Lecture 2 Marketing Yesterday and Today

Food Product Marketing

1

Overview

1. Who cares about food marketing?

2. What is food marketing?

3. Marketing Eras

4. Relationship Marketing: The Current Paradigm

5. Price Elasticities

6. Marketing Environment

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Who cares about food marketing?

• Business all along the food chain

– farmers, producers, wholesalers, distributors, retailers

• Consumers

– Consumers are eager to learn “tricks” and language of food marketers so they can make better decisions for themselves

– Information is key to functioning in the foodscape

3

Who cares about food marketing?

Policy makers (government) & medical community

• Food marketing science is being applied to get people to eat healthier

• Marketing scientist Brian Wansink, Executive Director of USDA's Center for Nutrition Policy and Promotion, 2007-2009, the Federal agency in charge of developing 2010 Dietary Guidelines and promoting the Food Guide Pyramid (MyPyramid.gov).

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How bad is it?

• 1 in 3 children will develop diabetes in their lifetime and that number goes up to 1 in 2 for underprivileged urban youths (CDC, 2010).

• For the first time in American history, the life-expectancy of children is less than that of their parents, primarily due to food choices.

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Food Marketing Defined

• The activities needed at all stages in the food system to facilitate the exchange of food products and services which satisfy the needs and wants of individual consumers and organizations.

• Because all exchanges are voluntary, for the food chain to exist, all parties must be satisfied.

• Food marketing then is concerned with the satisfaction of all the links in the food value added chain.

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Needs vs. Desires

• Need – the difference between customers’ actual conditions and their desired conditions.

• Desire – a particular choice that people make to satisfy their needs.

– Types of products and brands

• Satisfying customer needs gives rise to…

• Demand – an aggregate measure of the desire that potential customers have for a particular product and their willingness to pay for it.

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Needs and Desires: Examples • You want to

1. do something interesting

2. make a decent wage

3. be taken seriously

4. work really hard ;)

so you take AG BM 302 as part of your degree.

• You are hungry for something but nothing too filling and you don’t want to spend time preparing food, so you grab a banana.

• You want to reward yourself for your hard work with a hedonic binge, so you buy Oreos (and eat 2 sleeves).

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Needs and Desires: Examples

• You feel disconnected from your food source, and are skeptical of preservatives and “big” manufacturers…

– you buy

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Avoid Market Myopia

• Marketing Myopia is management’s failure to recognize the scope of their business.

• Occurs when a company identifies with their product or past structure instead of customer needs.

– If you sell oatmeal cookies, you might start to think your job is to satisfy the desire for your oatmeal cookies.

– This will limit growth

– This will lead to serious trouble if

• tastes change

• demographics change

• competition cuts in

• To avoid marketing myopia, companies must broadly define organizational goals toward consumer needs

• Focus on consumer benefits!

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Marketing Myopia Is a Perspective

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Company /

Brand

Myopic Description

(Product Based)

Consumer-Oriented

Description (Need Based)

Slogan / Mission

Dannon We produce yogurt and probiotic

fermented milk

Pringles We sell a snack made with less

than 50% of dried potato powder

Wal-Mart Our chain offers food and

general merchandise at low

prices

Campbell We produce soups

We deliver health Bringing health through food

to as many people as possible

We offer a one-stop shopping

experience at lower prices than

most of our competitors

Save money live better

Save time and eat a

home-style soup

Nourishing people’s lives

everywhere, every day

We sell a fun snack with a kick,

stackable and easy to consume

Everything pops with Pringles

Common Consumer Needs

• Security

• Social connection

• Nostalgia

• Self-esteem

• Belonging

• Feeling part of something bigger

• Adventure / Excitement

• Sense of strength

• Energy / Zest

• Control

• Prosperity

• Purpose

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• Caring for others (esp. children)

• Personal Identity

• Feel unique

• Make the world better

• Superiority / Prestige

• Personal ability

• Connect to the past – Tradition

• Authentic

• Indulgence / reward

• Celebrate

• Rebellion / Freedom

Avoiding Myopia – More than just lip service

Dannon’s Nutrica

• “Nutricia is a specialized healthcare division of the food company Danone, focused exclusively on research-based scientifically-proven nutrition, developed to meet the needs of patients and individuals for whom a normal diet is not sufficient or possible.”

