Food Marketing

 

 

Food Market Development

Background . Market development involves creating or expanding a market for new or existing products and/or increasing the value of these products. Few consumers today are aware of the prickly pear, however, but farmers who grow this cactus plant would like to market it as a way to decrease “bad,” low-density cholesterol without reducing “good,” high density cholesterol levels.

 

Strategies, objectives, and the hierarchy of effects . The promotional activities needed for a given product will depend on factors such as its current stage in the product life cycle. For prickly pear growers, simply getting more people to know that their product exists will be a challenge. Once more people know, a significant challenge is going to get more people to actually try the product. This may be difficult to accomplish because of the high cost of the product and the vast number of choices of other products that consumers can consume. There is simply not enough time or money to try all. If a product category catches on, emphasis may then need to switch to brand differentiation and the firm may need to work on getting consumers to hold favorable beliefs about their brand. In later stages of the product life cycle, where most consumers’ opinions have largely been set, temporary sales increases, usually through price promotions, may be the only realistic objective.

 

The strategic planning process . In order to make good investment decisions with respect to how much to spend on marketing and how to allocate this spending among opportunities available (e.g., advertising and price promotions), it is useful to go through a strategic planning process. This process involves several steps, but these steps are not rigidly separated and it may be necessary to return to previous stages as new considerations come up.

 

 

 

Setting marketing objectives. The first step involves setting the most appropriate marketing objectives. These objectives need to be reasonably specific and manageable; thus, merely saying that the goal is to maximize profit is not enough. How will this be done? It is also important to make priorities. A firm might like to reduce costs, improve quality, increase distribution channels, increase awareness, and improve consumer percpetion of the product at the same time. However, some of these objectives, such as reducing cost and improving quality at the same time, may not be compatible. The firm may also not have the resources to pursue all the other objectives at the same time. Therefore, the firm must focus on where resources will be used most effectively. Generically, some objectives may be:

 

•Get current users to use more

•Get more people to buy product

•Get product used for new purposes

•Develop preference relative to other products or brands; and

•Develop price insensitivity relative to other products or brands

Setting strategy. Once objectives have been set, a strategy for formulating these objectives can be made. Improving quality, for example, might be achieved either by increased research and development, the use of higher quality materials, or by investing in new manufacturing technology. The most appropriate choice will depend on factors such as cost and effectiveness, but may also depend on risk. There may be a new technology that, if it can be perfected, would represent a large breakthrough but also carries a risk that it will not work. A larger firm may be able to shoulder such a s risk but for a smaller firm, the risk may be prohibitive. Note that as a strategy is considered and potential complicatons arise, it may be necessary to reassess appropriate objectives.

 

 

 

Several criteria may be useful in evaluating a strategy. Some strategies may seem brilliant may, under stricter analysis, may be recognized as unrealistic. Strategies that take advantage of a firm’s special abilities (e.g., patents, technology, or human resources) and are consistent with consumer perception of the brand are also more likely to be successful.

 

A number of promotional tools are available—e.g., advertising, premiums, public relations, or distribution enhancement. For a review of this topic, see http://www.consumerpsychologist.com/Introduction.html .

 

Tactics and implementation. Once a plan for the strategy has been made, decisions must be made on implementation. If a decision as been made to position a product as a premium brand through advertising, specific ads must be developed and tested and appropriate media and advertising schedules should be resolved. When implementation begins, results need to be monitored. Some problems may be addressed with fine-tuning, but if the campaign does not seem to produce expected results, the strategy may need to be reconsidered.

 

 

 

In the longter term, consumer response—such as purchase rates and beliefs held about the brand—can be assessed in more detail. The next test is then whether this consumer response—such as improved attitudes—actually results in increased market share or higher profits. Even a successful strategy must be frequently re-evaluated to address changing market conditions such as change in competitor strategies, costs of materials, or changes in consumer tastes.

 

Consumer adoption of new food products. Some food products have great potential for sales growth through expansion of the customer base. One way to spread new foods is through massive advertising. This strategy appears to have been used in marketing the Hot Pockets® convenience products.

 

 

 

Many foods also spread as some groups of consumers “imitate” others they see consuming them, and some are encouraged to try new foods based on word-of-mouth communication. For a discussion of the diffusion of innovation, see http://www.consumerpsychologist.com/cb_Diffusion_of_Innovation.html ).

 

Levels of market development . Development efforts may center at several different levels. Producers of a commodity—e.g., Florida orange growers—may want to promote their food, hoping that preference will be developed relative to other food categories (e.g., apple juice or sodas) or to similar products from other regions. Alternatively, development efforts can focus on a branded product (e.g., Diet Coke ®), a brand (e.g., all Coca Cola ® branded products), or all brands owned by the same company (e.g., all beverages owned by the Coca Cola ® Company). More targeted development efforts may provide more specific results for a given product.

