How Innovative are Food Sellers?

I tend to think of the food and grocery business as hyper-competitive with many new product introductions and failures.  For example, data from the USDA ERS suggests roughly 20,000 new food and beverage products come on the market each year.  That seems like a lot.  But, compared to what?

I ran across a presentation that Austan Goolsbee and Pete Klenow recently gave at the ASSA conference in Philadelphia.  They use online price and quantity data collected by Adobe Analytics.  Their main objective was to construct price indices to compare against the official government consumer price index measures.  Those results are interesting, but I was intrigued by some of their other findings regarding new product introductions and exits.

Below are two slides they created that challenged my prior beliefs about the food and beverage category.  

If I'm understanding this correctly (and I may not be), I think the data below suggests that 69.8% of the total sales in the apparel category come from newly entering products.  Moreover, 29.5% of total sales in the the apparel category come from products that are soon to exist the market.  Other categories with high levels of "churn" and new product introductions are "other goods and services", ICT (which I believe is information and communications technology), and recreational goods.  For food and beverages, "only" 19.5% of sales are by new entrants, and 8.5% of sales are by soon-to-be-gone products. By this measure, the food sector seems less dynamic than others. 

Their next slide conveys the same information in a different way - by measuring the percent growth in sales-weighted variety.  By this measure, variety in food and beverages has only grown by an average of 1.2% per year, and the only category with a smaller growth in variety is medicines and medical supplies. By contrast, there is an average 18.3% growth in vareity in the aparel cateogory.  

One downside to these data is that they only reflect online sales.  Perhaps there is more "churn" and new product introduction in brick-and-mortar grocery stores than online?  Either way, this is interesting food for thought. 

Taste elasticities?

Economists are accustomed to reporting price elasticities, which indicate the percentage reduction in quantity of a product that will be demanded when the price of a product increases by 1%.  The focus on price elasticities might suggest that changes in prices are more important demand determinants than changes in other variables.  Another possibility is that prices are observable.  That is, we focus on price changes because we can see and measure them.

This new paper, published in Managerial and Decision Economics with Trey Malone, suggests other factors that are highly influential demand determinants.  In particular, Trey designed a survey to measure preferences (and demand) for different beer brands at various prices.  He asked people to answer choice questions like the one below.

The only difference across the choice questions were the prices assigned to brands.  It is straightforward to calculate the typical own-price demand elasticities from these data - one simply has to observe how the frequency with which a brand is chosen changes when its price changes.  

In addition to these standard questions, Trey and I also asked questions about consumer perceptions of each brand.  Here is a partial screen shot of the question we asked on taste (a similar question was asked about familiarity).  

Merging these data with the choice data, then, allows us to see how a change in perceived taste (or familiarity) affects choice.  

One of the key challenges with this sort of analysis is that taste/familiarity perceptions might be endogenously determined with other variables, such that we don't really know whether we're measuring mere correlations or the causal impact of taste changes on choice.  Our paper suggests a way to deal with this challenge.  In short, it involves using perceptions for other brands as instruments for perceptions of another brand.  I won't go into the details here, but we show the approach has a substantive effect on the results.  

So, what did we find?  Not surprisingly, taste and familiarity matter.  But by how much?  Here is a table of elasticities (not price elasticities, mind you, but taste elasticities). 

We write:

“Changes in perceived taste matter much more for the craft options (Marshall and Oskar Blues) than do changes in the perceived taste of the premium and macro options. For example, a 1% increase in the perceived taste of the Oskar Blues option leads to a 6.753% increase in the quantity demanded of that beer, whereas the same increase in the perceived taste of Corona leads to a 4.891% increase in its quantity demanded. Similar to the own-taste elasticities, relative to the familiarity elasticities, cross-taste elasticities are much larger. According to the model estimated via the control function approach, the perceived taste of Samuel Adams is the option most dependent on the perceived taste of the other beers. Specifically, the 1% increase in Corona’s perceived taste would also lead to a 1.339% reduction in the probability a Samuel Adams was selected, and the 1% increase in Oskar Blues’ perceived taste would create a corresponding 1.991% reduction in Samuel Adams’ quantity demanded.”

