AN ANALYSIS OF ALTERNATIVE-MARKETING I PROGRAMS FOR THE TART CHERRY INDUSTRY Thesis for the Degree oI-Ph. D. MICHIGAN STATE UNIVERSITY Dennis Lee- Oldenstadf 19.64- THESIS This is to certify that the thesis entitled An Analysis of Alternative Marketing Programs for the Tart Cherry Industry presented by Dennis L . Oldenstadt has been accepted towards fulfillment of the requirements for Ph.D. degree in Agricultural Economics WA. W14. L. Boger) Major [my ssor Date May 20, 1964 LIBRARY Michigan State University . IIIIIIIIIIILIMIIIIZIUJIJ“LI u I 3 12 916 , 937’ MAY 1 920 x f , . / ‘ JAN 1 O 2006 ' p/w s7 NHL-1287 a” ‘ _ t. . I .. q '1'!” ”‘3 if)»; ‘fid F| j L," ABSTRACT AN ANALYSIS OF ALTERNATIVE MARKETING PROGRAMS FOR THE TART CHERRY INDUSTRY by Dennis Lee Oldenstadt Producers of several agricultural commodities are engaged in or considering joint-marketing programs as a means of increasing net revenue. There is a wide range of alternative programs to consider. The programs are complex and their potential costs and returns are often unknown. The general objective of this study is to categorize alterna- tive marketing programs into five groups according to where their influence registers in the supply and demand complex of the market. The specific objective is to then apply this framework to analyzing alternative marketing programs for the tart cherry industry. Price and income effects are measured to provide some estimates of the merits of the alternative marketing programs. An estimate of the demand for all processed tart cherries (excluding tart cherry pie filling) was made at the processor level and extended to the grower and retail levels by applying appropriate margin data. The factors affecting tart cherry supplies were discussed. Demand estimates were used as the basis for determining price and income effects of the alternative marketing programs. An expanded tart cherry promotion program was con- sidered as the first program affecting tart cherry demand. Dennis Lee Oldenstadt It was determined that an increase in per capita demand of .1 pound per capita (about the quantity of tart cherries in one piece of pie) would be expected to increase total annual revenue at retail by between one and three million dollars. The cost of meeting the promotional objective was not estimated, but net revenue would equal the difference between total returns and total costs of the program. New product develOpment programs and government purchases and diversion were considered for their effect on, the demand for tart cherries. Six alternative programs for affecting tart cherry supplies were considered. These include market information, quality control, vertical coordination, surplus disposal, surplus set-aside and market diversion. Reduction in tart cherry supplies available for market was found to have different results on price and revenue depending on the size of the total supply and the level of the market. The estimated price elasticity of demand was greater than one at the processor and retail levels indicating that supply control programs would reduce total revenue at these levels. The demand at the producer level, however, was found to have both an elastic and an in- elastic segment in the relevant range. This indicates that producers total revenue could be increased through supply control programs particularly if the potential crop and total supply were very large. It was estimated that if total supply was reduced from 351 million pounds to 33k Dennis Lee Oldenstadt million pounds total revenue available to producers would increase about 693 thousand dollars. The effect of price bargaining between the tart cherry growers group and processors was briefly considered along with a transportation model for their influence on reducing marketing costs. AN ANALYSIS OF ALTERNATIVE MARKETING PROGRAMS FOR THE TART CHERRY INDUSTRY By Dennis Lee Oldenstadt A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1964 ACKNOWLEDGMENTS The author is indebted to all those who provided specific suggestions for improvement of this study and to those who helped prepare the manuscript. Helpful and guiding suggestions from Professor Lawrence L. Boger materially aided in the organization and presentation of the study. His con- tinued interest in the economic aspects of the tart cherry industry made his contribution particularly valuable. The establishment of a favorable environment for conducting this research was due in large measure to the close working relationship which exists between the Michigan Agricultural Experiment Station, The Department of Agricul- tural Economics and the Horticultural CrOps Group of the Marketing Economics Division, Economic Research Service, U. S. Department of Agriculture. The typing of the original manuscript was well done by Miss Sylvia Hankanson of the secretarial staff, Depart- ment of Agricultural Economics. The final typing of the thesis resulted from the effort of Mrs. Shirley Decker and is hereby acknowledged. Finally the author wishes to give special recognition to his wife Jacqueline whose patience and quiet encourage- ment contributed to the completion of this work. ii TABLE OF CONTENTS ACKNOYJLEDGIVIENTS o o o o o o o o o o o o o o o o 0 LIST OF LIST OF Chapter I. II. TABLES O O O O O O O O O O O O O O O O O ILLUSTRATIOIQS. O O O O O O O O O O O O O IIQITRODUCTION 0 O O O O O O O O O O O O 0 Problems and Background. . . . . . . . Objective of This Thesis . . . . . . . Procedure. . . . . . . . . . . . . . . THEORETICAL FRAMEWORK OF ANALYSIS. . . . Elaboration of the Concept of Price Elasticity of Demand . . . . . . . . Programs That Affect Consumer Demand . Market deveIOpment programs. . . . . Product development programs . . . . Government purchase and diversion Programs 0 O O O O O O O O O O O 0 Programs That Affect The Supply. . . . Informational programs . . . . . . . Coordination arrangements affecting supply 0 O O O O O O O O O O C O 0 Marketing quotas . . . . . . . . . . Health and sanitary regulations. . . Grade and size regulating programs . Programs designed to promote orderly marketing. . . . . . . . . Programs That Affect Production Costs. Programs That Affect Marketing Costs . Direct Payments or Income Subsidization. . . . . . . . . . . . iii Page ii vi viii 10 10 12 13 20 20 21 21 22 22 23 2a 24 25 25 28 29 30 iv Chapter Page Industry Objectives. . . . . . . . . . . 30 III. TART CHERRY DEMAND AND SUPPLY. . . . . . . 32 Factors Affecting Tart Cherry Demand . . 32 Factors Affecting Tart Cherry Supply . . #4 Bearing tree numbers . . . . . . . . . HM Yield per tree 0 O O O O O O O O O O 0 1+8 IV. MARKETING PROGRAMS DESIGNED TO INFLUENCE TART CHERRY DEIIAND o o o o o o o o o o o 51 Market DevelOpment Programs. . . . . . . 51 Package design and size. . . . . . . . 55 PriCing. O O O O O O O O O O O O O O O 56 Merchandising assistance . . . . . . . 57 Product distribution . . . . . . . . . 59 Public relations . . . . . . . . . . . 59 Defining promotional objectives. . . . 60 Economic Feasibility . . . . . . . . . 61 Product Development. . . . . . . . . . . 72 The product mix. . . . . . . . . . . . 73 Location of markets. . . . . . . . . . 87 Government Purchase and Diversion Programs 0 o o o o o o o o o o o o o o 93 V. MARKETING PROGRAMS DESIGNED TO INFLUENCE TART CHERRY SUPPLIES . . . . . . . . . . 101 Market Information Sources and Needs . .' 101 Supply Control Programs. . . . . . . . . 106 Quality Control. . . . . . . . . . . 108 Contracting for supplies (vertical coordination). . . . . . . . . . . . 112 Surplus disposal (orchard destruction) . . . . . . . . . . . . 113 Supply Management Programs . . . . . . . 11H Surplus set-aside (pooling). . . . . . 115 Market diversion (price discrimination). . . . . . . . . . . 119 Page Chapter VI. PROGRAMS AFFECTING MARKETING COSTS . . . . 12” Price Bargaining . . . . . . . . . . . . 124 Other Cost Reducing Programs . . . . . . 129 Transportation cost reduction. . . . . 130 VII. SUMMARY AND CONCLUSIONS. . . . . . . . . . 135 BIBLIOGRAPHY O O O O O O O O O C O O O O O O O O 0 lug Table l. 3. 7. LIST OF TABLES Retail Prices of No. 303 Canned Water Packed Tart Cherries, Detroit, Pittsburgh and Portland, Quarterly, 1957-1961. . . . Estimated Effect on Price and Total Revenue When United States Per Capita Demand Increases One-Tenth Pound and When Processor-Retailer Margins Are a Constant 15 Cents Per Pound of Raw Product Equivalent. . . . . . . . . . . . . . . . Estimated Effect on Price and Total Revenue When United States Per Capita Demand Increases One-Tenth Pound and When Processor-Retailer Margins Are a Constant 50 Percent of Retail Price. . . . . . . . Proportion of Total Tart Cherry Pack Going into Frozen, Canned and Other Products, United States, 1938-1963. e o o o o o o 0 Movement of Retail Sized Canned Pie Filling and Water Packed Tart Cherries, 1951-1963 Frozen Tart Cherries: Sales to Institutions in Dollars and Pounds by States and Regions, Calendar 1961. . . . . . . . . . Frozen Tart Cherries: Regional Sales Volume to Institutional Purchasers, Converted to Regional Per Capita Volume, Calendar 1961. C O O O O O O O O O O O O O O O O 0 Frozen Tart Cherries: The Top 15 States in Institutional Sales Volume, Calendar 1961. O O O O O O O O O O C O O O O O O 0 vi Page H3 67 68 7a 85 88 90 91 Table 10. ll. 12. 