 

 

 

 

Production Costs, Demand, and Competition

Influences on Prices. As the chart suggests, prices that farmers receive for their commodities and other products depend on supply and demand factors. The amount of output available from other farmers, from imports, or the extent to which other products represent good substitutes affect the supply side. Demand for the product can ultimately be traced back from the consumer through the value chain. Manufacturers will base their orders on expectations of demand. If demand is expected to be high, prices will tend to rise; if less demand is expected, prices are more likely to decrease.

 

 

 

Most retailers, with the exception of “giants” such as Wal-Mart, will tend to order through a wholesaler. The wholesaler must anticipate the demand from retailers and have stock on hand to meet this demand.

 

Bargaining Power of Farmers. Farmers, who sell commodities in relatively small quantities, ordinarily have very little bargaining power. Since the same commodity from different farmers is considered identical, the farmer can in theory sell all his or her product at the market price but cannot sell at a higher price. In practice, however, many of today’s commodities transactions take place electronically and/or through brokers. This means that there may not be reliable information about market prices available and that the buyer will have the upper hand in negotiations. The farmer could try to get bids from different buyers, but that will take a great deal of time away from the farmer’s work of actually producing crops.

 

Predictable and Less Predictable Market Changes. Farmers are very vulnerable to environmental change. Small changes in supply and/or demand can greatly affect the prices that are paid for commodities (where demand tends to be very inelastic) and for supplies needed. Some changes may be relatively predictable—e.g.,

 

•Phased-in trade agreements. When trade agreements are signed, all markets are usually not completely opened immediately. Producers are often given some time to adapt to the changes. Thus, farmers may be aware of a new source of competition that will be faced at some specified future time.

•Long-term diet trends. Low carbohydrate diets have spread very quickly in recent times, but most other diet trends take longer to grow. Consumers gradually reduced their consumption of some high fat foods over time, for example.

•Trends in substitute products. New technological advances may allow the use of certain substitute products. For example, after the approval of aspartame (NutraSweet ®), more and more consumers switched to sugar free soft drinks—very bad news for sugar and corn growers. However, not all consumers will get used to the new taste immediately, so the defection may be gradual.

•Changes in cost structure and technology. The market prices of some farm inputs—such as petroleum—fluctuate, but for some materials, there is a more definitive trend as production (supply) or demand change over time. Technology is now becoming available to assess the productivity of specific plot areas based on global positioning satellite (GPS). Since this makes those farmers who adopt the technology more productive, it can be expected to increase supply of affected crops and thus put downward pressure on crops. Because the technology is adopted gradually, the entire impact will not be immediate but can be anticipated over time.

Less predictable changes. Some market factors are more difficult to predict. Since most commodities prices respond very strongly to supply conditions, the size of the current harvest will greatly affect prices. The harvest crop yield usually cannot be accurately predicted at the time when sowing has to be planned. Exchange rates between currencies also fluctuate dramatically. If the dollar increases in value relative to other currencies, American crops will become more expensive for people in other countries to buy (they have to spend more of their own currency to buy the dollars that must be used to pay American farmers) and imports will become more attractive for Americans (because the dollar now buys more abroad).

 

Farm value. Farm value refers to the proportion of the total food costs paid by consumers that come back to the farmer. For some foods, such as bread, the farm value will be very low. Other ingredients are used in bread, too, but the farmer usually only gets about 5% of the retail bread price for the wheat supplied. The rest of the value is added through processing, manufacturing, distribution, and marketing. The farm value is higher for meat products.

 

The fact that parties other than the farmer are making money is not necessarily a bad thing. Other members of the value chain add steps that are valued by the consumer. In recent years, the farm value of many food products has decreased. Again, this is not necessarily unreasonable since consumers are demanding more services. The fact that consumers are willing to pay the supermarket more money for prepared foods, as opposed to the raw ingredients, does not mean that the farmer will be paid less. We can think of the trend toward consumers demanding more value added to the products as making the pie larger. The farmer will get a slice of fewer degrees, but because the pie is larger, the total area will remain unaffected. Other factors might, of course, influence farm value. When demand for a greater value added product is met, the demand for the farmer’s ingredients may go up, leading to higher prices and benefiting the farmer.

 

Several factors affect farm value. Some are:

 

•Degree of processing required. For foods that require more processing (such as the wheat that ultimately makes it into products such as bread and pizza), more of the value has to be added after the farm. Thus, we expect farm value to be less.

•Perishability. Perishable products require more expensive and less efficient transportation. It may also be necessary to add extra processing or to maintain extra capacity perform the processing quickly. Lettuce has to be transported very quickly, often in air conditioned trucks. Shorter and less efficient channels must be used to get the product to the store in fresh condition.

•Seasonality of supply. It may be necessary to add extra processing or to maintain extra capacity perform the processing of perishable seasonal crops quickly. Canners must maintain capacity that can be used only during part of the year to be able to handle the large crop of peaches coming in at harvest time. There may not be any use for the canning plants during the rest of the year, so the total yearly cost has to be absorbed by the crops processed during a short period of time. Canned and frozen crops may be less attractive to consumers, reducing the value of the crop during off-season.

