An Economic Evaluation of Changes in the U.S. Orange Juice Market. Allen Morris

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1 An Economic Evaluation of Changes in the U.S. Orange Juice Market Allen Morris Note: This paper successfully completed peer review by three University of Florida faculty members in the fall of However, University of Florida administration would not release it for publication unless the opinions put forth in the paper, clearly identified as opinions, were removed. I was unwilling to do that, so it was not published. To better understand any market, it is important to understand the difference between consumption and demand. Although in many cases consumption and demand follow similar trends, they measure different aspects of consumer behavior. Consumption is simply the physical disappearance of a product. It may drop because of increased prices, or increase because of lower prices. Demand looks at how consumption changes after accounting for price changes. If a consumer bought five products last month at $10.00 each, the price then increases to $12.00 each, but they still buy 10 of those same products next month, their demand increased. But if the price stays the same and next month they buy less, their demand dropped. In most situations, the reason to grow demand is to increase revenues and profits, not necessarily consumption. Between 2005 and 2010, U.S. per capita OJ consumption in all U.S. retail outlets declined by 24 percent while as a result of reduced OJ supplies, retail OJ prices increased by 24 percent (Figure 1.) OJ prices were not the only juice prices that increased. Prices of 100 percent juice blends (grape/peach/mango, cranberry/blueberry blueberry/ pomegranate, grape/raspberry), substitutes for OJ, increased by even more (Figure 2). During this same period, consumption of juice blends increased 8 percent. Even though prices of juice blends are 36 percent higher than OJ prices (Figure 3). Consumption of juice blends is increasing because juice blends are effectively advertised and merchandised. 1 And although orange prices are at record highs, they will not stay that way unless the citrus industry does something to grow OJ demand. Back in 2000, the grapefruit sector decided that with grapefruit prices more than twice as high as they had been a few years earlier, there was no need to continue growing grapefruit juice demand. Within a few years, grapefruit prices were less than half of what they had been, even though the crop was less than half of what it had been. 1 Marketing consists of advertising, merchandising and public relations. Advertising consists of exposing the final consumer to the product and its attributes via television, radio, in magazines and newspapers, etc. Merchandising entails providing incentives to retailers to promote and sell the product. Public relations keeps the product familiar to consumers using things like sponsored sports events, TV personalities who discuss the product publicly, possibly on TV talk shows, etc.

2 An analysis of orange juice demand that compares the period to the period showed: OJ demand dropped 4.3 percent between these two periods while demand for juice blends doubled. Juice blends are a stronger substitute for OJ than OJ is for juice blends. Incomes affect demand for OJ, but not very much. OJ is income inelastic. A one percent change in income changes OJ demand by 0.46 percent. At the current per capita consumption and retail price of OJ in all retail outlets, a family of four would need to spend only 83 cents a week to buy OJ, hardly something they wouldn t do or could not afford if they believe OJ should be part of a healthy diet. As a comparison, per capita soft drink consumption is 46 gallons (Beverage Digest). At an average price of $.50 per 12 ounce can, a family of four spends $18.86 a week on soft drinks, over 28 times as much as on OJ. And the average price of soft drinks is only 8% less than OJ. Since inflation-adjusted per capita disposable income increased by 25.3 percent between these two periods, 2 an income elasticity of 0.46 should have resulted in a growth in OJ demand of 11.6 percent, not a 4.3 percent decline. Later this paper will examine the last time that happened to OJ and what it took to change it. Is the diversion of funds from marketing to HLB research resulting in insufficient funding for marketing? Marketing funds have not been diverted to fund HLB research. Funds for all citrus marketing and specifically for OJ marketing have not declined since the FDOC began funding HLB research (Tables 1 and 2). My opinion of why demand is decreasing is that OJ advertising is underfunded and needs a more effective message. The current OJ advertisement doesn t do the two critical things that all effective advertisements must do: tell consumers what s different about the product and why that difference has value. And, OJ advertising expenditures are only 59 percent of what they were 30 years ago (Table 3) when per capita OJ consumption was much higher than now. The currently reduced Florida orange crop is not the reason per capita OJ consumption is the lowest it has been in over 35 years. In 1984/85 the Florida orange crop was 104 million boxes, 22 percent lower than now, and yet per capita OJ consumption was 73 percent greater than now. That was because OJ advertising, although mistakenly reduced because of freeze-reduced supplies, was still 38 percent higher than now. It certainly paid for itself. Processed orange prices in 1984/85 were $2.79 per pound solids in today s dollars. And although the current merchandising program appears to be working, with only two people devoted to it, less than half the retail stores are being covered. 2 The U.S. is in the midst of a major recession. But since the 1980s and 1990s the U.S. economy experienced so much economic growth that incomes are still above where they were then. 2