Another result that probably won't be too surprising to many craft beer drinkers:

“Once we control for endogeneity, our estimates indicate that some participants actually prefer an unfamiliar beer (i.e., they are variety seekers)”

Elite Consumer Motives

I ran across a couple recent articles (via a e-news letter by Susan MacMillian) that did a good job encapsulating some of the core drivers of the modern food movement trends.   

The first is a review by Benjamin Schwartz of Elizabeth Currid-Halkett's book, The Sum of Small Things: A Theory of the Aspirational Class.  He argues that people (particularly the people he calls the "educated elite") have descended into a form of "consumer narcissism" in which "consumption becomes the dominant means of self-definition."  He writes:

“Currid-Halkett convincingly argues that the consumer preferences of today’s elite—be it the approved podcast, TED Talk, or magazine; goat tacos from the farmers market, a five-dollar cup of Intelligentsia Coffee, ceviche at the Oaxacan restaurant in the approved urban enclave, or tuition for the anointed school—are now the primary means by which members of the educated elite establish, reinforce, and signify their identities. In a detailed analysis of the experience of shopping at a Whole Foods supermarket, for instance, she explores the rather stark hypothesis that “for the aspirational class, we are what we eat, drink, and consume more generally.” By creating “an identity and story to which people wish to subscribe,” the store allows members of that class to “consume [their] way to a particular type of persona.” The upshot is that elite consumption—the pursuit of personal gratification—somewhat paradoxically entwines with the pursuit and buttressing of what amounts to a tribal identity.”

Currid-Halkett herself summarizes some of the main themes of the book in this piece in Aeon.
Here's an excerpt: 

“Given that everyone can now buy designer handbags and new cars, the rich have taken to using much more tacit signifiers of their social position. Yes, oligarchs and the superrich still show off their wealth with yachts and Bentleys and gated mansions. But the dramatic changes in elite spending are driven by a well-to-do, educated elite, or what I call the ‘aspirational class’. This new elite cements its status through prizing knowledge and building cultural capital, not to mention the spending habits that go with it – preferring to spend on services, education and human-capital investments over purely material goods. These new status behaviours are what I call ‘inconspicuous consumption’. None of the consumer choices that the term covers are inherently obvious or ostensibly material but they are, without question, exclusionary.”

and

“While much inconspicuous consumption is extremely expensive, it shows itself through less expensive but equally pronounced signalling – from reading The Economist to buying pasture-raised eggs. Inconspicuous consumption in other words, has become a shorthand through which the new elite signal their cultural capital to one another. In lockstep with the invoice for private preschool comes the knowledge that one should pack the lunchbox with quinoa crackers and organic fruit. ”

Meat Consumption in 2018

An article in Bloomberg today reports on a USDA forecast that per capita meat consumption is projected to hit a high in 2018 of 222 pounds per person.  I received a number of emails from people today asking how this is possible.  Questions were of the sort: Aren't there more vegetarians than ever? Isn't plant-based protein and lab grown meat taking off? Aren't people more worried about environmental and health effects of animal production?  Aren't animal welfare concerns on the rise?

Embedded in many of these questions is conflation of demand and supply.  Yes, consumers are projected to consumer more meat in 2018, but that’s because we’re producing more of it than was the case a few years ago.  We consume everything that’s produced (after adjusting for trade).  In short, it's not that demand for meat has increased (what people are willing to pay for meat has remained fairly steady for the past several years - see also these beef and pork demand indices).  Rather, the supply of meat has increased.   

