Natural beef: theoretical and empirical consumer demand

Abstract

Conventional supermarkets concentrate on capturing the largest pool of consumers to generate profits from the industry's low margins. Selling to the largest pool of customers means that marketing, promotion, stocking and service decisions are based on the tastes and preferences of an average consumer. Innovators in the grocery industry, recognizing a shift in consumer tastes and preferences, are transforming the industry to attract smaller segments of consumers. The theory presented here demonstrates a method to understand the value of product diversification and a model of the gains from providing products that may have broader appeal than those targeted to the average customer. The increase in retail returns through this approach of developing in-store niches lies not in increased single-item purchases of any one consumer, but through the increased number of items purchased (a larger bundle) by an individual on a single shopping trip. Additional information is necessary to establish a new product in a retail grocery store. This information includes the appropriate price point and a description of the target consumers. The survey data used to develop a model of store choice is also used to define the target market segments and to evaluate the relationship between willingness to pay for new natural ground beef and steak. These results show that income is a significant predictor of probability of paying a premium and describes the most likely purchasers. Results show that demographic variables have limited predicted ability in the empirical models, and while production characteristics are significant in predicting store choice they have small marginal effects. The theoretical model, however, is tested empirically and the costs of providing only average products is real and results in a 13 percent reduction in demand for the supermarket. Consumers are willing to travel to multiple grocery outlets when the realized utility from finding the optimal product outweighs the increased travel cost. Target market segments are also described that can be valuable tools when forming marketing and promotion campaigns.