• Products target people with malnutrition, Alzheimer’s, dysphagia, tube fed nutrition, metabolic disorders, allergies, pediatric dietary/metabolic problems

• Most of their products require a prescription or should be taken under the supervision of a clinician.

• What factors led/allowed Dannon to take this market on? 15

Price = $139 Lasts 1 week

• How has Wal-Mart’s market-oriented description manifested itself?

• What has allowed/led Wal-Mart to expand/change its scope?

16

Wal-Mart Our chain offers food and

general merchandise at low

prices

We offer a one-stop shopping

experience at lower prices than

most of our competitors

Save money live better

Company /

Brand

Myopic Description Marketing-Oriented

Description

Slogan / Mission

Market Myopia: Traditional Grocers

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Market Myopia: Traditional Grocers Supermarkets emerge in the 1930s

• Traditional grocers:

– Fetched virtually all groceries from the back

– Had to measure out quantities from bulk bins

– Were small, numerous, and local

• Supermarkets

– Low prices

– Self serve

– Large, few, and required consumers to travel further than to traditional “corner store” grocers

• Traditional grocers attributed supermarkets’ rapid rise to novelty and appeal to a very narrow price sensitive segment.

• Traditional grocers identified themselves with their location, size, and folksiness instead of with customer needs.

• Only those that responded to the newly revealed customer needs survived (e.g. Safeway, Kroger)

• A similar change seems to be occurring today with supercenters and club stores

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• “Hard to believe that people will drive for miles to shop for foods and sacrifice the personal service chains have perfected and to which [the consumer] is accustomed.”

- Executive of one big grocery chain, circa 1935

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Hindsight is 20/20

Supermarkets cater to the Dude’s needs

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Marketing Mix

• Target Market - Group of people toward whom the firm decides to direct its marketing efforts

• All marketing efforts should have a target market in mind

– Whose needs are you trying to satisfy?

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Product Distribution

Promotion Price

Target Market

Four P’s of Marketing

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• The marketing variables that together provide customer satisfaction are

1. Product – goods and services, package design, the idea of the goods, customer service, brand names, product lifecycle, warranties, etc.

2. Price – set to maximize long-term profit (typically). Other considerations: production capacity, competition, relationships with suppliers and buyers, etc.

3. Promotion – ads, sales, coupons, flyers, tweets, give-a-ways, product bundles, etc.

4. Distribution (Place) – making sure customers find products at the right time and place. Involves transport, inventory management, marketing channel choices, order processing, warehousing, etc.

• Creating customers that want to stay with you is all about identifying needs, providing goods and services that meet those needs, pricing, and follow-up service.

• Consumers ≠ Customers

What is a product made of?

• Ingredients

• Packaging

• Services

• Credence attributes – not observed by consumer (like what?) – nutrients, health, production practices,…

– require labels

Coke Commercial

• Associated feelings and ideas are part of the Product

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Do the non-physical aspects of a product add value?

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Cola Wars: Pepsi Vs. Coke

Blind Taste Test

55% prefer Pepsi

45% prefer Coke

Non-Blind Taste Test

The percentages flip

Market Shares

Coke 20%

Pepsi 10%

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Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

Sales Prior to

1950/60s

Marketing Since

1950/60s

Relationship Began in

1990s

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Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

“A good product will sell itself.”

Sales Prior to

1950/60s

Marketing Since

1950/60s

Relationship Began in

1990s

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Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

“A good product will sell itself.”

Sales Prior to

1950/60s

“Simple marketing (advertising) and

selling will overcome consumers’

resistance and convince them to buy.”

Marketing Since

1950/60s

Relationship Began in

1990s

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Four Eras of Marketing

3. Marketing Era geared all aspects of the business to customer focused marketing concepts

• Marketing Concept: A company-wide (not just product) orientation with the objective of achieving long-term success.

