Food Marketing:

1
Food Marketing

• Consumers, Development, Manufacturing, and
  Distribution

2
Food Marketing

• Test marketing, segmentation, positioning,
  branding, etc.
• Dealing with perishable products.
• The value chain
• Processing and Distribution
• Services and Processing

3
Demographics and Food Marketing

• Understanding statistical characteristics of a
  population.
• Helps understand the current marketplace
• Aids predicting future trends
• Upward pull marketing

4
Food Marketing and Consumption Patterns

• Certain foods have experienced significant growth
  in recent years.
• Pork per capital consumption has increased from
  immigration from Asia.
• Beef and egg decreasing, but may be on the rise
  again because of high protein diets gaining favor.

5
International Comparisons

• Americans spend significantly smaller portion of
  income on food than other countries.
• India and Philippines spend 51 and 56
  respectively.
• Americans spend 7-11 and Japan spends 18.
• Food prices in U.S. are less than most
  industrialized countries.

6
Food Outlets

• Supermarkets, convenience stores, and food
  markets sell food products at higher prices
• Food is being brought closer to people for more
  convenient purposes which increases the cost due
  to travel.
• Food being consumed away from home
• People who eat out pay more money for food due to
  preparation cost

7
Government Food Programs

• While helping low income households, government
  programs increase the demand for food.
• U.S. food stamp program
• 1 dollar in food stamps increases the demand for
  food by 20 cents.

8
Food Marketing Issues

• Branding
• Allows increase in price for a product due to
  promotion and innovation of a brand.
• Leveraging the brand
• Can use their brand name on new product lines.
  Ex. Heinz pickles branched into ketchup
• Brand loyalty
• Consumers will keep buying a brand they prefer

9
The Four Ps of Marketing

• Product
• Investing in the product
• Price
• Price strategies
• Distribution
• Putting items on the shelf
• Promotion
• Getting the word out

10
The Value Chain

• Value of a product increases as the food passes
  through more parties.
• Allows people to specialize in what they do
  best.
• Farmers are able to focus on farming, and agents
  able to focus on making deals with processors or
  manufacturers.

11
Food Market

• Food Marketing Efficiency
• Characteristics of Food Products and Production
• Problems in Agricultural Marketing
• Decisions on Marketing Efforts
• Trends in Agricultural Marketing

12
Food Marketing Efficiency

• Desired levels of service at lowest cost
  possible.
• Does not meant to minimize costs after materials
  leave the farm.
• Some services added later may be extremely
  valuable to the consumer.
• The objective is to add the needed value as
  efficiently as possible.

13
Characteristics of Food Products and Production

• Problems are introduced by the characteristics of
  agricultural production
• Large Crop variations
• Crop size for the year affects price
• Seasonal Effects
• Thanksgiving, Christmas, etc.
• Increasing Production Levels
• Innovations in science
• Geographic Concentration
• Derived Demand

14
Problems in Agricultural Marketing

• Farming output takes time to adjust to current
  supply and demand
• Farmers have low bargaining power with buyers

15
Decisions on Marketing Efforts

• Producers promoting their own products
• Most participation is voluntary, and some
  producers will put in more effort than others.
• Brand building

16
Trends in Agricultural Marketing

• Science Innovations lead to more productivity
• Firmer Fruits for example
• More growers, processors, and manufacturers are
  needed to meet the demands for consumers
• Food industry needs to produce nutritional and
  safe products while being environmentally savvy

17
Distribution Food Wholesaling and Retailing

• Getting the product from the manufacturer to
  ultimate consumer
• Middleman adds efficiency
• Breaking bulk
• Carrying inventory
• Financing
• Channel structures will vary depending on the
  nature of the product

18
Distribution cont.

• Manufacturers will distribute differently
  depending on the product
• Parallel Distribution structures
• Distribution must be realistic toward the firm

19
Retailing

• Retail store can position themselves in many ways
• Example low-cost-low-service or
  high-cost-high-service
• Clear retail strategy is more effective
• Average strategy faces larger range of
  competition
• Sears competes with both stores like Macys and
  Wal-Mart
• Wal-Mart with a more refined strategy competes
  with K-Mart and Target

20
Margins

• What the store pays the retailer and what it
  charges the customer
• Net Margins take into account allocated costs in
  running the store.