13. 1”. vii United States Department of Agriculture Purchases of Canned Tart Cherries Under Section 6 and Section 32 Programs by Years, 1950-19630 0 o o o o o o o o o o o Tart Cherries: United States Production and U.S. Department of Agriculture Purchases as a Percent of Production, 1950-1963 . . Tart Cherries: Purchases by Federal Agencies, 1950-1962 e o o o o o o o o o o o o o o 0 Sources and Types of Tart Cherry Periodic Data Available in 196%. . . . . . . . . . Tart Cherries: Grower Prices, Total Revenue and Estimated Total Supply, United States. 0 O O O O O O O C O O O C O O O 0 Sources and Destinations of Frozen Tart Cherry Sales Volume to Institutional Buyers on a Minimum Transportation Cost Basis,1961............... Pace 96 98 99 103 110 132 Figure l. 2. 7. 8. LIST OF ILLUSTRATIONS Page A Hypothetical Demand Function. . . . . . 1H Hypothetical Consumer Demand and Derived Demand Under a Constant Absolute Mar‘kEting Margin. o o o o o o o o o a o 18 Supply and Demand Structure for Tart Cherries C O O O O O O O O O O O O O O O 33 Tart Cherries: Estimated Demand at the Processor Level, 19H7-1963 Data for the unitEd States 0 o o o o o o o o o o 35 Tart Cherry Prices and Total Annual Supply, Grower and Processor Levels, 1997-1963 Data for the United States. . 37 Tart Cherries: Estimated Demand at the Producers' Level, 19u7-1963 Data for the United States a o o o o o o o o o o 38 Tart Cherries: Estimated Demand at the Retail Level Under Constant Absolute and Constant Percentage Margin Assumptions, 19H7-1963 Data for the unitedStateSooooooooooooo ”1 Bearing Tart Cherry Tree Numbers, Great Lakes Producing States and Six Western Producing States, Interpolated Between Census Year Data for l9u0, 1950, 195% and 1959. O '0 O O C I O O C O O O O I O 1“5 Nonbearing Tart Cherry Tree Numbers, Great Lakes Producing States and Six Western Producing States Interpolated Between Census Year Data for 19H0, 1950, 195% and 1959 . . . . . . . . . . #7 viii ix Figure Page 10. Tart Cherries: Bearing Tree Numbers, 8- Year Moving Average Production and Production Per Tree, 19u0—1963 Data for the United States . . . . . . . . . . . . H9 11. Possible Combinations of Merchandising Assistants and Media Advertising With an Annual Expenditure of 150,000 DOllarS O O O O O O O O O O O O C O O O O O 58 12. Tart Cherries: Estimated Demand at Retail and Change in Demand of One-Tenth Pound Per Capita at All Prices When Processor- Retailer Margin is a Constant 15 Cents Per Pomd O O O O O O C C O O O O O C O C O 61+ 13. Tart Cherries: Estimated Demand at Retail and Change in Demand of One-Tenth Pound Per Capita at All Prices When Processor- Retailer Margin is a Constant 50 Percent of Retail Price . . . . . . . . . . . . . . 65 1a. Annual Pack of 30 Pound Frozen Tins of Tart Cherries, UoSo 1914'7-1963 o o o o o o o 76 15. Annual Pack of No. 303 Canned Water Packed Tart Cherries in Raw Product Equivalents, U. S., 1947-1963 . . . . . . . 77 16. Annual Pack of No. 10 Canned Water Packed Tart Cherries in Raw Product Equivalents, U.S., 1947-1963. . . . . . . . 78 17. Annual Pack of Canned Tart Cherry Pie Filling in Raw Product Equivalents, 1955-1963 e o o o o o o o o o o o o o o o o 80 18. Annual Pack of Retail Size Frozen Tart Cherries in Raw Product EQUivalentS, 1997-1953. e o o o o o o o o o 81 19. Annual Pack of 55 Gallon Barrels of Frozen Tart Cherries in Raw Product Equivalents ’ 19”,]-19630 O O O C O O O O O O 82 20. Annual Pack of Frozen Tart Cherries in No. 10 Cans and Other Package Sizes, 1997-1963 e o o o o o o o o o o o o o o o o 83 CHAPTER I INTRODUCTION Problems and Background Several commodity groups in the United States have reached a stage in the development of their industry where it has become necessary to integrate and rationalize the several programs, policies and actions currently underway or being pr0posed. Such is the case in the tart cherry industry in 196%. Tart cherry producers have undertaken self-help pro- .grams of organization, education and evaluation and have reached the point where further actions will require pro- gressively more complex analyses and intensive study. Each step in the decision-making process will require more informa- tion and discussion than previously when the programs and actions being considered were relatively uncomplicated and approPriate actions were more obvious. Of course a free market where producers do not attempt to influence demand or supply is a possible alternative to a more highly organized marketing program. This alternative is, in fact,currently being advocated by some members of the tart cherry industry. However, the more vocal or communicated point-of-view among growers appears to be toward studying 1 2 and evaluating more complex marketing programs. Several characteristics of the tart cherry industry are associated with the desire on the part of producers to consider more complex marketing arrangements. First is the nature of production which has fluctuated up and down from one year to the next precipitating wide swings in price and producers' income. Fluctuating production has created an un- stable carryover inventory in some years which adds to price instability. In other years of short supply, carryover in- ventories have been too small to adequately fill the marketing channels or so-called pipe-lines resulting in shortages in the markets. Fluctuations in production have also made it difficult to expand the foreign market for tart cherries. A foreign customer is reluctant to attempt a marketing program or to introduce a product line involving tart cherries unless he is assured a stable supply of high quality raw product. In years when production is up in the United States a foreign customer will have little trouble obtaining tart cherries but this is not true in years of short supply. Hence, as it has turned out, the foreign market must be partially redeveloped every other year when there is a need on the part of U. S. producers and processors to sell larger quantities of cherries .than the domestic market can absorb. Perhaps the most compelling reason why producers have been willing to consider more complex marketing programs is their realization that as individuals in the market they have absolutely no control over the price which will be received 3 for their tart cherry crop. Producers frequently express the fear or belief that if they don't take care of their own marketing problems someone else will and in a manner that will be unfavorable to producers. Another characteristic of the tart cherry industry is the apparent decline in demand for cherry products as a whole. After taking into account the effects of total supply on price over the period 1997-61, prices declined indicating a decline in demand. This tendency was much more pronounced during the period 19u7-55. Since 1955, prices have leveled off indicating that the declining demand has been at least partially arrested.1 Part of this more favorable situation since 1955 has undoubtedly been due to the development and acceptance of a new product, cherry pie filling, and the in- creased demand for frozen institutional packed tart cherries. Data indicate that cherry pie filling has increased from a raw product equivalent of 13 million pounds in 1955 to a record high #5 million pounds in 1962, Figure 17, p. 80. Nye reports cherry pie filling has been substituted for canned and frozen retail pack in the consumer's menu.2 In any event, despite a new and successful cherry product, the level of demand in the 1Dennis L. Oldenstadt, Economic Relationships In Red Tart Cherry Marketing, 1997-1962(Michigan State University, Departmentongricultur I Economics Mimeo. 