– Consumer NEEDS-focused.

– Market-oriented taken seriously

– Marketing concept help avoid market myopia

– Encourages smarter strategic positioning

• Ex: anticipating growing needs for socially responsible purchasing allows a brand to gain a first mover advantage in those markets

– Incorporates all 4 P’s of the marketing mix in a unified effort 33

Marketing Era cont…

• Sales and marketing are separated

– Marketers make more decisions

– Salespersons have less flexibility – must stick to the plan

• Marketers play leading roles in product development

• Companies represent ideas and specific customer needs (recall Birds Eye’s brand personality)

• Consumer focused

– “The Customer is always right.”

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Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

“A good product will sell itself.”

Sales Prior to

1950/60s

“Simple marketing (advertising) and

selling will overcome consumers’

resistance and convince them to buy.”

Marketing Since

1950/60s

“The consumer is king! Find a need

and fill it.”

Relationship Began in

1990s

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“We used to say that we did everything ourselves, for ourselves. Now we understand that we are only as good as the strength of our partnerships.”

- Joe Tripodi, Chief Marketing and Commercial Officer of The Coca-Cola Company

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4. Relationship Marketing

4. Relationship Marketing

• Marketing concept plays an increasingly important role – Firms are willing to go even further afield from their original

products to fulfill customer needs (see Dannon’s Nutricia)

• A shift away from transaction-based marketing that thinks of a market exchange as a conflict.

• Thinks of market exchanges as cooperative arrangements that benefit a long-term broad marketing concept.

• Motivated by the realization that it is easier to retain customers than it is to attract new ones

• Results in a greater grasp of consumer NEEDS.

• Business decisions are made with a longer time horizon

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How Does Satisfaction Affect Loyalty?

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1 2 3 4 5

Satisfaction Rating

Loyalty

Four Eras of Marketing Era Approximate

Time Period

Prevailing

Attitude

Production Prior to 1920s

“A good product will sell itself.”

Sales Prior to

1950/60s

“Simple marketing (advertising) and

selling will overcome consumers’

resistance and convince them to buy.”

Marketing Since

1950/60s

“The consumer is king! Find a need

and fill it.”

Relationship Began in

1990s

“Long-term relationship with

customers and other partners lead to

success.” 39

Cobranding

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• Why would they do this?

More Cobranding

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Mad Men clip

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Marketing Environment

• A series of EXOGENOUS factors and elements impacting how a business designs its marketing strategy (to reach its target market)

1. Competitive Environment

2. Social-Cultural Environment

3. Technological Environment

4. Economic Environment

5. Political-legal environment

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Marketing Mix within an Environmental Framework

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Includes the biological environment

1 – The Competitive Environment Competitive Environment - The interactive process that occurs in the marketplace among marketers of directly competitive products, marketers of products that can be substituted for one another, and marketers competing for the consumer’s purchasing power.

• Monopoly/Monopsony

– One seller/buyer

– Monopoly prices set according to a simple rule

– High barriers to entry

p = price, c = unit cost, = price elasticity of demand

• Oligopoly/Oligopsony

– Few sellers/buyers

– Oligopoly prices set strategically; approximately

i = firm index, = market share

• Perfect Competition

– Many sellers/buyers

– Prices accepted by the market

– 0 profits

– no barriers to entry

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Mark

et Po

wer

1p c

p

i i

i

p c s

p

is

0 i

i

i

p cp c

p

Market Power by Food Manufacturers

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markup

= market power

elasticity of demand

economies of scale

1 increasing returns

= constant returns

< decreasing returns

p cL

p

Observations Non-perishables have higher markup and increasing returns to scale. Markup and returns to scale are highly correlated (= .86).

1 – Competitive Environment • Regulatory environment can limit market power (e.g.

Sherman Act)

– Too much market power results in social welfare loss (deadweight loss) from high prices

– This is especially the case in food economics because food is a necessity

• Food taxes are “regressive”

– Ex: Supermarkets in the 1970s were forced to divest because they had too much market power

• Prices were too high which resulted in a loss of consumer welfare (esp. the poor)

– Ex: Cereal industry was under scrutiny for being too concentrated

• Price margins are unusually high. Why?