21
Slotting Fees

• Additional fees payed by a supplier to get access
  to retailers shelves.
• Usually done by newer products to get shelf space
  against branded products
• Some of the fees are passed to the consumer

22
Increasing Power of Retailers

• The increase of products have allowed retailers
  to be more selective of sale items.
• Retailers are able to hold out for better prices
• Retailers also make their own private label
  brands to compete with manufacturers

23
Wheel of Retailing

• Retailers tend to progressively add services to
  their stores.
• Other retail stores open up that has a narrow
  approach to fill the void of the expanding
  retailers.

24
Retailing Polarity

• Retailers tend to go from one extreme of service
• Low prices or high service
• Economic growth has made high service retailers
  more desirable to higher income consumers, and
  lower costs to low income consumers.

25
Scanner Data

• Strategic decisions are made from information
  gathered from items that are purchased by
  consumers.
• Patterns are recorded on how many people by a
  specific product, or which products are purchased
  together.
• Retailers give membership cards to track
  individuals buying habits
• Demographic buying patterns can be tracked from
  chains in different areas

26
International Markets

• Benefits of International markets
• More economical to grow in other countries
• Can serve niche markets better
• Perceived better quality if made from certain
  countries (e.g., Belgian chocolate)?

27
Exchange Rates

• Floating
• Currencies set based on the supply and demand of
  each currency.
• If U.S. imports more from Japan than it exports
  there will be less demand for U.S. dollars and
  more demand for yen.
• Fixed
• Currencies dependent on another currency or some
  other valuable such as gold.

28
Measuring country wealth

• Nominal per capita gross domestic product (GDP)?
• The value of goods and services produced per
  person in a country which is exchanged into
  dollars.
• Gross Domestic Product (GPD)?
• Includes citizens working abroad, and does not
  include foreigners working in the country
• GPD is more commonly used
• Some countries income is unevenly distributed so
  measurements may not be meaningful.

29
Protectionism

• Tariff Barriers A duty, tax, or fee is put on
  products imported
• Quotas A country can export only a certain
  number of goods to the importing countries
• Voluntary export restraints Not official
  quotas, but involve agreements made by countries
  to limit the amount of goods they export to an
  importing country.
• Subsides to domestic products Cost advantage is
  given to producers who domestically make a
  product.
• Non-tariff barriers testing of products for
  safety puts greater time constraints on foreign
  food products.

30
Justifications for Protectionism

• Protection of an infant industry
• Resistance to unfair foreign competition
• Preservation of a vital domestic industry
• Countries would prefer to be self sufficient
• Intervention into a temporary trade balance
• Country may want to increase their temporary
  decline in trade balances by limiting exports.
• Maintenance of domestic living standards and
  preservation of jobs
• Retaliation

31
Variations in Food Taste Preferences

• Food preferences are establish at an early age
  usually.
• Strategies are devised to expose other cultures
  to products to allow future generations to
  establish a preference to that food.
• Religion also disallows the consumption of
  certain food.

32
Food Diffusion

• Food products spread to other countries
• Process is long
• Chinese food believed to be more popular in U.S.
  due to immigration of Chinese families.
• Products from other countries start to change
  drastically
• Pizza in the U.S. is much different from the
  traditional Italian dish.

33
Food Positioning

• Origin can have a lot to do with a food products
  image.
• e.g. Spaghetti from Italy
• Sometimes producers imply origins to their
  product which raises ethical questions.
• Food may need a different type of positioning
  based on usage occasion
• China has cheaply made food on the streets so
  U.S. fast food companies are less viable in China.

34
Food Adaptation

• Food sometimes has to be adapted to be more
  successful in a new country.
• KFC uses less sugar in Japan because of they
  prefer food that is less sweet.
• Serving size could also be adjusted.
• Products shipping packaging might also need to be
  upgraded before export.

35
Promotional Decisions

• The majority of U.S. food promotion is done
  through television. However, other countries
  this media type is not the right type of
  promotion.