925, June, 1963), p. u. 2Jerrold Nye, The Processor to Consumer Marketin Channels and Flows of Red Tart Cherries and Cherr Products (unpuEIisfied Master's {5e81s, Department of AgricuIturaI Econnmics, Michigan State University, East Lansing, Michigan, 1963 . a industry is not always high enough for price to cover production and harvesting costs and keep tart cherry production competitive with some alternative enterprises. Besides pie filling and a so far unprofitable attempt to market a jellied cherry sauce, no new cherry products have been forthcoming from the industry. The lack of new products has been a reflection of the difficulties of introducing a new food product plus the fact that few firms have seen fit to commit large amounts of risk capital to the development and promotion of new products. The advent of new dehydration processes has, so far, not offered processors the incentive to market tart cherries in this form. Although the Great Lakes Producers Marketing Cooperative is experimenting with individually quick frozen cherries in a retail pack, it has yet to be fully market tested. Thus the industry has not had a range of new products with which to meet changing consumer tastes and preferences as have some other commodity_groups. The main marketing group efforts have been in the ad- vertising and price bargaining areas. New York and Wisconsin producers collect monies for advertising and promotion under State Marketing orders. Michigan, the largest producing state, Operates an advertising and promotion program under a state legislative act which has established the Michigan Cherry Commission to administer collected funds. Pennsylvania and Ohio growers have voluntary programs for collecting promo- tional funds. Price bargaining has been conducted by the Great Lakes Producers Marketing Cooperative since 1958. Their stated objective is to raise grower price but they also attempt 5 to arrive at a realistic price based on supply and demand conditions existing in the market. Their bargaining effort is put forth before each harvesting season, and price offers are announced by telegram to processors usually during the third week in June. The bargaining cOOperative operates in the five states of Michigan, New York, Pennsylvania, Ohio and Wisconsin. Their membership is composed of about zuoo out of an estimated 6500 growers and is strictly voluntary. Member- ship is formalized by a grower contract which gives the co- 0perative exclusive rights to sell members' tart cherries. Members preference processors by written notice to the board of directors of the bargaining cooperative. This preference scheme provides a service to processors for which the coopera- tive receives a fee. Voluntary assessments are collected by processors and are returned to the c00perative. The coopera- tive members produce from #0 to 60 percent of the total annual volume of tart cherries. The producers' cooperative marketing program has evolved from price bargaining into other areas. In 1961, it engaged in a marketing program with the objective of intro- ducing frozen tart cherries into EurOpe. This program was continued in 1962, a bumper crop year, and to a lesser degree in 1963, a year of extremely short supply. In 1963 the Great Lakes Producers Marketing CooPera- tive contracted with a Michigan vegetable freezer to produce individually quick frozen (I.Q.F.) cherries for export. And they have been developing a retail pack to market I.Q.F. cherries domestically. This product is being market tested (IKIII(IIIIIIII(IIIIIII‘(IIII‘III in 1964. The structure of thetart cherry processing industry is relevant to a discussion of alternative marketing programs for the tart cherry industry. The National Canners Guide lists 77 processors in the country who engage in tart cherry canning.l There are approximately 30 processors of frozen tart cherries. These 107 processors handle approximately 95 percent of the annual production, the remainder being used in fresh form. There are several established national brands being marketed as well as local or regional brand distribu- tion. The processors can be categorized into two groups according to their distribution policies. Some market their July and August pack throughout the remainder of the year while some process and sell immediately at harvest time usually packing only those amounts for which they have orders. Those in the formergroup carry a line of products on a 12- month basis and they are interested in seeing a stable market at harvest time with prices rising throughout the remainder of the year to reflect storage and handling costs. Proc- essors selling at harvest time hape to cover their raw product and processing costs and realize a quick turnover profit. In most years less than one-third of the pack is sold during harvest time or by the end of August. There is no apparent barrier to entry into the tart 1Canners Directory 1963-69, National Canners Associa- tion, Washinngn, D. C., l . 7 cherry processing business as evidenced by the growth in numbers of processing firms over the past 17 years.1 A recent trend toward the consolidation of processing firms may, however, make entry of new firms more difficult since they would have to compete against well entrenched, full line processors with established consumer brands for the retail shelf and freezer cabinet Space. About one-half of the annual tart cherry crop is frozen in institutional sized 30 pound tins. This form of processing is easy to enter since capital requirements are not large and no brand promotion is necessary in the institutional market. The location of tart cherry processing plants has in the past been determined largely by the location of produc— tion. This was dictated by the perishability of freshly picked tart cherries and the deterioration of quality due to transportation and handling. More recently, however, tart cherries are increasingly being handled and hauled in water making transportation over longer distances feasible. Trans- portation of finished or processed tart cherries over long distances is not restricted by perishability and quality deterioration. Hence, processed tart cherry products can be moved from one region to another subject only to the economic I limitations of increased transportation costs for shipping greater distances. 1Dennis Oldenstadt, "The Tart Cherry Processing In- dustry: Some Historical and Regional Aspects," 1962 Annual Progress Report (Great Lakes Cherry Producers Marketing CEop, Inc., May, 1962). 8 Ease of interregional marketing has been largely responsible for the fact that processors generally must con- tend with the competition or threat of competition from processors in other regions as well as from those nearby. For this reason, they tend to be much more concerned with competition from other processors than with the bargaining efforts of producers. In actual practice a successful bar- 'gaining effort by producers can benefit processors. If the bargained price truly reflects supply and demand conditions, the regional stability in price within a given year provided by bargaining lessens the threat of other processors gaining a price advantage in procurement. The competitive threat then arises only from the cost reducing processing and market- ing efficiencies of neighboring processors and not from their ability to procure the raw product at a lower price. For these reasons many processors have reacted positively toward the establishment and activity of the price bargaining pro- ducers' cOOperative. This favorable reaction is perhaps most noticeable among the processors who are in the market on a twelve month basis. Those who pack and sell at pack time are more interested in purchasing tart cherries for the smallest possible price unencumbered by the bargaining effort. Because of their practice of processing only those amounts for which they have orders they naturally have less to fear from neighboring processors. The processors who market over a twelve month period bear the brunt of post harvest price declines or reap the 9 fruits of post harvest price advances. There is no typical pattern of prices for processed cherries over the marketing year. Prices developing over the year appear to be heavily dependent upon the movement of tart cherries early in the marketing season (July through September). If the large buyers believe Opening prices of the products are higher than warranted, they are prone to buy on a so-called hand-to- mouth basis under the assumption that prices will come down. Their very action of withholding from the market may precipitate a price decline. Processors holding tart cherry products often cannot recover their storage and handling costs since financing arrangements and product keeping characteristics dictate that most of the products be sold by the end of the marketing season, 12 months after they are packed. This risk is hope- fully offset by the financial gains available in those years when large buyers purchase most of their requirements early in the season and prices increase throughout the year as de- mand exceeds available storage stocks. In either case it is the processing sector which provides most of the storage and risk capital to even out the flow of cherry products through- out the marketing year. Even in years when wholesale and retail buyers commit themselves to heavy early season pur- chases, a purchase arrangement is usually consummated which makes deliveries "subject to buyers approval of price" (S.A.P.). This permits buyers to shift storage costs to processors providing them with an avenue of escape from their purchase commitments if they choose to exercise their I;r.l‘\.