Is food innovation profitable?A case study for yogurt and milk in Spain

Johanna Elena Trieb

August 2013 Summer School

Budapest, Hungary

FDI and Food Innovation In 2006, global food and drink industry (FDI) retail sales

> 2 trillion US$, representing one of largest industries in the world(Winger and Wall, 2006)

10-14% of total hh expenditure (high income) and 40-50% of total hh expenditure (low income) spent on food(Winger and Wall,

2006)

Growing world population, increase in urbanization, increasing environmental concerns, changes in lifestyle will require the FDI to keep up

Innovation is generally an important driver of economic growth, and in the FDI will continue to be important to ensure the sustainability of manufacturers and satisfaction of consumers

New product development

Currently, only 1% of the products found on shelves will be there in 5 years…(Winger and Wall, 2006)

Many types of new food products: new to the market, new to the company, new packaging, reformulating of existing products

In general: incremental (re-development of existing) vs radically novel

Functional food

Inte

stina

l Fun

ction

Cardio

vasc

ular

Imm

une

syst

em

Bone

Health

Nervo

us S

yste

m

Beaut

y

Oth

er05

101520253035404550

Percentage of Functional Claims in World Market

Source: adapted from Jago. 2009

“if together with the basic nutritional impact it has beneficial effects on one or more functions of the human organism thus either improving the general and physical conditions and/or decreasing the risk of the evolution of diseases” (EC)

46%

21%

6%

5%

5%

4%

4%3%

2%2% 2%

Food Classes with Functional Claims in World Market

Dairy Products

Alcohol-free beverages

Childrens Food

Others

Baked food

Snacks

Breakfast Cereals

Chewing Gum

Desserts and Ice Cream

Sauces and Dressings

Processed Fish, Meat, Eggs

Source: adapted from Giannetti et al. 2009

35%

32%

25%

8%

Share of Global Functional Foods Market (2003)

United States

Europe

Japan

Rest of World

Source: adapted from Kotilainen et al., 2006

The FF market

46% of FF are dairy products (Jago, 2009), brought 1.35 billion US$ in Europe in 1999 (Benkouider, 2005), mainly pro (lactobacillus/bifidus) and prebiotics

Probiotics = 5 mill to 419 mill US$ from 1995 to 2000 (5 years) in Germany alone (yogurt and milk) (Menrad, 2003)

Global FF market estimated revenue 33-48 billion US$ in 2003 (depending on definition) (Menrad, 2003)

European market was estimated between 8 and 15 billion US$ in 2003 and 2006, respectively (Menrad, 2003; Kotilainen et al. 2006)

Germany, France, UK, Netherlands

The cost of innovation Steps in NPD

develop strategy design and production commercialization & launch

BUT: high costs associated with NPD (technologies, investment in

R&D; scientific and market research), especially in case of FF Cost of development of new food 1-2 mill US$, Unilever invested over 50 milll

US$ to develop functional margarine Becel(Menrad, 2003)

high risks (Relatively high market failure rate, 25% of innovative food products fail)(Hoban, 1998)

Most important to prevent failure of the product = consumer acceptance

Objective of this study Analyze consumer demand of various

categories of innovative food products (ie conventional vs reduced fat vs functional) in Spain to study possible differences in purchasing behavior and ultimately determine potential profitability of food innovation

Procedure 1) Choose product(s) and categories 2) Find appropriate demand model to

calculate expenditure and price elasticities 3) Analyze influence of demographic variables

DiscussionResultsModelData

Source: own graphical depiction

Data Set Daily retail scanner data from a major

discount supermarket chain in Spain 4-month period (July 1, 2011 – October 31,

2011) Focus on Madrid and Barcelona, 17 stores

Customers according to Residence

% C

ust

om

ers

Data

Source:adapted from Cataño, 2013

Product Choice

25%

17%

31%

6%

5%

5% 6%

2%1% 2%

Milk Consumption

Unflavored Normal Whole Milk

Unflavored Normal Non-fat Milk

Unflavored Normal Low-fat (semi) Milk

Whole Milk Enriched (Calcium, Fiber, Energy, Bifidus, Omega3)