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Time-Based Competition

• Time-based competition is a strategy of developing and distributing goods and services more quickly than competitors

– First Mover Advantage – The often large advantage that the first firm to market a product, service, or address a customer need has over subsequent entrants

• consumers tend to buy the same foods repeatedly…why?

– Second Mover Advantage – The advantage gained when another firm enters a market first

• allows the second firm to avoid the mistakes the first

• can simply adopt the innovations of the first

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• Ex: If the 1st mover has a 15 year head start, and you provide a 26% discount, it will take 13 years to reach 50% market share.

– Compare this to the market share if they entered the market simultaneously: 65%

Bronnenberg, B., Dube, J.-P., Gentzkow, M., 2012, “The Evolution of Brand Preference: Evidence from Consumer Migration,” American Economic Review, 102(6): 2472-2508.

Estimates from Nielsen grocery store data

Direct vs. Indirect Competition

• Direct – battle of the brands – usually hurts both brands

• Indirect – product-type competition among substitutes;

– e.g. competition between milk and juice

• All Consumer Purchases – competition for disposable income; competing against the decision not make a purchase whatsoever

– Less relevant in food economics as manufacturers compete for “stomach share”

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Who are DiGiorno’s direct and indirect competitors?

• Direct: Tombstone, Tony’s, California Pizza Kitchen

• Indirect: take-out/delivery/restaurants

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Something From my Kitchen

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Let’s Take a Look at Granola Bar Markets

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FROM Mintel Report… Cereal Bars and Snack Bars - US - March 2013

Snack Food Competition (granola bars)

Basis of Competition

Direct Competition (called “internal comp” in IBIS World reports)

• Perceived quality – Top brand “command a premium price, primarily due to their

reputations as high-quality products.”

– “Consumers who are loyal to specific snack brands are not as sensitive to changes in price levels.”

• Differentiation – “[O]ne of the key bases of competition.”

– “Due to the limited opportunities for growth…it is imperative for manufacturers to distinguish themselves from competitors to maintain market share.”

66 FROM IBIS WORLD: HOME > INDUSTRY MARKET RESEARCH > US INDUSTRY REPORTS (NAICS) > SNACK FOOD PRODUCTION

Snack Food Competition (granola bars)

Basis of Competition

Direct Competition (called “internal comp” in IBIS World reports)

• Price

– “[P]rice sensitivity of consumers in the snack food market varies between product segments.”

• Business-to-business relationships

– “Developing and maintaining strong relationships with downstream suppliers is another critical area of competition.”

67 FROM IBIS WORLD: HOME > INDUSTRY MARKET RESEARCH > US INDUSTRY REPORTS (NAICS) > SNACK FOOD PRODUCTION

Snack Food Competition (granola bars)

Basis of Competition

Indirect Competition (called “external comp” in IBIS World reports)

• Crackers, chips, cookies, etc.

• Especially: “Healthier brand extensions of regular cookies and crackers.”

• Anything else?

68 FROM IBIS WORLD: HOME > INDUSTRY MARKET RESEARCH > US INDUSTRY REPORTS (NAICS) > SNACK FOOD PRODUCTION

Snack Foods

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Granola MKT Shares

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2 – The Social-Cultural Environment • The relationship between marketing and society

and its culture

• Very important in international marketing decisions

– Ex: KFC’s buckets were not well received in Japan.

• Switched to twice as expensive single layer containers that did not absorb grease

• Brand perception and sales improved drastically

• "Kentucky (Fried Chicken) would never have been successful here by following American advice."