[l|' ( [II-I. llllll‘ ‘ 10 prerogative. Fluctuating production and carryover of tart cherries, wide shifts in prices and net incomes, the difficulties of expanding markets, a changing demand structure for tart cherry products and other structural and competitive aspects of the industry discussed above have been associated with depressed prices and incomes to tart cherry producers to the extent that new tart cherry tree plantings have declined in recent years. These are the problems which producers are attempting to offset with marketing programs. Objectives of This Thesis The problems outlined above provided the motivation for this study. The general objective is to provide analytical guidelines which can be used by agricultural commodity market- ing groups in program and policy formation and evaluation. While this study was developed specifically for the tart cherry industry, the framework of analysis and analytical techniques are generally applicable to other agricultural marketing situations and commodities. The specific objective is to categorize and study alternative marketing programs for the tart cherry industry employing a demand and supply analysis of the industry. The various marketing programs will be evaluated for their poten- tial effects on prices and net revenue to the industry. Procedure A theoretical discussion of potential marketing 11 programs is presented in Chapter 2. This discussion will categorize marketing programs according to where their in- fluence falls in the supply and demand complex of the market. Chapter 3 is devoted to a discussion of the demand and supply structure of the tart cherry industry and forms the basis for the analysis of alternative marketing programs which follows. Programs affecting tart cherry demand are discussed and evaluated in Chapter u. Market development, new products, the product mix, the geographical location of the frozen institutional tart cherry market and government purchase and diversion are categorized as demand stimulating programs. Data are developed which measures the price and income effects of increasing tart cherry demand. Chapter 5 provides an analysis of alternative market- ing programs affecting the supply of tart cherries. Market information, supply control and supply management or orderly marketing procedures are considered. The effectiveness of these programs is measured by determining the price and income effects of these programs at the producer level. Costs of the alternative programs are considered when relevant data are available. Programs affecting marketing costs are discussed in Chapter 6. Two programs are considered for their effects on marketing costs: Price bargaining and minimization of trans- portation costs for marketing frozen institutional tart cherries. Chapter 7 is a summary of the study. CHAPTER II THEORETICAL FRAMEWORK OF ANALYSIS Economic analysis of alternative marketing programs may be viewed as an attempt to determine the economic impact of the programs as measured by changes in prices and net revenue. One of the most useful methods to employ in evaluat- ing potential marketing programs is the analytical problem approach based on supply and demand analysis.l Estimates of the price elasticity of demand obtained from a statistical demand function can be used to determine the effectiveness of alternative programs in increasing price and revenue to the industry. Several aspects of price elas- ticity of demand are reviewed in the following section. This discussion is particularly relevant to the analysis of alternative tart cherry marketing programs which follows since the estimated demand relation at the producer level has both an inelastic and an elastic segment within the relevant range over which supply moves from one year to the next. The esti- mated demand functions at the processing and retail levels, on the other hand, are both elastic over the entire range. 1For a discussion of alternative approaches see: Geoffrey Shepherd, "The Analytical Problem Approach to Market- ing," Journal of Marketing, (Vol. 20, October 1955), pp. 1 3-177. 12 l3 Elaboration of the Concept of Price Elasticity of Demand Under very restrictive conditions when the demand curve is a rectangular hyperbola, the price elasticity of demand is constant over the entire range of quantity and price. When this is true, total revenue is constant over the entire range of quantity and price since changes in quantity will be offset by cpposite changes in price to the extent that price multiplied by quantity is equal at all points on the demand curve. The more usual situation is for the price elasticity of demand and total revenue to be different at different points on the demand curve. Figure 1 presents a hypothetical linear demand function from which the price elasticity of demand can be determined at two points B and C. Joan Robin- son, following Alfred Marshall's treatment, has shown that the elasticity at the point B on a linear demand function can be found as follows:1 EB=AB ED Similarly the price elasticity of demand at C in Figure 1 is: If the demand curve is not a straight line, the elasticity can be determined at any point by drawing a straight-line tangent to the point, extending it to both axes and computing elasticity as shown above. From the above definition of price 1Joan Robinson, The Economics of Imperfect Competition (London: Macmillan Company, Ltd., 1959), pp. 35-36. 1“ Price A Quantity Fig. l.--A hypothetical demand function 15 elasticity of demand, it is possible to compute these measures at various points along a specific demand curve. The price elasticity of demand for a particular commodity can be less than one over one segment of the demand curve and greater than one over another or it can be entirely elastic or inelastic. If a demand function has both an elastic and an inelastic segment there is one point on the demand line where the price elasticity of demand is exactly one. In the inelastic segment of a demand curve a reduction in quantity supplied at a higher price will be associated with a decrease in total revenue. Net revenue at any point is the difference between total revenue and total costs. Thus, to increase total and net revenue, a constant cost industry having both an elastic and an inelastic demand seg- ment would strive to move toward the point of unit price elasticity.1 In actual cases the demand curve at the retail level is probably neither a straight-line nor a monotonic increas- ing or decreasing function. Thomsen and Foote have indicated that demand curves for agricultural products probably turn up at high prices and down at low prices.2 1If average revenue declines more rapidly than average total costs as output increases net revenue will increase with movement toward the point of unitary elasticity. Net revenue would be maximized when industry output was at the point where marginal revenue and marginal costs were equal. 2Fredrick L. Thomsen and Richard J. Foote, Agricul- tural Prices (2d ed; New York: McGraw Hill Book Co., Inc., ’ p. O 16 This would indicate that at very high prices only a small number of buyers would be willing to make purchases. The fact that these buyers do not seek alternative products in this price range means that demand is inelastic in this extreme. Similarly the non-linear demand curve discussed by Thomsen and Foote means that at very low prices buyers would not be willing to purchase very much more of the product even if prices goes very low. Here the market is saturated in that buyers are no longer willing to give up any more substitute products for more of the low priced commodity. In between the two extremes, the price elasticity of demand may be relatively elastic or inelastic depending on the number of substitutes and the proportion of consumer incomes spent on the product. This phenomenon may explain why a bumper crop of some fruits and vegetables cannot be easily moved into consumers' hands even though price is lowered by a considerable amount. The shape and level of the demand curve is very important when considering appropriate policy to follow in a controlled market. Program costs are also important. For example, a supply restriction program may actually reduce net revenue if it is put into operation when price and quantity are in the elastic portion of a demand curve or if program costs exceed returns. Another important consideration is the shape of the demand curves at different levels of the market. The demand curve at the retail level is a reflection of the willingness 17 of ultimate consumers to purchase the product. There are, however, still other demand