Issue 209 - The In-Elastic Food Industry

Last week we mentioned that Food Distributors and Processors face unique challenges when compared to other industries. This week we look at one of those key differences to help understand why defending your pricing and profit margin is critical to the success of your company. Due to the larger than usual number of charts we've put our thinking inside the box at the bottom of the page in text.So we don't lose the point here, food guys do not have products that when the lower the price demand increases, thereby increasing their total profit. Volume deals are just a way to get you to lower your price fro price sake alone, details below.

Price elasticity of demand is defined as the measure of responsiveness in the quantity demanded for a commodity as a result of change in price of the same commodity. It is a measure of how consumers react to a change in price. – Wikipedia

The demand for a good is relatively inelastic when the change in quantity demanded is less than change in price.

That's nice, but how does this apply to the Food Industry and why should I care if it does?

The closer to 0 the elasticity is the less effect price will have on volume. Exagerating the effect of last weeks total profit loss when reducing price.
The statistics we're about to display identify the dramatic difference between the US Food Industry and most other Industries.

You'll notice immediately while the rest of the products hover near -1 (Unitary Elastic) Food and Beverages have a rating of -0.084 That's a dramatically inelastic product set! This means that it takes a drastic pricing change to affect the consumption of the goods. So the majority of price you give away does not increase volume, it only trades less and less profitable market share.

So let's boil this down to "How does this affect my profit?"

We have plotted some rough areas on the chart below showing where Food Distributors(Red), Food Processors(Blue) and Hybrid Processor Distributors(Green) might fall based on percentage of profit and elasticity of product. This chart is a decision making tool provided by AC Neilson to help demonstrate the effect of pricing changes on profitability. Your company is probably inside one of those bubbles depending on your current pricing, product mix, and value added services.

What you'll notice is that Food Distributors and Processors almost always fall into the very top right corner of the graph and run a very high risk of losing profit by giving up price, and have a very good chance of increasing profit by increasing price. As long as these changes are made "within reason."

So how do I Think Inside the Box and Profit from This Information?

Recognize that it is very unlikely that you will ever win a profit for volume trade off.
If you are offered a "volume deal" hinge it on reduced variable and fixed costs
- Insist on automating Order Entry
- Agree to an Electronic Billing System
- Set up-front expectations for service and delivery
Remember that if the decision comes down to price the consumer is not buying /more/ because of your pricing he's buying from /you/ because of your pricing. Look for other ways to differentiate yourself from your competition besides price.