36
Government Export Assistance

• The U.S. government and several states have
  programs to help food products abroad.
• Financial assistance
• Paperwork and making connections

37
Price and Competition

• Basic Economics
• Supply and Demand Curve
• Sharp changes may occur when critical price
  points are reached.
• Price Elasticity the extent to which quality
  demanded is affected by changes in price

38
Price and Competition cont.

• Real life demand is not always as smooth as it is
  portrayed in theoretical curves.
• Sharp curves may be reached when critical price
  points are reached

39
Demand Curves

• Total demand for a product is the result of
  adding the demand for each consumer
• Certain consumers will value a product more than
  others.
• Atkins diet followers will value steak more.
• Low fat diet followers will value steak less

40
Supply

• Supply is determined by what is available
• Prices go up when there is a lot of something and
  down when it is not.
• Adjustments to supply often take a long time, and
  supply might have changed.

41
Costs

• Come in fixed and variable categories
• Fixed costs are not affected by the quantity
  produced.
• e.g. mortgage on a farm costs.
• Variable Costs depend on the quantity produced.

42
Changes in supply and Demand

• Supply may change due to changes in the market
  such as
• Size of the years crop
• Changes in population
• Changes in income or wealth
• Changes in tastes and preferences
• Changes in the prices of substitutable products
• Future price expectations

43
Market/Clearing Prices

• Set when market matches supply and demand
• If a price is too low more quantity will be
  demanded.
• If a price is too high there will be a surplus of
  product.

44
Macroeconomic Influences on Prices

• Common concern is food prices are too low
• Governments try to mitigate prices
• Negative Tax
• Farmers given extra money from government
• Price controls can be taken to effect such as
  limiting maximum that can be charged for a
  product.

45
Consumer Response to Price

• Prices are dictated by both manufacturers and
  retailers.
• Retailers handle final decisions for pricing
• Manufacturers make promotional and other
  decisions that influence retailer decisions.

46
Ways to Change Prices

• One obvious way to increase the price of a
  product is to increase the sticker price.
• Consumers tend to react strongly to this type of
  change.
• Other methods methods have been devised.

47
Value Received

• Numerator Denominator
• Sticker prices is a change to the numerator
• Supply affects the denominator
• Quantity Quality
• Reducing the quantity can keep prices for a
  product the same
• Reducing the quality will help with cutting
  prices
• Terms and Service

48
Price Discrimination

• Marketers are interested in getting a customer to
  pay as much as he or she is willing.
• Explicit price discrimination
• Student or Senior discounts
• Implicit price discrimination
• Coupons

49
Consumer Price Response and Awareness

• Most consumers neglect price comparison
• Consumers on average inspect only 1.2 items
  before making a selection
• Consumers respond to great deal price changes
• Tend to respond to a promotional signal than to
  prices.

50
Odd-Even Pricing

• Supermarkets end prices in .99 or .95 rather than
  round figures.
• Makes prices seem lower than they really are
• 2.99 is associated with 2 rather than 3
• Consumers respond better to even pricing when the
  prices are higher
• Odd pricing came from the fact that it forced
  clerks to ring up purchases for customers to give
  them change.

51
Estimating Consumer Willingness to Pay

• Its extremely difficult to estimate how much a
  consumer will be willing to pay for a new product
• Focus groups and questionnaires are ineffective
• Laboratory tests
• Conjoint analysis

52
Competition in Agricultural Markets

• Farmers are considered equivalent to other
  farmers, and therefore have no bargaining power
  to raise prices.
• Some manufacturers have a lot of power over the
  whole market
• e.g. Coke and Pepsi

53
Food Prices and Costs

• Prices that farmers receive are based on supply
  and demand factors
• Supply can be affected by the amount of output
  available from other farmers, imports, or
  substitutes for that particular product.
• Demand are based on the expected purchasing of a
  product by a consumer.

54
Bargaining Power of Farmers

• Farmers that sell small quantities usually have
  little bargaining power.
• Most farmers can sell at market price, but not
  any higher.
• Many of todays commodities transactions take
  place electronically or through brokers.
• Buyers will not have information on market prices
  and the farmer will have the upper hand.
• This approach however takes a great deal of time
  and effort.