Non-fat Milk Enriched

Low-fat Milk Enriched

Whole Milk without Lactose

Non-fat Milk wo Lactose

Low-fat Milk wo Lactose

Flavored Milk&Drinks

Unflavored Normal Soja Milk

Unflavored Normal Low-fat (semi) Soja

Flavored Soja Milk

Soja Milk Enriched with Calcium

19%

5%

20%

4%7%

37%

7%

Butter/Margarine Consumption

Unsalted Butter

Salted Butter

Normal Margarine

Salted Margarine

Margarine Light

Enriched Margarine (Omega3, Vitamins, Proactive, Gourmet)

Olivespread-Margarine

37%

7%24%

14%

10%7%

Joghurt (&Drinks) Consumption

Normal Joghurt (Whole&Non-fat)

Joghurt Drinks

Bifidus Joghurt + Drinks (Whole&Non-fat)

Lactobacillus Joghurt + Drinks (Whole&Non-fat)

Greek Joghurt

Other (Mouse, Creams, Dessert Joghurt, Soja, Babies)

64%

2%

29%

2% 3%

Mayonnaise Consumption

Normal Mayonnaise

Mayonnaise with Olive Oil

Light Mayonnaise

Low-Sugar Mayonnaise

Other (with Mustard)

13%

44%

41%

2% 0,003%

Egg Consumption

Eggs XL

Eggs L

Eggs M

Freerange Eggs M

Eggs Enriched w Omega-3

51%

28%

21%

Breakfast Cereal Consumption

Sweetened Kids Breakfast Cereal (Sugar, Honey, Chocolate)

Unsweetened Breakfast Ce-reals

Fruit, Fiber, All-bran Break-fast Cereals

14%

46%

27%

1%

1%2%

10%

Canned Tuna Consumption

Canned Tuna in Water/Natural

Canned Tuna in Vegetable Oil

Canned Tuna in Olive Oil

Canned Tuna in Sauce

Canned Tuna in Water Low Salt

Canned Tuna in Olive Oil Low Salt

Other (Tuna Belly, Tuna-meatballs, pickled Tuna)

82%

5%

8%5%

Sugar/Sweetener Consumption

White SugarBrown SugarSweetener SolidSweetener Liquid

182404* 20493* 243724* 21975*

71021* 35940* 29022* 55588*

Source: own calculations*purchases

Data

Yogurt consumption

38%

26%

22%

14%

Total Yogurt Ex-penditure

Drinkable

Enriched

Whole-fat

Low-fat 1088(82%)

241(18%)

Gender Distri-bution

FemaleMale

2%

20%

44%

34%

Consumer Age Range

18-2526-4041-6061-95

Drinkable Enriched Low-fat Whole-fat

0

10

20

30

40

50

60

70

80

61.00

43.51

21.4133.59

13.42

7.74

4.92

8.33

Total Expenditure by Category (in 1000€)

Male

Female

Data

Source: own calculations

Fluid milk consumption

236(77%)

71(23%)

Gender Distribution

Female

Male

3%

21%

45%

31%

Consumer Age Range

18-25

26-40

41-60

61-92

Enriched Semi-skim Skim Whole

0

500

1000

1500

2000

2500

3000

3500

4000

27072346 2117

2887

939

878

683

729

Total Expenditure by Category

Male

Female

27%

24%21%

27%

Total Milk Expenditure

EnrichedSemi-skimSkimWhole

Data

Source: own calculations

Research Questions and Hypotheses RQ1: Are there differences in the price/expenditure

elasticities of demand between the various categories? H1: Low-fat more inelastic in demand than whole-fat; functional

food demand more inelastic than conventional; enriched and drinkable more expenditure elastic than conventional

RQ2: Are there potential differences between products? H2: Expect comparable changes in demand with changes in

price/expenditure for milk and yogurt.

RQ3: Do age and gender influence demand of innovative food products? H3: Age and gender play a role in demand of FF (since majority of

studies show for example that females and consumers over 60 years have increased demand in FF) (Urala and Lähteenmäki, 2007)

Model specification: QUAIDS Almost Ideal Demand System (AIDS)(Deaton and Muellbauer, 1980)

Quadratic AIDS (QUAIDS)(Banks et al., 1997)

where is the expenditure share for good i

pi is the average price of good i = 1….k (4), x the total expenditures on yogurt/milk

When the quadratic income term in each expenditure share falls away = QUAIDS = AIDS