curves for the commodity that are derived from the ultimate consumer demand. Just as re- tailers face the consumer demand situation in the market, wholesalers face the retailer demand and processors face the wholesaler demand. Similarly, producers face the demand created by processors seeking to process those quantities which will enable to fill orders from wholesalers. The de- mand schedules below the consumer demand level are called derived demand schedules, because they are derived from the ultimate consumers' willingness to buy a product. In the long run, it is expected that the difference between demand curves or schedules at any two levels will equal the per unit cost of the services provided by that seg- ment. That is, the difference between the consumer demand and retailer demand curves should equal the per unit cost of the retailing function. The important consideration to be explored is the shape and price elasticities of the various demand and derived demand curves. The question to be raised in this context is, will a marketing program which affects the supply or demand curves be acceptable to all the market participants or is it possible that one group would benefit from such programs while another group would suffer? Let us assume that a linear demand function prevails at the consumer level, that per unit costs of wholesaling and retailing are constant over the full range of output and that the retail margin is a constant absolute amount. The consumer demand and the retailer derived demand curves are shown in Figure 2. 18 Price Derived demand D \ B Consumer demand q C C' 1 Quan ity Fig. 2.--Hypothetical consumer demand and derived demand under a constant absolute marketing margin. 19 Assuming that the supply function is perfectly in- elastic at ql, the price elasticity of demand on the retailer derived demand curve at point A is less than that at point B on the consumer demand curve. This can be proven by the use of the line segment formulas discussed above sincel AC BC' ADHmH 90mmooono cam mesonw .haoasm Hmsccm arrow new moOfino unnoco unment.m .mwm Amazon and mpcoov oowmm Grower price (cents per pound) 38 ll 1:1 112 1.3 1.u 1.5 1.6 1:7 1:8 1:9 2fo 2.1 Total supply (or movement) of tart cherries (pounds per capita) Fig. 6.--Tart cherries: Estimated demand at the producers' level, 1907-63 data for the United States. 39 For purposes of comparison, the demand relationship estimated by Dennis is represented in Figure 6 as the broken line.1 His analysis used per capita movement rather than per capita total supply as the quantity variable, which is smaller than total supply by the amount of inventory carried at the end of season. The points of unitary elasticity on both de- mand relationships are shown and will be referred to in more detail later in this study. The demand at retail can be estimated from the demand relation Obtained at the processor level by applying apprOpri- ate processor-retailer margin relationships. Since adequate data are not available on retail prices, two assumptions are made about the nature Of the processor-retailer margins and their results are compared. The first assumption is that the processor-retailer margin is a constant 15 cents per pound. This links processor and retail prices together by the formula:2 Pr = 15 + PP where Pr = retail price in cents per pound Pp = processor price in cents per pound. 1C. C. Dennis, Long-Run Equilibrium in Tart Cherry Production (Michigan Agricultural Experiment Station Bulletin No. 29, I963), p. 14. 2 . . . . For an excellent d1scuss1on of market1ng marg1ns see: Sidney Hoos, Prices and Marketin Mar ins for Fruits and Vegetables: 2 Weekly Pr1ces and Retail Margins - Small Médium and Lar e Stores, Orangesz Lemons, and Grapefruit, Denver, August ISEI- u y . a 1 ornia gr1cultural Experiment Station, Gianfiini Foundation of Agricultural Economics, Mimeo No. 170, Sept. 195“), pp. 123-1u1. 40 The retail demand function obtained under this assumption is: Is Pr = (21.39 * 15) - H.732 T.S. or‘P; = 36.39 - 9.732 T.S. /\ where Pr is the estimated price of tart cherries at retail and T.S. is the annual per capita total supply of tart cherries. The retail demand relation under the constant absolute margin assumption of 15 cents is shown by the solid line in Figure 7. The second assumption is that the processor-retailer margin is a constant percentage margin of 50 percent of re- tail price. The relationship between prices at the processor and retail levels is given by the following formula:1 Pr = Pp I=K9 where Pr and Pp are the same as above and K = the percentage margin as a percent of retail price. The demand function Obtained under the assumption of a constant percentage margin of .5 is: /\ Pr = 21039 - ”0732 T080 :5 92.8 - 9.969 T.S., where all variables are as defined above. The retail demand relation under the constant percentage margin is shown by the dotted line in Figure 7. The margin assumptions (a constant absolute amount and a constant 50 percent Of retail price) were made partly lIbid., p. 129. H1 33 r 32 V\ 3 \ m ‘\ $4 31 t u... o O . cr~ 30 5+: 8.5 Constant absolute ,3; 29' argin of 15 cents 3.: . s \ H 0 28 ’ ~\ 0.. '\ 3 3 . 0}; 27 0;. \. -ac1 g 26 r \ \ r: \ 3 25 ' \ o Constant percentage \ ‘1‘ margin of 50 percent of\ 29’ retail prices ‘\ \. 23 ‘ ‘ t ‘ ‘ *’ 4 ‘ 7* 1.2 1.3 1.9 1.5 1.6 1.7 1.8 1.9 2.0 2.1 Total supply of tart cherries. (Pounds per capita) Fig. 7.--Tart cherries: Estimated demand at the retail level, under constant absolute and constant percentage margin assumptions, 1997-63 data for the United States. H2 on the basis Of the following data showing retail prices of tart cherries for three cities, by quarters over the period 1957-1961. Weighted average processor price of No. 10 and 303 canned and 30 pound frozen for the period 1957-61 was about 1“ cents. Average retail prices for the same period for October were: Detroit 29.6, Pittsburgh 26.2 and Portland 26.6 for an overall average Of about 26 cents. This indicates an overall margin for canned No. 303 tart cherries of 12 cents per pound equivalent since one can of NO. 303 water packed tart cherries contains about one pound of tart cherry raw product equivalent.l Other products such as tart cherry pies, and tart cherry pie filling sell for even higher prices rais- ing the average margin to at least 15 cents. Thus given the data on retail and processor prices, a 15 cent absolute mar- gin and a 50 percent relative margin appear realistic. The above demand estimates will t>e used throughout Chapter H. Program alternatives will be formulated and their influence on demand will be estimated. The differences be- tween price, quantity and total revenue will then be computed to give an indication of the economic feasibility or to indicate potential changes in price and total returns(or net returns when cost data are available) of the alternative marketing program. 1Conversion Factors and Wei hts and Measures for Agricultural Commodities and Their roducts (Production and Marketing Administration, U. S. Department of Agriculture, May 1952), p. 61. 43 TABLE l.--Retail prices of No. 303 canned water packed tart cherries, Detroit, Pittsburgh and Portland, quarterly, 1957- 1961 City January April July October 1957: Detroit 1 24.9 24.5 23.8 Pittsburgh El, 2 / 25. s 2 3.9 Portland _1 2y 2] 24.6 1958: Detroit 25.1 24.3 24.6 25.9 Pittsburgh 23.0 28.4 26.9 25.7 Portland 25.9 25.7 25.2 26.5 1959: Detroit 25.9 26.2 26.5 24.5 Pittsburgh 29.5 27.6 27.9 28.3 Portland 27.7 28.2 28.3 27.4 1960: Detroit 24.4 23.6 22.8 24.4 Pittsburgh 25.0 25.8 25.3 26.8 Portland 27.2 26.4 26.6 27.7 1961: Detroit 25.5 26.1 Pittsburgh 27.9 24.5 Portland 29.2 28.8 %/ BLS prices revised in February 1957 _j Insufficient number of quotations Source: Bureau of Labor Statistics data collected by Loyd Martin, Leader Horticultural CrOps Section, Economic Research Service, U. S. Department Of Agriculture. 41+ Factors Affecting Tart Cherry Supply The supply Of tart cherries is determined by two main factors: bearing tree numbers and yield per tree. The number of bearing trees depends largely on prices for tart cherries that existed 6-25 years previously when new trees were set out and, to a lesser extent, on producers expecta- tions about future tart cherry prices at that time. Costs and returns from production of tart cherries relative to other crOp or livestock alternatives also have a bearing on _ decisions to plant cherry trees. The yield per tree depends primarily on weather condi- tions during the spring months when trees are in the bud and bloom stages. But other factors such as the age of tree, cultural and management practices in the orchards and avail- able technology also play a role in affecting yields. These forces affecting available supplies of tart cherries were diagrammed in Figure 3. Bearing tree numbers.