Transcript CHAPTER 3 - Department of Agricultural and Applied Economics

Lecture 10
Marketing of Food Products:
Wholesale, Retail, and Food Service
Required Text: Chapters 3 and 15
Marketing of Food Products
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Agribusiness marketing can be categorized into two
broad categories
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Marketing of Agricultural Commodities
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Production, handling and sales of farm products
Marketing of Food Products
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Commodity procurement
Processing
Wholesaling
Retailing
Food Service
Marketing of Food Products
Wholesaler-Retailers Marketing
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Wholesalers-Retailers: Chains, Affiliates, Independents,
Supermarkets, and Convenient Stores
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Chain = 11 or more food stores under one ownership
Independent = one store or as many as 10 under one
ownership
Chains: A larger chain often owns a distribution center and
does its own wholesaling
Affiliates: an independent retailer or chain retail store that is
associated with a wholesalers by ownership or by contract.
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Voluntary: organized by wholesalers and contract to receive
wholesaling functions – the Red and White Stores, IGA
Cooperative: Retailers cooperatively own distribution centers and
provide the wholesaling functions
Marketing of Food Products
Wholesaler-Retailers Marketing
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Wholesalers-Retailers: Organized around the larger metropolitan
areas
 53 distribution areas cover the US market
 40-70% of the retail grocery sales are made by top 4 firms
Wholesale-Retail Margin:
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Margin: The difference between selling price and invoice cost
expressed as a percentage of selling price
 WR Margin = 100 × (Sale Price – Invoice Cost) / Sale Price
Private vs. Processor Label: Margins for WRs have generally been
somewhat higher on private-label than on processor brands, while
consumer prices have usually been higher for processor brands.
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Private label benefits retailers with larger margins and consumers
with lower prices.
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Why WR products have not obtained a larger market share?
Marketing of Food Products
Wholesaler-Retailers Marketing
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Wholesalers-Retailers: Organized around the larger metropolitan
areas
 53 distribution areas cover the US market
 40-70% of the retail grocery sales are made by top 4 firms
Wholesale-Retail Margin:
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Margin: The difference between selling price and invoice cost
expressed as a percentage of selling price
 WR Margin = 100 × (Sale Price – Invoice Cost) / Sale Price
Private vs. Processor Label: Margins for WRs have generally been
somewhat higher on private-label than on processor brands, while
consumer prices have usually been higher for processor brands.
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Private label benefits retailers with larger margins and consumers
with lower prices.
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Why WR products have not obtained a larger market share?
Marketing of Food Products
Wholesaler-Retailers Marketing
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Are WRs price takers or price makers in their procurement?
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Depends on specific products and the structure (size) of the WR
Smaller WRs are price takers
Larger WRs are price takers when dealing with large processors with
highly differentiated (or branded) products, and price makers when
dealing with processors of commodities (e.g., fresh meats)
Local retail market structure:
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Retail markets are concentrated at the local level
For all metropolitan areas, the 4 largest retailer’s joint market share is
typically greater than 40%
Oligopoly – only a few firms and entry is not easy because of the large
capital costs, relationship with wholesalers, and competition
 Chains have been accused of “predatory pricing” practices
 Competing for customers
Marketing of Food Products
Retailers Marketing
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Competing for customers
 A food retailer does not have market assurance – success
depends on attracting necessary volume of customers
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Location – nearby (central)
Shopping atmosphere – pleasant
Merchandising skills –
Services – speedy shopping and check out
Product mix – one stop shopping, specialty departments such as delis
Pricing – economic prices
Wal-Mart –
Warehouse clubs – Sam’s club, Costco, BJ’s
Aldi – 500-1,500 items – targets customers concerned with prices only
Combination stores - CVS, Walgreens, Rite Aid – more than 20,000
items
Marketing of Food Products
USDA classifications of food retailers
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Food Store: A retail outlet with at least 50% of sales in food
products intended for off-premise consumption
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Grocery Stores: A food store that sales a variety of food products
 Convenience Stores: A small grocery store selling a limited variety
of food and non-food products and typically open extended hours
 Superette: A self-service grocery store with annual sales below
$2.5 million
 Supermarket: A self-service grocery store, providing a full range of
departments, with at least $2.5 million in annual sales
 Combination food and drug stores
 Superstores
 Warehouse store
Specialized Food stores: Food stores primarily engaged in the retail
sale of a single food category
Marketing of Food Products
Retailers Marketing
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Promotion of retail Business
 Advertising: Retail advertising relies heavily on weekly
newspaper ads, listing many prices, and mailing flyers
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Advertising costs are substantial – 0.7 cents of the sales dollar –
nearly 4% of the retailers gross margin
Other promotional devices
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Coupons
Trading stamps
Games or toys
Premiums
Vacation trips
Marketing of Food Products
Retailers Marketing
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Two groups of customers
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Bargain shoppers: Chase deals and buy whatever is on sale
Convenience shoppers: Shop according to the list of needed items
Currently there are more convenience shoppers than bargain shoppers
Pricing the items
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While profit maximization is the main objective of the management, it
prices each individual item giving considerable attention to overall gross
margin and overall price image
 An independent supermarket prices about 25,000 items
 A chain supermarkets prices about 40,000 items
 A supercenter or a large combination store prices about 80,000 items
Pricing involves variable markups on procurement costs
 Variation in markups depends on costs and income estimates,
competition, tradition, pricing image, and suggestions from wholesalers
Marketing of Food Products
Retailers Marketing
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Pricing strategies of the supermarkets
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Variable Price Merchandising (VPN): High-low variable prices with frequent
manipulation of the prices of numerous items.
 Specials on a strategic set of items drawn from various departments,
while leaving prices of other items the same (or even raising prices of
other items).
 The weekly ads present a low-priced image even though the gross
margins are much higher on most items not in the ad.
 Temporary price reductions (Price Specialing) rests on the premise
that the store can increase traffic and increase sales by offering
bargain prices on few items.
 Frequently used to obtain or regain market share
 Characterized by inventory management problems, especially for the
perishable items.
Marketing of Food Products
Retailers Marketing
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Pricing strategies of the supermarkets
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Everyday Low Pricing (ELP): Persistent low prices for selected items
 Advertises a set of items with persistent low prices, but not cut as
deeply as in the VPM approach.
 For items of high turnover and popular appeal that normally carry fairly
high margins, prices reductions are repeated for many weeks to build a
low-priced image.
 Wal-Mart has successfully used ELP during its expansion.
 Easier to manage than VPM.
Marketing of Food Products
The Food Service Industry
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Hotels, Restaurants, and Institutions (HRI) - Two Major sectors
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Public (Commercial) Eating Places: Food court to Restaurant .
Institutional Food Sector: Schools, colleges, military, hospitals, care
homes, prisons, etc.
 Sales volume is about one-third of the public eating places sector
Franchising: the most important institution in food service
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Franchisor – the owner of a trade name and concept
Franchisee – an individual firm with license from a franchisor to operate
under the trade name and format
Franchisees are required to follow the chain’s standard of operations and
pay royalty (fees)
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3-5% of gross sales as royalty
If they lease property, the rent payments are additional 4-8% of gross sales
In addition, each franchisee has to contribute 1-4% of gross sales to a joint
advertising and promotion fund