JOURNAL OF THE. Agricultural Economics Council. L Northeastern 0,/IA-<- '-'-". ~. ' ) VOLUME Ill, NUMBER 2 OCTOBER 1974 NOV

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1 C i.; ' I FOUNDI.\T!ON OF AGRICULTURAL ECONOMICS LIBRARY NOV JOURNAL OF THE - L Northeatern Agricultural Economic Council ~ 0,/IA-<- '-'-". ~. ' ) VOLUME Ill, NUMBER 2 OCTOBER 974

2 -56- THE DEMAND FOR PACKAGED MUMS Farrell E. Jenen Aitant Profeor Department of Agricultural Economic & Marketing Rutger Univerity Patrick J. Kirchlingl/ Reearch Aociate Department of Agricultural Economic~ Rutger Univerity & Marketing Introduction The principal ale outlet for floral product ha traditionally been the retai l florit hop. Florit hop have performed many market function including arranging, delivery, information, and credit. The ale of flower through ma outlet tarted on a limited cale prior to World War I I. Recently, however, upermarket have demontrated a greater interet in the floricultural buine. Conequently, many chain have included florit hop in their tore or in adjacent area. Other have become involved, on a maller cale, by tocking a limited number of plant in the produce department of the individual tore on a regular or eaonal bai. The mall-cale operation have led to a number of problem. Firt, flower require periodic maintenance and produce peronnel are generally not trained or inclined to perform thi function. Improper care reult in a lower quality product for the conumer and greater loe for the upermarket. The econd problem i phyical damage to the plant from hipping and in-tore handling. It i not uncommon to ee bloom, bud, leave and tem broken during ditribution, or by overzealou cutomer. Mot of thee damaged plant are a lo to the tore. Recent work with chryanthemum cultivar indicate that thee problem can be olved (for mum) by encloing the. plant in a 4-mil polyethylene bag. The bag i heat ealed and injected with air which cuhion the plant and protect it from damage. The film allow the paage of gae but retain water vapor, which eliminate the need to water the plant during l/ We are indebted to Malcolm R. Harrion, Extenion Specialit in Flori culture, Department of Horticulture and Foretry, for hi contribution to the tudy. Mr. Harrion developed the packaging concept teted in thi tudy. We alo acknowledge the contribution of Dr. Bruno c. Moer and Dr. John Scali of the ame department.

3 -57- ditribution and merchandiing. In laboratory tet ~onducted at Rutger Univerity, chryanthemum plant that were in the package up to 7 day till had a life of 6 or more day after being unpacked. [3] The package alo erve a a merchandiing aid, a it provide a product that doen't require additional packaging at the tore. An attached handle provide convenience of handling by cutomer. The purpoe of thi tudy wa to conduct a market tet t o determine if thi new packaging approach to flower merchandiing wa economically feaible and would m.eet with conumer acceptance. A number of tudie have examined the feaibility of ma merchandiing but thi tudy i unique becaue of the packaging concept. [,2,4,5,6] Eatern market have a competitive advantage in potted plant due to the tranportation cot which offet the economic advantage of other area. The concept teted in thi tudy ha potential for expanding market for potted plant produced for the local metropolitan market. Objective The objective of thi tudy were to:. Obtain an etimate of tne demand for potted chryanthemum plant at a erie of controlled price in upermarket. 2. Determine the price a upermarket would charge to maximize profit from the ale of thee plant. Procedure Six upermarket located in New Jerey uburb erved a cooperating tore. Diplay unit were located in the individual produce department but the location varied between tore according to the available pace. The tore were elected on the bai of volume and geographic location. They were not elected at random o the reult cannot be generalized to the indutry. Flower were delivered to the tore tarting Tueday, January 6, 973, with deliverie continuing for a 2-week period ending April 9, 973. The flower were delivered to tbe tore and the diplay unit were erviced by Rutger peronnel. Inventorie were counted every Tueday morning to determine plant ale for the week. Flower were left in t he package for a maximum period of 2 day after which they were removed from the diplay unit. Neptune, Yellow Mandalay and I llini Trophy varietie-- white, yellow and pink repectively-- were old. A contant ratio of two Yellow Mandalay to one of each of the other varietie wa maintained thl-eughout the