3 In order to solve the OJ market problem, four key questions must be answered. (1) Does generic marketing grow OJ demand? (2) Is it cost effective? (3) Will advertising by the brands alone do the job? (4) Is merchandising cost effective? Numerous studies show generic marketing grows OJ demand. These include studies by Lee and Brown in 1985, by Ward in 1992, by Brown and Lee in 1999, Brown in 2003 and the most recent by Forecasting and Business Analysis (FABA) in The most recent study, by FABA, showed that generic advertising increased OJ demand by 3.3 to 7.7 percent, and that each dollar spent resulted in an additional 1.9 to 4.4 gallons of consumption. The benefit to cost ratio was According to FABA, brand advertising did not grow total OJ demand, it only shifted market shares between brands. Nielsen all-outlet data measure all retail store sales while Nielsen greater than $2 million sales measure about 30 percent of retail store sales. The majority of the difference is Wal-Mart. OJ sales in stores with annual sales greater than $2 million declined by 29 percent while OJ sales in Wal-Mart increased slightly. It is likely that the 29 percent greater sales volume in Wal-Mart was due to two things: (1) Price-conscious consumers switching from stores like Publix or Kroger to Wal-Mart to save money, and (2) the merchandising in Wal-Mart by FDOC staff. According to the FDOC, because of its size, over the past five years they have directed a significant portion of their merchandising efforts toward Wal-Mart. It is also the only store where FDOC has a TV presence. FDOC also directs a merchandising effort at Kroger, Safeway and Publix. But with these four chains, only 45 percent of the retailers are covered (Table 5). If demand is to be grown, more retailers need to be covered. Solving the problem of declining OJ demand requires three key changes: (1) A different generic advertisement, (2) restoring a merchandising force that can cover the majority (at least 70 percent) of the retailers, and (3) obtaining and maintaining data on substitutes (juice blends). The current advertisement is not only applicable to OJ, its message could be claimed by products like high protein nutrition bars, instant breakfast, juice blends, even high caffeine products. It does not answer the two fundamentally important questions required for effective advertising: what makes this product different from other products consumers could choose, and is this difference of value. The sample advertisement the agency used to get the FDOC account has a focused message unique to OJ. It does tell what is different about OJ and why that difference has value. However, it is too long for the time slot that FDOC can afford, but it can be shortened and still deliver its message effectively. Regulatory agencies are increasingly imposing regulations that require health and wellness messages to be supported by scientific studies that quantify how much the 3

4 product being advertised reduces this or that disease. One way to substantiate health benefits is to get a credible scientist, say one representing the American Cancer Society or the American Medical Association to provide testimonial support. For example, at the end of the commercial the health expert could indicate, I m Doctor XX, President of the American Medical Association. We support OJ as a vital part of a healthy diet. In 2000, the FDOC merchandising field staff consisted of 21 people. This many is no longer required because of consolidation among retailers (Tables 4 and 5). FDOC estimates that the top 40 retail accounts are now about 70 percent of the market. They estimate that with a total of four people, three more than we currently have, that 70 percent of the market could be effectively covered. They estimate this to cost about $250,000 annually for salaries, benefits and travel. Finally, the FDOC needs to obtain and maintain data on existing and potential future substitutes for OJ (juice blends and juice drinks). The main one currently is juice blends, but others such as juice drinks may become substitutes. This should be relatively inexpensive. The five years of juice blend and juice drink data which can be purchased from Nielsen is easily affordable. In an environment as competitive as the juice market, knowing what the competition is doing is critically important to managing OJ marketing. Following is an examination of why the industry can t afford not to make these relatively inexpensive changes. Several reasons have been offered as to why the FDOC shouldn t try to grow OJ demand in this environment. 1. Additional consumption and demand would be supplied by imports, benefiting only importers. It is true that during periods of reduced Florida supply and high prices imports have been highest. But fruit prices have also been high (Table 6). It would seem that Florida growers would rather have Brazil supplying half of this market with fruit prices of $2.00 per pound solids than 10 percent of it with fruit prices of $1.00 per pound solids. Brazil s largest export destination, Europe, has never had a stronger market. In spite of prices for OJ imports more than doubling recently, Europe OJ imports only declined 9 percent (Table 7). The reason European import demand is so strong and no longer very price sensitive is greatly increased OJ demand. This is primarily due to Eastern European countries becoming new OJ consumers, which is greatly increasing household penetration of OJ in Europe. As strong and profitable as the European market is for OJ, it is doubtful whether Brazil can or would want to export much more OJ to the U.S. than they currently do. 2. Additional demand would lead to price increases, enabling substitutes to raise their prices under the OJ price umbrella. That should not matter as long as Florida growers benefitted from higher prices. Also, juice blends are already higher-priced than OJ. 4