--Tart cherry trees come into production 6 to 8 years after being planted and continue to bear fruit about 25 years. The Bureau of the Census tabulates numbers Of bearing and nonbearing tart cherry trees in census years.1 Data are available for census years 1940, 1950, 1954 and 1959 and are tabulated for 11 principal producing states. Figure 8 traces bearing tree numbers for the 5 Great Lakes producing states and the 6 Western producing states of 1Reported by U. S. Department of Agriculture, Agri- cultural Marketing Service, Fruit and Vegetable Division, Unpublished Work Sheets, 1964. 45 Bearing tree numbers (1000) 6000r 5500 Total U.S. 5000 6 WesterH'State 4500‘ Ohio Penn. 4000 Wise. 3500 3000 New York 2500 1500’ 1000; 500 D p b 1940 1950 1954 1959 Fig. 8.--Bearing tart cherry tree numbers, Great Lakes producing states and six Western producing states, interpolated between census year data for 1940, 1950, 1954 and 1959. 46 Washington, Oregon, Colorado, Utah, Idaho and Montana. Wisconsin growers have increased bearing tree numbers only slightly. New York and Pennsylvania bearing tree num- bers have remained about the same over the 20 year period while Ohio and the six Western states combined have experi- enced declining bearing tree numbers. Only Michigan has shown a definite upward trend in bearing tree numbers over the period Spanned by census data. Bearing tree numbers in Michigan climbed from less than 2 million in 1940 to slightly more than 3.3 million in 1959, a 65 percent increase. Michigan accounted for two-fifths of the total in 1940 but climbed to three-fifths of the total by 1959. The nonbearing tart cherry tree numbers are also tabu- lated by the Bureau of the Census. These figures reflect normal replacement of Old trees and give an indication of increases and decreases in tart cherry tree numbers by states. Figure 9 shows a state breakdown of nonbearing tart cherry tree numbers for census years. The most interesting feature of Figure 9 is that non- bearing tree numbers fell Off drastically in 1959 indicat- ing a decline in new plantings. Prices of tart cherries since 1959 probably have not been favorable enough to alter the downward trend in nonbearing tree numbers. At least one-twenty-fifth of the bearing trees must be replaced each year in order to maintain tree numbers over the long run. Since there are approximately 6 million bearing No 47 nbearing tree no 0 (100,000) 20 19 18 17 16 15 14 13 12 11 10 (D 1 PM“) #0103 use 940 1950 1954 1959 Fig. 9.--Nonbearing tart cherry tree numbers, Great Lakes producing states and six Western producing states interpolated between census year data for 1940, 1950, 1954 and 1959. 48 trees, at least 240,000 new trees must be planted each year just for maintenance purposes. In actual practice an even greater number of trees may be required for maintenance since considerable numbers are lost because of disease, in- sects, pests and winter damage. In addition to orchard maintenance, population in- creases mean that larger quantities of tart cherries are required annually assuming per capita demand of about 1.4 pounds is maintained. An annual pOpulation increase of about 3 million people and an average production per tree of 42 pounds means that about 100,000 extra trees are required each year just to keep up with pOpulation growth. Still another factor has a bearing on needed tree numbers. Figure 10 shows the trend in production per tree has declined from a peak in 1953 of 50 pounds per bearing tree to about 40 pounds per tree in 1963. If yield per tree continues to decline, still more trees will have to be brought into production in order to maintain supplies at the current level. Declining numbers of nonbearing trees, lower yield per bearing tree, the limited life of the trees and popula- tion pressure may eventually lead to shortages and higher prices. Yield per tree.--The yield of tart cherries per bear- ing tree is the second factor along with the number of trees which influences production or supply of fruit in a given year. Figure 10 also traces the movement of yield per tree Tree nos. Production (millions) 49 (million lbs.) ” 6r ’1’ . 320 Bearing . 300 Trees 5. . 280 8 yr. moving 7" a e. prodn. ->’ . 260 u b . 240 . 220 3+ I200 . 180 2 160 Pounds per tree 50 , us. us. 44L 42 . Prodn. per in pounds. ree 40 . 38 , 36 A - A A A A A A .A # 44 46 48 50 52 54 56 58 60 62 64 Fig. 10.--Tart cherries: Bearing tree numbers, 8-year moving average production and production per tree, 1940-1963 for the United States. 50 over the period 1946-1963. These annual estimates were ob- tained as follows: Bearing tart cherry tree numbers were ob- ‘tained for the census years as in Figure 8 and interpolated between census years to obtain annual estimates of tree num- bers. Then an eight-year moving average of total U. S. pro- duction of tart cherries was computed for each year. This average total production figure was divided by estimates of bearing tree numbersto‘obtain annual estimates of yield per tree. The most notable feature of these yield estimates is that they have not trended upward over the past several years as might have been expected with the advent of improved spray materials, fertilization and cultural practices. The effect of these technological innovations apparently reached its peak in the 1953 to 1955 period. Since that time the data show a fairly continuous downward trend in yield per tree. Whether this phenomenon is caused from the cyclical nature of weather and production, from a growth in tart cherry diseases despite improved chemicals or from an increase in age of bearing trees has not been investigated. CHAPTER IV MARKETING PROGRAMS DESIGNED TO INFLUENCE TART CHERRY DEMAND Market Development Programs A market development program includes finding new uses for old products and locating and opening markets both domestic and foreign where tart cherries are not currently available.1 Promotion may be aimed at creating or forming a favor- able image of a new product through informing consumers of the advantages (real or imagined) of the product. For es- tablished products, promotion may be aimed at improving or changing the image consumers have of the product. A wide range of factors must be jointly considered in formulating a promotion program including package design and size, pricing, merchandising techniques and assistance, product distribution procedures, advertising, and public relations of all types. It is unrealistic to formulate a mass advertising program unless the industry can assure ade-. quate distribution and merchandising to complement the ad- vertising. And it is unrealistic to formulate a mass 1 . . Frederick V. Waugh (ed.), Readings on Agricultural Marketing (Ames: The Iowa State College Press, 1954), p. 414. 51 52 advertising program for a product that is inadequate with regard to quantity, package size and price. Advertising program planners must make decisions about the types of media that will be most effective and about the extent of the advertising, whether it should be national, regional or local in scope. Newspapers, for example, usually have lower rates for local advertisements than for national advertisements. There is considerable variation between the costs and returns of an advertisement on radio and on tele- vision and other media. Tart cherries are promoted as a commodity by several states and a national organization. In addition, consider- able brand promotion is conducted by processors and food brokers. The National Red Cherry Institute has been estab- lished to conduct national promotion of the commodity. State marketing orders are in effect in New York and Wisconsin to collect promotional funds. Michigan has a state law which has established a Cherry Commission to collect funds on a check off basis. Pennsylvania and Ohio have voluntary pro- .grams whereby growers contribute two dollars per ton for pro- motion of their tart cherries. These programs tie collections and contributions to production which is variable. In an average year, however, about 250,000 dollars is available for commodity advertising and promotion. This amounts to between one-half and one percent of the producer value of the tart cherry crop. In addition it is estimated that at least 250,000 53 dollars is spent annually by tart cherry processors for brand promotion. This amount of funds is not tied closely to production. In the past two years heavy promotional programs have been undertaken by three large processors of cherry pie filling. Two are attempting to establish national distribution of their brands by promotional activities and advertising. Large sums of money were spent in 1959, 1960 and 1961 to deve10p a market for jellied cherry sauce, a new product that has not been readily accepted by consumers. A variety of advertising programs are in effect. Since at least half of the annual cherry pack is for the institutional market, a large part of the advertising is aimed at pie bakers, preserve manufacturers, candy makers and other institutional users. These programs attempt to push tart cherries through the marketing channels to con- sumers. Trade magazines receive a lot of this advertising business. Most of the brand advertising and promotion is de- signed to "pull" tart cherries through the market by develop- ing a favorable consumer image of the product. Point-of- purchase material is widely used as well as newspapers and magazines. Place mats are available for restaurant use. Most of the emphasis is on media advertising.1 1The 1962-63 budget of the National Red Cherry Insti- tute listed $108,000 for institutional and trade advertising, $52,000 for consumer food publicity and tie-in advertising, $37,000 for recipes and National Red Cherry Recipe Contest and $53,000 for operating expenses and reserve fundin , for a total of $250,000. Data obtained from Ted Stebb‘ 3, Secretary, Michigan Cherry Commission, Grand Rapids, Michigan. 