How do I know this is true?  If there were a demand increase, we'd expect higher quantities and higher prices.  But, at least compared to a couple years ago, we're seeing higher quantities but lower beef and pork prices, suggesting it is the supply curve that has shifted. To induce people to consume the higher volume of meat that’s currently being produced, prices have to fall to clear the market.

So, why have supplies increased?  One main reason is that feed prices (particularly corn) dropped and have remained low for the past several years.  All the while, productivity has increased.  Lower input prices and greater inefficiencies means we are going to have more meat as long as consumer demand remains steady.  And at least for now, despite all the negative information about meat production I alluded to earlier, demand appears to be fairly stable.  

2017 Year End Review

Today is the last day of 2017, and keeping with tradition, it's time to look back over the past year.

After 12 great years at Oklahoma State University, it was time to move on.  Since this summer, I've had the pleasure to serve as Distinguished Professor and Head of the Agricultural Economics Department at Purdue University.  This year, I wrapped up my term as president of the Agricultural and Applied Economics Association (AAEA), had the opportunity to participate in a couple programs at the National Academies in Washington DC, attend the presentation of the World Food Prize in Des Moines, and travel and give talks in Grenoble France, Parma Italy, Guelph Canada, West Texas A&M, Texas Tech University, San Francisco, Reno, Boston, Chicago, and more.  My coauthors and I published 15 articles published in peer reviewed journals in 2017 and have a half dozen or so are already forthcoming for 2018.  I was particularly happy to finally see this paper on the distributional impacts of fat taxes and thin subsidies with Laurent Muller, Anne Lacroix, and Bernard Ruffieux finally appear in the Economic Journal.

On the blog, there were about 115 posts garnering more than 86,000 page views in 2017.  Here are a few of the most viewed posts of the year.

Why Large Scale Organic Requires Large Scale Non-Organic (discusses the origin of nitrogen fertilizer on organic farms)

How Risk Averse Are You? (discusses a paper I wrote with Andreas Drichoutis where we point out some problems with popular experimental economic methods used to measure risk preferences and where we introduce a new method)

Where Do People Eat the Most Meat? (using data from the Food Demand Survey (FooDS), I show how demand for various meat cuts varies geographically across the US)

How Food Spending Varies with Income (also using data from the Food Demand Survey (FooDS), I show how spending on food at home and away from home varies with household income)

When Consumers Don't Want to Know (describes the phenomenon of "information avoidance" with focus on some animal welfare research with Eryn Bell and Bailey Norwood)

The Great Bacon Freak-out of 2017 (debunks a popular news story that we were going to run out of bacon)

Costs and Benefits of Local Food Policies (here I discuss a paper by Jason Winfree and Philip Watson showing that only under highly unusual conditions will we expect popular local foods policies to produce more in benefits than costs)

The Adoption of Genetically Engineered Corn and Yield (discusses an NBER working paper I wrote with Jesse Tack and Nathan Hendricks showing that adoption of GMO corn increased yields by about 17%)

Does Everybody Prefer Organic? (short answer, "no")

Redefining Agricultural Yields (here I critique the interpretation of research results arguing that yield should be measured not as bushels or tons per acre but by the number of people fed per acre).

Food Values of the Rich and Poor (data from the Food Demand Survey (FooDS) shows the relative importance of different factors when buying food for the rich and poor)

Here are some posts written in previous years that continued to be popular in 2017.

• Country of Origin Labeling and Cattle Prices
• Real World Demand Curves
• Buffalo Extermination - Environmental Catastrophe or Savior?
• Who are the Vegetarians?
• What Do Consumers Do When the Price of Beef Rises? 
• Why American Farming is Different than European Farming - Blame 4-H
• What do Meat Eaters and Vegetarians Spend on Food? 
• The Organic Food Subsidy Myth
• The USDA by the Numbers
• Food Demand Survey (FooDS) - January 2015 (where I first reported that around 80% consumers want mandatory labeling of foods that contain DNA, a result we've now confirmed in a half dozen different surveys)