5 3. The economy is the reason demand is down, and until it improves, the industry is wasting its money to try to increase OJ demand. This issue was discussed previously. OJ demand is income inelastic. I doubt if paying 83 cents a week to provide OJ to a family of four would be unaffordable by anyone, particularly if they believe OJ should be part of a healthy diet. Currently the average family of four spends $18.86 a week on soft drinks. If only half of the consumers diverted only $2.00 (4 cans) each year from soft drink consumption to OJ consumption, it would increase OJ sales by 10%. A Health Challenge Month could be designated on OJ cartons with the slogan, Improve your health by substituting one can of soda each week for 12 ounces of OJ during the month of January. This would be a combination of marketing and merchandising, and should cost Florida growers nothing. As evidence of the potential success of such a program, when Tropicana issued the taste challenge in a similar fashion back in the late 1980s, it was so successful that extra people had to be put on the switchboard to handle all the calls. Minute Maid currently uses a taste challenge urging consumers to compare Simply Orange to fresh oranges and apparently that is very successful as well. Funding for marketing to grow OJ demand was abandoned during reduced OJ supplies and high prices in the 1980s. Growers reasoned that the industry couldn t supply the market it had and thus wouldn t support increase advertising taxes to pre-freeze rates to grow demand. They reasoned it would only benefit Brazil. Consequently, OJ advertising expenditures dropped below pre-freeze levels (Table 3). The result was a disaster. Between 1980 and 1994 (Table 8), juice blends and drinks increased their share of the fruit beverage market from 24 to 43 percent, while the OJ share of this market declined from 47 to 35 percent. Between 1983/84 and 1992/93, combined OJ production from Florida and Brazil increased by 87 percent, inflation-adjusted per capita disposable incomes increased by 37%, and retail OJ prices declined by 29 percent in inflationadjusted dollars (Table 9). There was a lot more supply, purchasing power was up significantly, and retail OJ prices had declined. Retail OJ market volume tumbled in spite of all this, and orange prices collapsed by 45 percent to $.68 per pound solids ($1.03 in 2010 dollars). The Triple Crown marketing program that advertised why OJ was different from other beverages and why that difference had value saved the industry. There were also credible scientists saying that OJ should be part of a healthy diet. And, the focus of merchandising was improved, with field staff providing data to retailers showing the financial benefits to these retailers of giving more shelf space to, and promoting, OJ. The program was phenomenally successful. Between 1996 and 2001, retail OJ volume increased by 10 percent and retail OJ prices increased by 20 percent - significant demand growth. 4. FDOC projects that orange production in both Florida and Brazil will be flat-todeclining, so there will not be enough supply for the current market, and certainly 5

6 not a bigger one. The FDOC long-term fruit production scenarios are realistic. But there is another scenario that is equally realistic. Orange production in both Florida and Brazil may increase over the next 10 years. High density (270 trees per acre) plantings can give groves a perpetual life like before HLB was found in Florida, if resetting can be practiced. With aggressive scouting, tree removal and psyllid control, and being in one of the Citrus Health Management Areas (CHEMAS) where thousands of contiguous acres of citrus are under one psyllid control program, HLB infection rates can probably be kept at 2 percent or less. With inoculum levels this low, resetting should be successful. At densities of 270 trees per acre, economic analysis shows that a grove has a perpetual economic life (Morris, Muraro and Castle, 2011). The Florida Agricultural Statistics Service estimates that there are currently 143,370 acres of abandoned citrus in Florida. Most of these properties are permitted and have the infrastructure in place for replanting. It would not be that difficult to replant them. If growing demand keeps prices at or near current levels, most will probably be replanted. In Brazil, new plantings are moving into regions with little or no HLB and tree densities are being increased to trees per acre. It is expected that fruit yields will be almost double those in traditional plantings. Thus, production in Brazil may increase by 50 percent or more over the next 10 years. The strong European market will certainly be a growing, profitable market for this additional juice. If OJ supply increases and OJ demand does not, a repeat of what happened when supplies returned after the 1980s or worse given the weaker U.S. OJ market and higher costs of producing oranges to cover greening management costs is likely to occur. With high density plantings and CHEMAS, the industry can survive greening until a cure is found. Brazil is already doing that, and the strong European market will support them. With a few minor relatively inexpensive changes, OJ demand will grow and keep fruit prices high. A successful marketing program (Triple Crown) more than tripled processed grapefruit prices in the 1990s. In 2000 Florida grapefruit growers faced the decision to continue to support grapefruit juice marketing in the Triple crown program. They elected to reduce the grapefruit advertising tax by roughly 3 cents a pound solids and saw processed GF prices drop from $1.14 in 1999/2000 to $.49 per pound solids by 2002/03, even though the grapefruit crop was 28 percent lower than in 1999/2000. They saved 3 cents and it cost them 65 cents. So it s all up to Florida citrus industry. It can control its destiny. Will we learn from past mistakes, or pay the price of repeating them? 6

