore corporate farms tend to be rare—usuallly, they would simply not be cost-effective.

 

Vertical Integation. Another way for a firm to grow is to integrate vertically. Here, the firm will buy firms that come earlier or later in the value chain. For example, McDonald’s could buy a meat packing plant that would supply much of the beef that its restaurants would need.

 

 

 

There are certain advantages to vertical integration. The most important advantage probably is having an assured supply in case of a “tight” market. Sometimes, it may also be possible to obtain “synergy”—a situation where two assets together may be worth more than the “sum of their parts.” For example, a seed manufacturer might be able to buy a chemical firm that supplies fertilizer used in the process of producing the seed and be able to use some research and development investments in both processes.

 

 

 

In agricultural industries, however, genuine synergy potential does not appear to be frequent. There are also considerable potential downsides to vertical integration:

 

•The management will need to oversee investments in an industry where it has limited experience;

•Management attention is being spread between more industries, allowing less time to focus in each;

•High levels of leverage—if economic developments depress one industry, this may “ripple” through the value chain, compounding the problem;

•Lack of willingness of customers at one level to buy from a firm at which they may be competing at another level (e.g., other fast food restaurants where reluctant to buy Pepsi when the parent company also owned fast food restaurants); and

•Potential conflicts of interest. If a food manufacturer also owns a bank that lends to farmers, farmers may feel pressure to make decisions on sales based on financing decisions or vice versa. This may cause regulatory concern and/or intervention.

In practice, therefore, many atttemps at vertical integration have not been very successful.

 

Specialization. Firms that tend to focus on one process often become more effective. KFC, for example, prides itself on the slogan of doing only “chicken right.” It is possible for firms that specialize to gain considerable economies of scale, including considerable bargaining power because of large quantities purchased. The firm can also spread research and development expenses across large volumes and can afford to invest in technology and research that allow superior quality and performance. Wholesalers spread costs of distribution across numerous product categories and develop extensive knowledge of efficiency in distribution. Farmers may hire agents to negotiate and tend to focus on farming rather than getting into how to make and distribute butter and cartoned milk in small quantities.

 

Diversification. Agricultural price markets often fluctuate dramatically. Therefore, it may be dangerous for a farmer to put “all [his or her] eggs in one basket.” For this reason, a farmer may produce several different crops or may even produce both produce and meat. On the average, this will probably be a less efficient strategy—the farmer does not get to specialize, does not get the same economies of scale, and does not get as much use of each piece of equipment. However, in return, the farmer is less likely to be driven out of business by a disaster in one crop area. For larger firms, diversification appears to be less useful. Financial theory holds that it is usually not beneficial for stockholders if firms diversity. The stockholders themselves can diversify by buying a portfolio balanced between different stocks. Sometimes, however, it may be difficult for a firm to find an opportunity to invest current earnings in the core industry, and management may be motivated to buy into other industries mostly as a way to avoid paying dividends that would be subject to immediate taxation.

 

Decentralization. In the old days, it was frequently necessary for buyers and sellers to physically gather to settle market prices. Many commodities would be sold through auctions where the price would be set by supply and demand. Nowadays, much of the negotiation can be done electronically. A farmer may notify an agent of what he or she has to send and one or more buyers can be approached. Buyers and sellers can then accept or reject offers that are being made at various times. This is more efficient, but it also means that less will be known about market prices by at least some participants. Large buyers that can invest in extensive market research often will know much more than small sellers about market conditions and thus have an advantage in negotiations. Since auctions in some markets now account for only a minority of commodities sold, the U.S. government is now unable to supply reliable market price estimates for some categories.

 

Farmer cooperatives. Farmers may decide to set up organizations that allow them to pool sales and purchases or provide or obtain certain services jointly. Cooperative organizations may be set up to run storage elevators or milling operations rather than contracting with outside firms to provide these services. In many cases, cooperatives appear to come about not so much for economic savings but rather for ideological reasons—farmers feeling in control of the process rather than having to deal with outside firms. Cooperatives may not be cost efficient, especially if they need to handle smaller volumes than commercial operators. They must also be managed—either by volunteers or outside management. With cooperatives also come governance issues and the need to resolve disputes between members. Cooperatives may be set up for marketing purposes—finding buyers for and transportation to potential buyers or establishing a regional brand identity. Purchasing cooperatives may allow for greater bargaining power through larger volume purchases. Cooperatives can also pool buying of such services as medical benefits or insurance for farms with a small number of employees.

 

 

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