50 Some effort is aimed at improving retail merchandising by the use of field personnel. But this activity is expensive and not readily accepted by large retail chains who have merchandising specialists and policies of their own. When formulating an advertising program the industry must consider potential benefits and costs of alternative methods of affecting consumers' images of the products. It must also take into consideration the institutional inertia which might inhibit the adoption of new ideas to bring about favorable changes in how consumers view a product. For purposes of this discussion only the commodity (as opposed to brand) promotion will be considered. No attempt will be made to evaluate the promotional programs of the various tart cherry packers. Historically the National Red Tart Institute's funds have been spent for commodity rather rather than brand promotion since no differentiation of product between states and regions of production is possible or realis- tic. Thus, New York promotion can benefit Pennsylvania growers and processors, Michigan promotion can benefit the New York and Pennsylvania industries and so on. One alternative program which should be considered by the industry is to expand the direct merchandising assistance available from the National Red Cherry Institute and also strengthen the state programs in supporting promotional activities such as product and package design and size, pric- ing, development of improved merchandising techniques, product distribution schemes, public relations and defining promotional objectives. These supporting promotional functions can 55 probably be most effectively operated at the state level since the public agencies and institutions able to assist in these programs are more available to the state organizations than to a national group. Financial grants and close liaison between the public institutions and the secretary-managers of the state associations could be very conducive to the success of supporting programs such as those discussed here. The cost of redirected state programs would not necessarily have to be substantially increased over current levels since state promotional organizations are already in operation in the major producing states. It would, however, involve some reorganization of current efforts and activities of some state promotional activities. The state promotional organizations are perhaps in a favorable position to develop supporting promotional pro- 'grams along the following lines. Package design and size.--The basic retail sized canned tart cherry product is the number 303 water packed can. This product has declined in popularity since it re- placed the number 2 canas the predominant retail canned pack in the 1950 to 1956 period. Two and one-third million cases were packed in 1955. The pack has declined since then so that even in the bumper croP year of 1962 only slightly more than 2 million cases were packed.1 This decline in retail canned pack occurred deepite the general increases in 1Oldenstadt, o . cit., Economic Relationships in Red Tart Cherry Marketing 947-1962, p. 26. 56 population and consumer disposable income which occurred during the same period. Part of this decline reflects the growth in pOpularity of canned pie filling which has occurred since 1955 and part of the decline undoubtedly resulted from the wide range of improved substitute dessert items now available. The number 2 can contains approximately 20 ounces of product on a net weight basis while the number 303 can contains approximately 16 ounces. The question of the adequacy of the smaller can for household use should be explored. Do some consumers find the 16 ounce 303 can too small to make a satisfactory pie? Or are tart cherries packed in water too difficult to use in this form? Perhaps if these questions could have been adequately raised and answered before the can size was changed processors would have resisted the use of the smaller can size. State promotion groups should be encouraged to ex- plore alternative package designs and assist in bringing about necessary changes. Personnel in the packaging schools at the university level could be consulted and market tests made of alternative label designs and colors. Pricing.--There is a relationship between product price and movement of tart cherry products at retail. Allega- tions have been made that retailers often do not pass on price decreases to consumers thereby inhibiting product move- ment through the marketing channels at times when supplies 1 . . are larger than normal. Part of this problem 18 related to 1The Canning Trade, Magazine, December 17-24, 1962, p. 5. 57 the characteristic lag in price movements at the retail level. Hence a relevant question is not whether this lag should occur but how the price adjustment can be accelerated. A retailer will be encouraged to make a downward price adjustment if his nearest competitor has previously done so and his sales are falling off. But a retailer might also be willing to make a price adjustment in the absence of price competition if he is informed of the supply situation and the desirability of not having a large year-end carryover. Strong commodity pro- motion organizations at the state level could provide valu- able assistance by helping to inform retailers of the need for such price adjustments. Merchandising assistance.--There is undoubtedly some favorable relationship between advertising and merchandising assistance by direct contact with the trade. In general, promotional activities would be combined so that the ratios of their marginal value products to their prices would be equal to each other and equal to one. But data on these ratios are not available. It is possible, however, to indi— cate what combinations of advertising and direct merchandising assistance are possible given the total funds available and assuming that it costs 15,000 dollars per year to keep a field man on the job. Figure 11 shows the number of fieldmen on the vertical axis and the money Spent on media advertising on the horizontal axis. If the total annual available fund at the national level is 150,000 dollars, this could all be used to buy media advertising at point A or would support ten field men or merchandising assistants at point B. A line Number of Fieldmen 58 A A 30 60 90 120 150 Expenditures on media advertising (1000 dollars) Fig. ll.--Possible combinations of merchandising assistants and media advertising with an annual expenditure of 150,000 dollars. 59 drawn between these two points on the axes shows all possible combinations of media advertising expenditures and merchandis- ing assistants. The economic choice criterion for selecting the optimum combination given the fund restriction would be the point at which the line in Figure 11 was tangent to the highest possible line on a superimposed product transforma- tion map. While such a map is not available, it seems reasonable to suggest that some combination of merchandising assistance and media advertising would be more desirable than all of one or the other. Product distribution.--An advertising program in a particular market is wasted if the product distribution to that market is inadequate. State promotional organizations for tart cherries can serve a very useful function if they work closely with processors to inform them where and when an advertising program will occur and help to insure adequate stocks and merchandising schemes in the markets being served. Coordination of commodity and brand advertising can also be improved by a closer working arrangement between brand ad- vertising agencies and the state promotional organizations. Obviously this coordination should also occur between the National Red Cherry Institute and the processors and the ad- vertising agencies serving them. Public relations.