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 Source: adapted from Jago “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)

Source: adapted from Giannetti et al 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 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 % Customers Data Source:adapted from Cataño, 2013

Product Choice * 20493*243724*21975* 71021*35940*29022*55588* Source: own calculations *purchases Data

Yogurt consumption Data Source: own calculations

Fluid milk consumption 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  p i 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 Restrictions Adding up: Homogeneity: Symmetry: 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 vs 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 , 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: drinkable, conventiional). Again, whole-fat more elastic than low-fat (Milk studies: Boehm, 1975; Gould, 1996 ( whole, %/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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