7 References 1. A.C. Neilsen Retail OJ Sales in All-Outlet Stores. U.S. Citrus Reference Book, Florida Department of Citrus, Economic and Market Research Department, Gainesville, Florida, August A.C. Nielsen Retail OJ Sales. U.S. Citrus Reference Book, Florida Department of Citrus, Economic and Market Research Department, Gainesville, Florida. Various issues. 3. Brown, M.G. Advertising Impacts on Demand for Orange Juice. Staff Report Florida Department of Citrus, Economic and Market Research Department, Gainesville, FL Brown, M.G. and J.Y. Lee. Health and Nutrition Advertising Impacts on the Demand for Orange Juice in Fifty Metropolitan Regions. Journal of food Products Marketing 5 (3): Capps, Jr., O; D.A. Bressler and G.W. Williams. Evaluating the Economic Impacts Associated with Advertising Efforts of the Florida Department of Citrus. Prepared for The Advertising Review Committee in Association with the Florida department of Citrus and Florida Citrus Mutual. College Station, TX: Forecasting and Business Analysis, LLC (FABA) Consumer Price Indexes for Major Expenditure Classes, U.S. Department of Labor, Bureau of Labor Statistics, Washington, D.C. February Eurostat Yearbook 2010, European Commission. Luxembourg, September, Florida Citrus Economic and Market Indicators, Florida Department of Citrus, Economic and Market Research Department, Gainesville, Florida. Various issues. 9. FDOC Advertising Expenditures in 2011 $. Finance and Accounting Department, Florida Department of Citrus 10. Florida Department of Citrus Budget. Finance and Accounting Department, Florida Department of Citrus 11. Foodnews Juice Yearbook, Various Issues. The Foodnews Company LTD, Kent, UK. 12. Juice Blends and Juice Drinks: Monthly Gallons and Dollars. Unpublished Special Report Prepared for IFAS. A.C. Nielsen, Lee, J.Y. and M.G. Brown. Coupon Redemption and the Demand for Frozen Concentrated Orange Juice: A Switching Regression Analysis. American Journal of Agricultural Economics 67 (3) 1985:

8 14. Morris, Allen, Ronald P. Muraro and William S. Castle. Optimal Grove Replanting to Mitigate Endemic HLB. Citrus Industry, Vol. 92, No. 4, O Leary, Noreen. Soft Drink Consumption Continues to Decline. Beverage Digest, March Orange Juice Sales in US Retail Outlets. Nielsen Scantrack and Homescan. October, Supermarket News Top 75 Retailers for Supermarket News, Supermarket News Top 75 Retailers for Supermarket News, Total and Per capita Disposable Personal Income and Personal Consumption Expenditures, and Per Capita Gross Domestic Product, in Current and Real Dollars, U.S. Department of Commerce, Bureau of Economic Analysis. Washington, D.C., February, Ward, R.W. Discussion: Generic and Brand Advertising. In Commodity Advertising and Promotion, edited by H.W. Kinnucan, S.R. Thompson, and H.S. Chang. Iowa State University Press, Ames, IA Weighted Average Price for Oranges Used in FCOJ Seasons. Statistical Summary. Florida Citrus Processors Association, Winter Haven, FL, various issues. 8

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12 Table 4. Market Share Among Major U.S. Food Retailers, 1998 Company Share Kroger 9.6 Alberston s 8.0 Wal-Mart 7.1 Safeway 5.6 Ahold USA 4.4 Top 5: 34.7 % Supervalu 4.0 Fleming 3.4 Winn-Dixie 3.1 Publix 2.7 A & P 2.3 Top 10: 50.4 % Source: Supermarket News Table 5. Market Share Among Major U.S. Food Retailers, 2008 Company Share Wal-Mart 29.0 Kroger 8.6 Costco 8.1 SuperValu 5.0 Safeway 5.0 Top 5: 55.7 % Loblaw Cos. 3.5 Publix 2.7 Ahold USA 2.4 Delhaize America 2.1 C&S Wholsale 2.1 Top 10: 68.5 % Source: Supermarket News 12

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