Although consumers spend about $790 billion in 2006 on food, the economics of the food industry is extremely profitable only to huge corporations. The reason is that profits gained per dollar from selling the products are low. According to 1997 statistics from the Economic Research Service (ERA), the price for food that consumer paid nearly matches the cost of bringing the food to the consumer. This includes labor, processing, packaging, storage, transportation, advertising, etc. If one looks at the marketing bill provided above from the ERA, the profit margin gained is about 3.5% per dollar in 1997. Of the cost, the most extensive is labor. According to the Food Marketing Institute, labor accounts for 60% of supermarkets' operating cost.Furthermore, in this highly competitive market, marketing plays an important rule in attracting consumers. When one turns to television, one is almost instantly bombarded with advertisements to process food, such as Oreo cookies, Fruit Loops, magically delicious Lucky Charms cereal, instead of fresh produce. So this is unsurprising that according to the Federal Trade Commission, this industry spent at least $1.6 billion annually in advertising to children via media, internet, and other outlets.
Process food is the most profitable sector for this industry. First, fast food is inexpensive and appeals to a mass audience. Second, they last much longer than fresh produces; thus, it is easier to store goods for later processing when bought in bulk from farmers.
http://www.ers.usda.gov/publications/aer780/aer780d.pdf
http://printfu.org/read/food-costs-continue-half-century-decline-8d7b.html?f=1qeYpurpn6Wih-SUpOGumqWnh7Le5cmUq9Tj5tyOt9Xj4c7a5NuFvMnR1p-s0-La6t_ejLPbyODR09WUpOGumK-P2eCRsdiumZaqlNPj59ri3bW81OLKlqPYqqOjkNqIsOCfoKiwh9zc2eCsmJ3r3eyby9nYpNTmz5TU4czho8zW0NnfztzO29uU1uHY0uTY3tDK353mydqKoO0
Process food is the most profitable sector for this industry. First, fast food is inexpensive and appeals to a mass audience. Second, they last much longer than fresh produces; thus, it is easier to store goods for later processing when bought in bulk from farmers.
http://www.ers.usda.gov/publications/aer780/aer780d.pdf
http://printfu.org/read/food-costs-continue-half-century-decline-8d7b.html?f=1qeYpurpn6Wih-SUpOGumqWnh7Le5cmUq9Tj5tyOt9Xj4c7a5NuFvMnR1p-s0-La6t_ejLPbyODR09WUpOGumK-P2eCRsdiumZaqlNPj59ri3bW81OLKlqPYqqOjkNqIsOCfoKiwh9zc2eCsmJ3r3eyby9nYpNTmz5TU4czho8zW0NnfztzO29uU1uHY0uTY3tDK353mydqKoO0
It is interesting to see that the profit margin for food is not that large, I did not know this! From what I understand from your post, Liam, companies are successful in the food industry only if they sell more of a good at a lower price than their competition. This must explain the reason that prices are relatively higher in smaller grocery stores as compared to larger ones. In order to receive a profit for sales, smaller stores must sell less products at a higher price. This is while larger stores have the luxury to sell more goods at lower prices. I'm interested to see the price of food during the recession as compared to the years you indicated in your post. Liang, would you happen to know how much was spent on food in 2010?
ReplyDeleteThe smaller stores, such as Whole Foods, also get the luxury of carrying themselves as more high-end, healthier grocery stores and advertising to the upperclass. I'm unsure as to how much was spent total on food in 2010 but I believe it was a lesser percentage of income than in the earlier years Liang mentions. I could be wrong though, I haven't double checked, however I think the recession is just leading to increased sales of cheap, unhealthy food as less people can afford the more expensive food-those who can manage continue to buy it though, of course.
ReplyDeleteAccording to the Economic Research Service, "total food expenditures for all food consumed in the U.S. were $1,240.4 billion in 2010, a 3.4-percent increase from $1,199.8 billion in 2009. Spending on food away from home accounted for 47.9 percent of total food expenditures in 2010; spending for food at home accounted for 52.1 percent."
ReplyDeletehttp://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/Data/Expenditures_tables/
However, during the recession,food expeditures definetly took a hit. During 2007-2009, analysts stated consumer decreased food expeditures as much as 5%. http://www.ers.usda.gov/AmberWaves/September11/Features/FoodSpending.htm
So as the economy jumps back, people are spending more and spending more healthier.