– Ex: Wrigley sells cucumber flavored gum in China

– Ex: Oreo became the best selling biscuit item in China, after they made it rectangular

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Marketing Trends in our Social-Cultural Environment

• Green Marketing – Organic

• Nutrition Marketing – “All Natural”, Nutraceuticals, fortification, health

claims galore

• Buy American

• Social Consumer Activism

• Locavore – CSAs, farmers’ markets

• Convenience

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Demographics and Food Marketing

• Staying in touch with demographic and lifestyle changes helps marketers understand consumer needs

– People’s value of time has been increasing

• more convenience food

• How have the 4 P’s responded?

– Ex: Increasing house sizes: 290 sq ft per person (1950) 900 sq ft per person today

• Larger quantities / packages

• more stockpiling

• … enter Costco

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What does your product

mean

to today’s consumers?

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(Granola Bars)

Granola Bars

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Granola Bars

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Granola Bars

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3 – Technological Environment • The technological environment represents the application of

knowledge in science, inventions, and innovations to marketing.

• Neat Consumer Examples • QR code – in upper right corner

• PriceSpotting – put product name in app, lists prices at nearby store

• Fooducate – put food name in app, get a health score

– UPS logistics, advances in packaging materials,…

• Advances in communication technology has allowed for interactive marketing where the consumer gets to control the flow of information

– Websites allow for direct purchasing

– Email allows for customized interactions that recipients can opt out of

– Online ad expenditures are now about equal to TV ad expenditures

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3 – Technological Environment

• What recent innovations have been the most important for the food industry in the last 50 years? – Universal Product Code (UPC) allowed for grocers to order

products just as they were needed thereby improving inventory management.

– Hurdle technologies and other technologies have improved shelf lives

– GMO technologies have allowed for lesser use of pesticides and herbicides and increased yields. Also promise for solving a lot of 3rd world nutritional problems.

– Data collection and statistical analysis know-how

– Food science (artificial sweeteners,…)

– Shipping containers

– Radio Frequency Identification (RFID)

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Chill Can – press button, gets 30° F cooler in 3 min.

$3.95/can starting in March

Dissolvable Pouch “We believe a market exists for dissolvable pouch packaging to address the macro

trends in the food sector such as convenience

delivery, portion control, replacing

primary packaging.”

Innovations In Food Packaging Technology

Canned Food Nicolas Appert wins a prize from the French government for inventing a way to preserve soldiers’ food during war.

Wikipearls

Tech Environment and your Plans

• They probably won’t be high tech

• If you’re product is Mac N Cheese, discuss

– the process of making the product

– relevant processes of making inputs

– equipment needed

– state of the art / cost concerns

– etc. (including the seemingly mundane stuff)

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Granola Bars

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Granola Bars

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4 – The Economic Environment

• Factors that influence consumer buying power and marketing strategies, including

– Inflation

– Unemployment

– Resource availability

– Income

– Stages of the Business Cycles

– Prices

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Rising Income

• Most income gains have been at the top end of the distribution

• Luxury Goods: goods whose share of expenditure rises with income.

– If people spend 1% of their income on fish when poor and 2% of income when rich, then it is a luxury good

– Ex: organics, skinless boneless chicken, higher quality foods, restaurants

• Inferior Goods: goods that people purchase more of when incomes decrease

– Ex: beer, lower quality foods, potatoes, canned veggies

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Business Cycle

92

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan-48 Jul-57 Jan-67 Jul-76 Jan-86 Jul-95 Jan-05 Jul-14

Per

cen

t

Source: U.S. Department of Labor: Bureau of Labor Statistics/FRED

Civilian Unemployment Rate

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Economic Indicators

• Discretionary Income — amount of money people have to spend after buying necessities.

• International economic factors: – Exchange rates

– GDP Growth rates

– Import/export structure

• Prices Indexes – Consumer Price Index (CPI) – tracks a composite of prices

faced by consumers

– Producer Price Index (PPI) – tracks a composite of prices faced by producers

– Bureau of Labor Statistics (BLS) price data can be tailored to your needs (go to http://www.bls.gov/data/)

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Lot of Changes with Trump Admin.