Demographics age and a gender dummy were included via a demographic scaling technique

wi i ij log p j i logx

a( p)

j1

k

i

wi i ij ln p j i lnx

a( p)

j1

k

i

b( p)ln

x

a(p)

2

i

ln a(p) 0 i ln pi 1

2ij ln pi

j1

k

i1

k

i1

k

ln p j

b(p) pi i

i1

k

wi piqi

x

i 0i

RestrictionsAdding up:

Homogeneity:

Symmetry:

i 1i1

k

i 0i1

k

ij 0j1

k

i 0i1

k

ij i1

k

ij 0j 1

k

ij ji

Model

Expenditure and Price elasticities Expenditure Elasticities

Uncompensated (Marshallian) Price Elasticities

Compensated (Hicksian) Price Elasticities

Model

Descriptive statistics & Wald-test

Results

Source: own calculations

Expenditure Elasticities

Results

Increase in consumer expenditure results in greater increase in expenditure on drinkable and enriched yogurt (above unity; luxury) than low- or whole-fat (necessity)

Low-fat greater expenditure elasticity (near unity) than whole-fat yogurt (Davis et al 2010, normal nondrinkable yogurt 0.998 vs 1.000 drinkable)

Again, increase in consumer expenditure results in greater increase in expenditure on enriched/functional milk (above unity; luxury) compared to skim- or whole-fat milk (necessity)

Again, skim-fat greater expenditure elasticity (near unity) than whole-fat yogurt (Glaser and Thompson, 2000; Dhar and Foltz, 2004; Li et al 2012)

Note: conditional (wrt total yogurt/milk expenditures)Source: own estimation results

Uncompensated Price Elasticities

Yogurt: all relatively inelastic. Enriched functional yogurt most sensitive to price changes (Bonnano, 2009: functional drinkable yogurt more sensitive than conventional). Low-fat yogurt demand most inelastic. Whole-fat yogurt more sensitive than low-fat (Bonnano, 2009). Drinkable less sensitive than enriched, whole-fat (Davis et al., 2010: drinkable -1.103, refrigerated – 1.012)

Milk: Enriched and semi-skim demand more inelastic than skim and whole. Whole-fat more elastic than low-fat. Contradicts with yogurt where enriched was most sensitive to price changes. But Di Giacomo 2008 showed than functional drinkable yogurt more inelastic than conventional drinkable.

Results

Source: own estimation results

Compensated Price Elasticities

Yogurt: All compensated smaller in value than uncompensated (consumer shld have same utility before and after price increase; consumer gets “compensated” for price increase with rise in income); thus effect will be less severe. Since different suggests that the income effect on demand is significant. CPE positive = substitutable products. Drinkable and enriched demand more inelastic than low and whole-fat yogurt (Davis et al., 2010: -0.159 drinkable, -0.605 conventiional). Again, whole-fat more elastic than low-fat (Milk studies: Boehm, 1975; Gould, 1996 (-0.803 whole, -0.593 1%/skim))

Milk: Again, low-fat less sensitive to price changes than whole-fat. Enriched though insignificant, appears most inelastic.

Results

Source: own estimation results

Demographic variables Yogurt:

Increase in age increases demand for drinkable yogurt, decreases demand for low-fat yogurt

Gender (female) influences demand of whole-fat yogurt negatively

Milk: Gender positive and significant impact on semi-

skim milk demand (Females increased demand)

Discussion

Based on this study, would be “un-academic” to assume that investing in development of functional products is profitable

But; suggest that functional yogurt and milk products in Madrid and Barcelona in general are relatively inelastic in demand.

Also low-fat varieties in both cases appear less sensitive to price changes than whole-fat varieties

Further and continuous consumer demand/market research crucial…

Discussion

Limitations and Future considerations Larger data set, ie including retail scanner data from other

supermarket to get full overview Longer time period, to decrease probability of zero-consumption and

analyze possible seasonal effects Further disaggregation of the products (by functionality and fat-level,

flavored or plain) Look at more products Conditional (wrt to yogurt/milk expenditure) vs Unconditional (wrt to

total food expenditure) to take direct and indirect effects of price changes on yogurt/milk demand into account; conditional will likely be larger in absolute value than unconditional…

Analyze influence of further demographic characteristics on demand presence, number and age of children; education, labeling advertising household income

Discussion

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References continued..

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