--A significant contribution to the tart cherry industry could arise through a well planned and executed public relations program. This area of emphasis could be expanded by the state promotion organizations. Food 60 editors of magazines and newspapers could be contacted periodically and provided with recipes and information on new products, the pack and harvest situation and other relevant information about the tart cherry industry. The importance of the tart cherry industry to the states and nation should continually be reemphasized. The results of market tests and experiments should be made available to news media. Even the technical aSpects and developments of tart cherry production and harvesting can be used in a strong public re- lations program. Defining promotional objectives.--The final area of tart cherry promotion to be discussed involves the formulation of goals and objectives. The vice-president of a national marketing research corporation has suggested that the use of market research in setting purposeful objectives for a pro- motion is "an astonishingly neglected area."1 He then made a plea for laying out meaningful and productive objectives for promotional work which specify in greater detail what a pro- motional campaign is being designed for. The following exam- ples of meaningful promotional objectives were provided: 1. To attract 22! users for the product. 2. To raise the purchase rate of younger housewives, who currently lag behind the national average. 1Curtis C. Rogers, "The Role of Research in Develop- ing Promotional Programs," Proceedings of National Workshgp on Promotion of Farm Products (Michigan State University and the Economic Research Service, U. S. Department of Agriculture, processed as ERS — 58, U. S. Department of Agriculture, 1963). 61 3. To get buyers to trade up to a larger package size. 4. To encourage additional uses of the product. 5. To counteract promotions by competitive products, at key seasons of the year. 6. To regain lost customers. Specification of objectives helps the promotion group evaluate results of their promotional expenditures and more importantly, it gives meaning and direction for program planners. It can lead to the develOpment of new promotion approaches and techniques and can mean a break with the tradi- tional and often antiquated techniques. Economic Feasibility The economic feasibility of a promotional program hinges on relative costs and returns of the program. Wein- berg suggests that the key question faced by a firm's manage- ment is that of determining the most profitable trade-off between an improved ratio of company sales to industry sales and a lower ratio of company profit to company sales. A parallel question faces an agricultural commodity .group considering a promotion effort, i.e., what is the most profitable "trade-off" between an improved ratio of their commodity sales to total food sales and a weakened ratio of commodity group profits to commodity sales? The question suggests that the relevant variables 1Robert S. Weinberg, An Analytical Approach to Adver- tising Expenditure Strategy (NewYork, N. Y.: Association of National Advertisers, Inc., 1960), p. 11. 62 to consider in a promotional feasibility study include the commodity group's share of total food sales and the costs and net profit situations under alternative promotional strategies. And it is implicit that both short and long- run benefits and costs should be considered. Such data are usually lacking in actual practice. But despite this void, considerable funds are allocated by producers and processors for commodity promotion. A study conducted in 1958 and 1959 found over 1,100 agricultural promotion groups which spent about 67 million dollars during the fiscal year ending in 1958.1 In many instances the promotional objectives of the promotion groups were not clearly defined. There was a general satisfaction on the part of the group leaders with the adequacy and effec- tiveness of their promotional programs, but little or no specific, objective appraisal of promotion efforts.2 The following analysis is an attempt to provide information on one aspect of the promotion costs and returns question, i.e., what will be the price and revenue effect of increasing per capita demand by one-tenth pound at all 1Robert E. Frye and Violet D. Grubbs, Promotion of Farm Products By Agricultural Groups (U. S. Department of— Agriculture, Economic Research Service, Marketing Research Report No. 380, January 1963), p. 3. 2Robert E. Frye, Harper W. Boyd, Jr., and Ralph Westfall, Advertising Procedures and Practice§_of Agricul- tural Commodity Promotion Groups (Washington, D. C.: U. S. Department of Agriculture, Economic Research Service, Marketing Research Report No. 567, November 1962), pp. 21-22. 63 price levels. Assume that the objective of a promotion program in the tart cherry industry is to raise per capita demand by .1 pound per year. This is an increase of 1.6 ounces per person per year or equivalent to about the quantity of cherries in one more piece of cherry pie per person per year. Given existing demand conditions as estimated in Figures 4, 6, and 7, the assumed objective would be to in- crease the demand curve at retail by .1 pound at each price level. Under the additional assumption that the marketing margins at retail and at the processor levels would remain the same, the demand curves at the processor and producer levels would also move to the right by .1 pound at each price level. This can be viewed alternatively as a promotional program that increases the price at which consumers are will- ing to purchase various quantities of tart cherries. For example, where a per capita demand of 1.3 pounds was associ- ated with a retail unit price of 30.24 cents, the assumed advertising and promotional program would lead to 1.3 pounds per capita being associated with a per unit price of 30.71 cents. In either case the demand curve has moved upward and to the right under the assumption that the promotional objective has been met as shown by the hatched line in . 1 Figures 12 and 13. lNo allowance has been made for the possibility that the promotion program will change the slope of the demand curve. This is a refinement that would require additional assumptions and produce a different result. 64 Price (cents per pound) 32 29 28 27 26 25 24 Demand increased by \ \ one-tenth pound per \capita '\ Estimated Retail demand 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 Total Supply of Tart Cherries (Pounds per capita) Fig. 12.--Tart cherries: Estimated demand at retail and change in demand of one-tenth pound per capita at all prices when processor-retailer margin is a constant 15 cents per pound. 1| 11.3.1 I 65 Price (cents per pound) 31 30 29 28 \ Demand increased \ one-tenth pound \ per capita 27, \. 26, Estimated ‘\ Retail Demand 25, 24, 23 . I 1.2 1.3 1:0 1.5 1.6 1:7 1.8 1.9 2.0 2.1 Total Supply of Tart Cherries (Pounds per capita) Fig. 13.--Tart cherries: Estimated demand at retail and change in demand of one-tenth pound per capita at all prices when processor-retailer margin is a constant 50 percent of retail price. 66 Data represented by these graphs are shown in tabular form in Tables 2 and 3. Data in Figure 12 correSpond with those in Table 2 and represent retail demand under the assumption that the processor-retailer marketing margin is constant at 15 cents per pound. Data in Figure 13 corres- pond with those in Table 3 and represent retail demand under the assumption that the processor-retailer marketing margin is constant at 50 percent of retail price. In actuality the processor-retailer margin is probably somewhere between these two limiting cases. Column 1 of Table 2 lists per capita total supply while column 2 converts this to total pounds by multiplying per capita total supply by estimated population of 190 mill- ion. Column 3 relates retail prices to total supply. These prices can be read from the solid line in Figure 12. Total revenue (price multiplied by total pounds) is listed in column 4. Columns 1 through 4 summarize price, quantity and revenue conditions which existed over the 1947-62 period adjusted for the 1964 population level. Columns 5 and 6 show retail prices and total revenues under the assumption that demand can be increased .1 pound per capita through an expanded promotional program. Column 7 then shows differences in total revenue or, alternatively, shows what additional total revenue could be expected if the promotional objective were met. Column 7 data thus indicates the potential gross returns of an ex- panded promotional program. 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