55
Predictable and Less Predictable Market Changes

• Farmers are vulnerable to environmental change.
• Changes in supply and/or demand also affect
  change.
• Some changes however are relatively predictable.

56
Predictable Market Changes

• Phased-in trade agreements
• Trade agreements are not opened immediately, and
  producers are given time to adapt to the changes.
• Long-term diet trends
• Diets change the demand for certain products.
• Trends in substitute products
• Changes in cost structure and technology.

57
Less Predictable Changes

• It is difficult to predict the supply conditions
  of a harvest at the time of planting.
• Exchange rates between currencies fluctuate
  dramatically.

58
Farm Value

• The proportion of the total food costs paid by
  customers that the farmer receives.
• Foods like bread farm value is very low.
• Farmer usually only gets 5 for the wheat
  supplied.
• Farm value is higher for meat products.
• Most of the value added is from processing,
  manufacturing, distribution, and marketing.

59
Farm value cont.

• Other parties other than the farmer making money
  is not a bad thing.
• Recent years farm value of food products have
  decreased.
• Not a bad thing due to increase in demand for
  services. e.g. Consumers are willing to pay more
  money for prepared foods versus raw ingredients.
• We can think of this as a trend of consumers
  demanding more value added to the products.
• If this demand goes up so will the farmers demand
  therefore leading to higher prices for the farmer.

60
Farm Value Cont. 2

• Several Factors Affect farm value
• Degree of Processing required
• Some foods require more processing which lowers
  farm value.
• Perish ability
• Perishable products require more expensive and
  less efficient transportation.
• Seasonality of Supply
• It may be necessary to add extra processing to
  maintain a perishable product. Canned and
  freezing crops during the off season will reduce
  value of crops.
• Seasonality of Supply
• Some commodities are demanded heavily at certain
  times. e.g. Turkey during Thanksgiving.
• Transportation costs
• Small quantities and difficult to handle products
  cost more to transport.
• Bulk-to-value ratio
• Bulkier and difficult to handle products cost
  more to transport.

61
Trends vs. Fluctuations

• In the chart prices fluctuate but we see a trend
  line indicated that average prices increase over
  time.

62
Trends vs. Fluctuations cont.

• Trends that have been experienced in the past
  dont always continue.
• E.g. eggs have been declining for some time
  because of concerns of cholesterol, until the
  trend reversed because of high protein diets.

63
Trends vs. Fluctuations cont.

• Data with large fluctuations is considered noisy.
  Noisy fluctuations are difficult to distinguish
  the trend opposed to clean fluctuations.

64
Trends vs. Fluctuations cont.

• Trends can change over time.
• Some occur in a linear rate where others can
  reverse, or level off

65
Trends vs. Fluctuations cont.

• Some trends involve seasonality.
• E.g. Turkey and cranberries are consumed more
  during the November and December months than any
  other month.

66
Lags in response to market conditions.

• Reacting demand levels will take time for
  farmers.
• Reaction could lead to reversing a trend of a
  particular product.
• Too many farmers producing one product will flood
  the market creating to much supply for the
  demand.
• By the time farmers meet the demand levels the
  price might of already fluctuated.

67
Real vs. Inflation-adjusted prices

• Over time average prices tend to go up
  dramatically.
• Inflation rates vary dramatically between product
  categories.
• To make price comparisons meaningful over time we
  can adjust for inflation.

68
Food Market Structure

• Several characteristics determine a market
  structure.
• No one firm or individual controls the entire
  value chain.

69
Horizontal Integration

• Economics of scale can be important to some
  industries.
• When growth opportunities in existing firms are
  limited there may be significant pressure to find
  other businesses to invest current earnings.
• Buying up another firm is an attractive
  alternative.

70
Vertical Integration

• Growth through purchasing firms at a later or
  earlier period in the value chain.
• McDonald's could have a meat packing plant
• Allows an assured supply.
• There can be downsides
• Management overseeing investments where it has
  limited experience.
• Management attention being spread among more
  industries
• Developments depressing one industry will harm
  the others in the value chain.
• Potential conflicts of interests.