• Changing tax rates

• Tariffs

– Disruption to supply chains

– Higher food input costs

– Higher consumer prices

– Less real disposable income (esp. low income)

– Retaliatory tariffs (discourages exports)

– Some “winners,” mostly “losers”

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Our Trading Partners

Rank Country/District Exports Imports Total Trade

Trade Balance

- World 1,620,532 2,347,685 3,968,217 -727,153

- European Union 276,142 418,201 694,343 -142,059

1 Canada 312,421 347,798 660,219 -35,377

2 China 123,676 466,754 590,430 -343,078

3 Mexico 240,249 294,074 534,323 -53,825

4 Japan 66,827 134,004 200,831 -67,177

5 Germany 49,363 123,260 172,623 -73,897

6 South Korea 44,471 69,518 113,989 -25,047

7 United Kingdom

53,823 54,392 108,215 -569

8 France 31,301 46,874 78,175 -15,573

9 Brazil 42,429 30,537 72,966 +11,892

10 Taiwan 26,670 40,581 67,251 -13,911

11 India 21,608 45,244 66,852 -23,636

12 Saudi Arabia 18,705 47,041 65,746 -28,336

13 Netherlands 43,075 20,818 63,893 +22,257

14 Italy 16,968 42,115 59,083 -25,147

15 Belgium 34,790 20,885 55,675 +13,905

16 Switzerland 22,176 31,191 53,367 -9,015

17 Hong Kong 40,858 5,869 46,727 +34,989

18 Singapore 30,237 16,426 46,663 +13,811

19 Malaysia 13,068 30,420 43,488 -17,352

20 Ireland 7,806 33,956 41,762 -26,150

21 Thailand 11,810 27,123 38,933 -15,313

22 Colombia 20,107 18,300 38,407 +1,807

23 Israel 15,083 22,962 38,045 -7,879

24 Australia 26,582 10,672 37,254 +15,910

25 Chile 16,515 9,476 25,991 +7,039

- Remaining Countries

289,914 357,395 647,309 -67,481

Million $

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"The job we have at hand is to help our elected officials see the world from our perspective and then pray for them to make the right decision."

-Lance Fritz, chief executive of No. 1 U.S. railroad Union Pacific

"Everyone would lose, especially the consumer, it's that simple."

-Brandon Stallard, CEO of TPS Logistics

“Simply put, any policy proposal which drives up costs of Corona, tequila, or margaritas is a big-time bad idea. Mucho Sad.”

- Senator Lindsay Graham (R-SC) Tweet 1/26/2017

99 See “What it takes to get a Corona from Mexico to a U.S. heartland bar” Nick Carey, Jan 28, 2017 http://www.reuters.com/article/us-usa-trump-mexico-corona-idUSKBN15B2BO

Ex: MKTG Response to Econ Environment

100

Food Manufacturers’ Producer Price Index

Source: Data retrieved from BLS

• Starting in mid-2010, food producer costs rapidly rose; manufacturers had to raise prices

• But wages weren’t rising and unemployment was high resulting in high price elasticities. Why?

• At the brand level consumers are very responsive to price increases (elastic demand). Why?

• To avoid brand switching, manufacturers stealthily reduced packaging sizes without reducing prices

• Marketed as “green” packaging

Read “Food Inflation Kept Hidden in Tinier Bags” http://www.nytimes.com/2011/03/29/business/29shrink.html?pagewanted=all

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Size Before Recession

Size After Recession

Canned Veggies 16 oz 14.5 oz

Pasta 16 oz 13.25 oz

Tuna Fish 6 oz 5 oz

Tostitos/Fritos X .8 X

Saltines/Graham Crackers

X .85 X

Edy’s Ice Cream 2 L 1.5 L

Tropicana OJ 64 oz 59 oz

Read “Food Inflation Kept Hidden in Tinier Bags” http://www.nytimes.com/2011/03/29/business/29shrink.html?pagewanted=all

Granola – Revenue Volatility & Growth

102

Econ Env and your Plans

Be specific to your target!

A discussion of U.S. GDP growth is not relevant to the marketing of a restaurant in State College

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5 – The Political-Legal Environment

• Component of the marketing environment consisting of laws and interpretations of laws that require firms to operate under competitive conditions and to protect consumer rights.

