Lecture 10 Marketing of Food Products: Wholesale, Retail, and Food Service

1. Lecture 10Marketing of Food Products: Wholesale, Retail, and Food Service Required Text: Chapters 3 and 15

2. Marketing of Food Products • Agribusiness marketing can be categorized into two broad categories • Marketing of Agricultural Commodities • Production, handling and sales of farm products • Marketing of Food Products • Commodity procurement • Processing • Wholesaling • Retailing • Food Service

3. Marketing of Food ProductsWholesaler-Retailers Marketing • Wholesalers-Retailers: Chains, Affiliates, Independents, Supermarkets, and Convenient Stores • 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. • 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

4. Marketing of Food ProductsWholesaler-Retailers Marketing • 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: • 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. • Private label benefits retailers with larger margins and consumers with lower prices. • Why WR products have not obtained a larger market share?

5. Marketing of Food ProductsWholesaler-Retailers Marketing • 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: • 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. • Private label benefits retailers with larger margins and consumers with lower prices. • Why WR products have not obtained a larger market share?

6. Marketing of Food ProductsWholesaler-Retailers Marketing • Are WRs price takers or price makers in their procurement? • 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: • 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

7. Marketing of Food ProductsRetailers Marketing • Competing for customers • A food retailer does not have market assurance – success depends on attracting necessary volume of customers • 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

8. Marketing of Food ProductsUSDA classifications of food retailers • Food Store: A retail outlet with at least 50% of sales in food products intended for off-premise consumption • 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

9. Marketing of Food ProductsRetailers Marketing • Promotion of retail Business • Advertising: Retail advertising relies heavily on weekly newspaper ads, listing many prices, and mailing flyers • Advertising costs are substantial – 0.7 cents of the sales dollar – nearly 4% of the retailers gross margin • Other promotional devices • Coupons • Trading stamps • Games or toys • Premiums • Vacation trips

10. Marketing of Food ProductsRetailers Marketing • Two groups of customers • 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 • 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

11. Marketing of Food ProductsRetailers Marketing • Pricing strategies of the supermarkets • 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.

12. Marketing of Food ProductsRetailers Marketing • Pricing strategies of the supermarkets • 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.

13. Marketing of Food ProductsThe Food Service Industry • Hotels, Restaurants, and Institutions (HRI) - Two Major sectors • 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 • 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) • 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