71
Specialization

• Firms that focus on one process are more
  effective.
• e.g. KFC and its chicken.
• Allows research and technology spending to be
  more focused.

72
Diversification

• Agricultural price markets fluctuate dramatically
• Could be harmful for a farmer to put all his or
  her eggs in one basket
• A farmer may produce different products to
  counteract this fluctuation.
• This is less efficient, but farmer will be less
  likely to be driven out of business.
• Larger firms consider diversification to be less
  useful.
• Financial theory holds that it is not beneficial
  for stockholders if firms diversify

73
Decentralization

• In the old days, it was frequently necessary for
  buyers and sellers to physically gather to settle
  market places.
• Nowadays, much negotiation can be done
  electronically.
• This causes more efficiency, but less knowledge
  of market prices by some participants.
• This lack of knowledge can be overcome by
  extensive market research.

74
Farmer Cooperatives

• Farmers may decide to set up organizations to
  pool sales and purchases, or provide/obtain
  certain services jointly.
• Cooperatives usually appear not because of
  economic savings, but idealogical reasons.
• Cooperatives may not be cost effective.
• They must also be managed by volunteers or
  outside management.

75
Market Development

• Involves creating or expanding a market for new
  or existing products and/or increasing the value
  of these products.

76
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

77
Strategic planning process
78
Setting market objectives

• Objectives need to be reasonably specific and
  manageable.
• Priorities need to be made.
• Firm may not have the resources to pursue all the
  objectives at the same time. So a firm needs to
  focus on the most effective resources.

79
Setting market objectives cont.

• Some objectives may be.
• Get more people to buy product.
• Get product used for new purposes
• Develop preference relative to other products or
  brands.
• Develop price insensitivity relative to other
  products or brands.

80
Setting strategy

• Once objectives have been set strategies can be
  made.
• Improving quality might be achieved by increased
  research and development.
• Most appropriate choice will depend on factors as
  cost, effectiveness, and risk.
• As a strategy is considered and potential
  complications arise it may be necessary to
  reassess appropriate objectives.

81
Tactics and implementation

• Once a strategy has been made, decisions must be
  made on implementation.

82
Consumer adoption to 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.
• Many foods also imitate others to attract
  customers.

83
Levels of market development

• Producers of a commodity may want to promote
  their own food to promote preference to other
  food categories.
• Development efforts could be focused on
  supporting all products within a brand.

84
Standardization and Grading

• Food standards and grades exist to allow buyers
  to determine the quality of a product with
  minimal inspection.
• Standards are there to regulate food sanitation.
• Food grades are done by federal, state, or
  industry grading.
• Most have no federal requirement, and state
  regulations vary.
• Most consumers have little or no knowledge of
  what a specific grade or food criteria.
• Grades are usually more useful in industry
  transactions

85
Transportation

• A large part of the food product cost.
• Occurs between many stages in the value chain.
• Many products have special transportation needs.
• Refrigeration
• Speed for perishable products
• Special equipment

86
Transportation cont.

• Sea transportation is usually the least expensive
  method of transportation.
• This type of transportation is slow, inflexible,
  and can only reach certain areas.
• Rail transportation is usually less expensive
  than trucking. However present the same problems
  with sea transportation.
• Trucking and flying products are more efficient
  but cost more.
• To improve efficiency parties within a value
  chain may locate themselves next to railroad
  locations to minimize transportation costs.

87
Storage

• Storage is needed for certain products for
  purposes such as
• Awaiting processing
• Maintaining safety from other stocks
• Storing a food for use outside its season
• Keeping unsold quantities from a previous period
• Efficiency is important here, but costs must be
  weighted against the quality of storage provided.

88
Risk Management

• One bad year for a farmer could risk losing their
  farm.
• It is possible to guard against such a risk by
  someone else providing insurance, which costs the
  farmer.
• Futures contract farmer agrees to sell at, and
  is guaranteed a specified price.
• Farmer takes the specified price no matter what
  the price change.
• Buy an option does not have to follow the
  contract, but the farmer can call upon it if the
  price is low in the open market.
• Investors may buy and sell these contracts