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Why is the regulatory environment very important in food industries?

105

Role of Government

• Laws Maintaining a Competitive Environment / Regulating Competition

– Started in the late 19th century and continues for the first part of the 20th century

– The objective was to maintain a competitive environment by reducing the trend toward increasing industry concentration

• What does competition do for society?

• benefits society by driving innovation

• increase consumer welfare

– Democrats promise to rejuvenate this issue.

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Role of Government

• “Police” markets for fraud

• FDA regulates package info

• FTC regulates ad info

• USDA regulates production practices

• Etc.

• Current levels of enforcement…LOW

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Government Food Agencies - FDA

Food and Drug Administration (FDA) regulates most foods

• food safety

– approves new ingredients

– common ingredients are Generally Recognized as Safe (GRAS) and do not need approval

• food identity

• labels

• nutritional information

– Although the USDA is in charge of the Standard Reference of nutritional information

108

Government Food Agencies - USDA United States Department of Agriculture (USDA) regulates livestock and poultry products, raw ag products

• organic labeling

• meat inspection

• food assistance programs

– Supplemental Nutrition Assistance Program (SNAP) – formerly “Food Stamps”

• 1/6 people receive SNAP assistance for a total distribution of $75 billion

– Women, Infants and Children (WIC)

• assists with healthcare and food for poor pregnant and breastfeeding women, and children less than 5 yrs. that are below 185% of the poverty line

• 53% of all newborns are served

• because WIC purchases more than ½ of all baby formula, the USDA can in effect dictate the quality of formula

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WIC and Baby Formula

• WIC money is distributed to states

• States choose vendors

– there are only 3: Abbot (Similac, 43%), Mead Johnson (Emfamil, 40%), Gerber (Good Start, 15%)

– states negotiate a WIC price

• 2/3 of formula is sold through supermarkets and supercenters; the rest through smaller stores

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How Low Would You Go? • Suppose your per unit production costs are 80% of the wholesale price.

What sort of discount (relative to the wholesale price) would you give WIC? Why?

– Will capture all of the WIC market (53% of total market)

– WIC consumers are unlikely to pay a high price premium anyways

– Increased production may reduce per unit costs (economies of scale)

– Guarantees the product will be sold in nearly every store that sells formula • Increased sales from non-WIC consumers

• More shelf space, greater visibility, more promotions

– Hospitals will give WIC samples out so that babies will not have to change formulas as often • post-partum moms will stick with the brand…why?

• Implicit quality endorsement by an influential 3rd party…who?

– WIC consumer may recommend the WIC brand to non-WIC consumers

– WIC consumers will stick with the brand when they no longer qualify for WIC

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Actual WIC Discount = 85%

• The winning producer is willing to take a (5%) loss on WIC consumers. Why?

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Granola • Public health & product labeling

– Fair Packaging and Labeling Act • requires the producer to identify the product and include specific information, such as

the ingredients used for the product and its nutritional content.

– Nutrition Labeling and Education Act • nutrient content claims & health claims

– Environmental Regulation

– Nuts etc currently protected by tariffs

– “The US government and consumers are demanding more stringent rules relating to food labeling, advertising, packaging and other nutritional claims made by manufacturers. Failure to abide by these rules can seriously impair a producer's credibility, result in expensive product recalls and lead to civil or criminal penalties. Pending enforcement of new FDA regulations has created opportunities for food manufacturers to differentiate themselves from the competition. Those that are able to respond quickly can eclipse the competition in terms of efficiency, quality and brand integrity.”

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FROM IBIS WORLD: HOME > INDUSTRY MARKET RESEARCH > US INDUSTRY REPORTS (NAICS) > SNACK FOOD PRODUCTION

Bibliography

• Bhuyan, S. and Lopez, R., “Oligopoly Power in the Food and Tobacco Industries,” American Journal of Agricultural Economics, Vol. 79, No. 3 (Aug., 1997), pp. 1035-1043.

• http://www.herrs.com/AboutHerrs/History.html

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