•Seasonality of supply. A commodity disproportionately in demand at one time—such as turkeys whose sales are concentrated during November and December—often require services such as freezing and/or storage, adding to costs.

•Transportation costs. Products that must be transported for long distances, in small quantities, or are difficult to handle raise costs.

•Bulk-to-value ratio. In part based on transportation costs, bulkier products are more difficult to handle and store. Meat has high value for its bulk but wheat does not. For corn, the cob and leaves carry little if any value.

Trends vs. fluctuations. It is normal that prices, demand, or other variables will fluctuate—that is, go up and down in a seemingly random manner—over time in response to a large number of factors. On the other hand, some changes over time tend to show a consistent trend—that is, even if prices seem to vary, they may tend to go up over time.

 

 

 

In the above chart, prices fluctuate, but if we graph a trend line (based on a regression analysis of price as a function of time), we see that average prices tend to increase over time. It is important to recognize that a trend that has been experienced in the past will not necessarily continue. For example, consumption of eggs had been declining for some time, due to concerns about cholesterol, until the trend reversed, in large part because of the growing popularity of high-protein diets.

 

Data with large fluctuations is described as “noisy.” That is, it is difficult to distinguish the genuine trend from the temporary fluctuations because these fluctuations are relatively large. Below, we see examples of relatively “clean” (as represented by the heavy line) and relatively “noisy” (as represented by the dotted line) data:

 

 

 

A number of characteristics influence the evolution of prices, costs, consumption rates, or other phenomena. Some possibilities can be see in this chart:

 

 

 

Some changes are linear, suggesting that the change happens at a relatively consistent rate over time. Changes can also be non-linear—that is, they can happen at increasing or decreasing rates. For example, immigration rates and the proportion of Americans over age 65 are growing at exponential levels. Some trends go until a point and then level off—thus, the early higher rates of growth are no longer predictive of future trends. A clear case of this is the maturity phase of the product life cycle where a product has now been adopted by most of the consumers who will, leaving little opportunity for growth. Some trends will reverse themselves. For example, in the late 1990s, a number of people invested in ostriches, driving up the price. Ostrich meat was touted as offering a taste similar to red meat but with much lower fat content. Owners bred the ostriches hoping for greater profits from selling ostriches to others. When the stocks were large enough that it was time to try to actually sell the meat, however, the “bottom fell out” of the market, resulting in a sharp decline in value. Much the same thing happened in the Internet stock market during the 1990s.

 

A special kind of trend involves seasonality. Turkey and cranberries are consumed disproportionately during November and December in the U.S. Prices of fresh peaches reach very high levels during the winter months, where much of the supply is imported, and drop dramatically during the summer months. It is possible to “partition” such seasonal effects from a long term trend:

 

 

 

When one adjusts for seasonal effects, this chart shows a consistent upward trend.

 

Lags in response to market conditions. A free market economy is based on the idea that the buyers and sellers will respond to changes in the market. When it is no longer profitable to produce and sell the current quantity, sellers will want to cut back on production. When prices rise due to high levels of demand, seller will want to increase capacity to produce a greater quantity. In practice, however, adjusting takes place. If the price of beef goes up, it will take time to raise more cattle to be slaughtered. In the short run, the farmer may actually produce less because cattle are held back for breeding rather than being sold off for meat. When prices go down, the farmer has already invested in facilities and/or the current crop. Thus, it will take time to adjust production. Ironically, the adjustment phase may take so long, and too many farmers may “jump on the bandwagon,” that by the time the adjustment has taken place, the trend may have reversed. For example, if farmers see an attractive market for almonds, they may grow more almond trees. By the time these trees are ready to yield, however, the price may have declined. Too many farmers may have grown too many trees, flooding the market. Many farmers may then rip up their trees and grow other commodities, forcing supply down and prices up, encouraging a new round of investments!

 

It takes time to recognize that prices are consistently going up or down (as opposed to just fluctuating). Implementing the capacity change then takes time, and it may be necessary to secure a loan or other capital before the investment can be begun. It may take some time for prices to be felt at the different ends of the value chain or channel. For example, if the wholesale supply price of peanut butter goes up, peanut farmers who contracted in advance to sell at a given price may not feel the price change until it becomes time to negotiate for next year’s contract.

 

 

 

“Real” vs. inflation-adjusted prices. Inflation is a reality. Over time, average prices tend to go up dramatically. Measures of inflation—such as the U.S. Consumer Price Index—are based on weighing the cost of a “basket” of goods. Different expenditures felt by a typical family—such as food, housing, medical care, and transportation—are each weighted in arriving at an estimate of overall price changes. Often, however, inflation rates vary dramatically between product categories. Some components of the economy—such as health care and real estate—have very high rates of inflation while the costs of many electronic products are actually declining. Changes in the prices of different agricultural products often vary considerably by category. To make price comparisons meaningful over time, we can adjust for inflation. If we set an arbitrary year to be our “index” year, we can more meaningfully compare economic data over time.