4 -58- tet. Thi ratio wa elected on the bai of the reult of a preliminary market tet where yellow mum wa the mot popular color. [ 5] Point-of-purchae ign were ued to advertie the product. No other promotion activitie were attempted. The product wa old under the brand name, "Dew Freh." Pricing Model Six price which repreented the likely price range for quality 4- inch pot mum old in ma outlet were elected. The price ranged from $0.99 to $.99 in 20-cent increment. A randomized block deign wa ued to aign price to the tore each week. The model wa: u + ( ) where: Y.. k = ale per thouand cutomer for tore J week k u = the grand average for a y.. k J. = the effect of tore p. = the effect of price j J Tk = the effect of week k ( SP).. J = interaction of tore and price j (ST)ik = interaction of tore and time period k (PT)jk = interaction of price j with time period k 2 E.. k = NID (0, (J ) variate J at price j in Two time block were ued to reduce variation due to eaonal and holiday effect. The ix price were aigned at random w_ithin the i x week of each block for each tore. Under thi ytem, all tore had each of the price on two eparate week, once within each block. Demand Model Demand theory tate that quantity demanded i a function of price, when demand-hifting factor are contant. The reaon for uing the i x price wa to etimate a number of point on the demand curve for packaged mum. Thi type of experimental approach i not optimal becaue of changing factor in the market which affect ubtitutability, income and other

5 -59- factor. However, it can provide ome point on the demand curve. The model teted wa: " Q = f ( P_, S, S 2, S 3, S 4, S 5, S 6 ) (2) where: " Q = quantity old per thouand cutomer P = the ix tet price thee are 0 or dummy variable ued to account for the difference in the level of ale at each of the tore. 3 wa et equal to. The ue of dummy variable baed on the of the demand curve i contant for all?tore. the coefficient for P i a common etimate for variable alow for dffference in the level of aumption that the lope A uch, the etimate of all tore. The dummy ale among tore. Profit-Maximizing Model The firm objective for handling flower hould be to maxmze the net return after procurement cot, in-tore handling expene, and hrinkage loe. Traditionally, upermarket have ued a tipulated percentage gro margin to determine the elling price for product. Thi gro margin may or may not reflect the profit-maximizing price for the tore. After an etimate of the demand curve i obtained, it i poible to determine the profit-maximizing price. Conider a cae where:. Operating cot at the upermarket level are contant per unit over a relevant range of output. 2. Procurement cot are independent of the level of output. 3. All tore in a given company charge the ame price for the flower. Let: T. = total revenue per thouand cutomer for tore i Q. = quantity purchaed per thouand cutomer for tore p = price for an individual flower which i contant for a tore Therefore: T. = p Qi ( 3)

6 -60- Net profit i defined a total revenue minu total cot. Aume that flower are purchaed in a perfectly competitive market o that a given company i unable to influence the purchae price. Under thee condition, which likely approximate actual market tructure, procurement cot will be contant. Let: Therefore: P. = total procurement cot p = procurement price per plant p p. = Q.P p per '000 cutomer for tore (4) The mot important in-tore cot factor i hrinkage lo from damaged plant, dead plant, unaleable plant, etc. Let: L. = hrinkage loe per thouand cutomer for tore L =percent hrinkage lo which i contant for all tore. Since the amount of loe will be a function of the purchae price and quantity handled, we can define: L. = l P Q. p (5) All other cot incidental to in-tore merchandiing are aumed to be contant over the relevant range of ale. Let: C. =all other cot per thouand cutomer Now that the cot factor are delineated, we can define net revenue -(N.) at tore i a: N. = f( Q., P, P, L, C.) p The exact form a follow: N. = T. - P. - L. -C. Thi equation can be written in term of the demand function a: N. = P Q. - Q.P - L P Q. C. p p But Q. can be expreed a Q. = f.(p ) when all other factor are contant. Upon ubtitution of thi functional relationhip for Q. we obtain: (6)

7 -6- N. = P f.(p ) - P f.(p ) - L P f. (P) p p N. = f.(p ) [P - P - L P ] -C. p p c. (7) (8) The objective will be to differentiate thi function with repect top to determine the price that will maximize net revenue for~ tore. Let: N =average net revenue per thouand cutomer for all tore in a company. It can be written a: where: n : i=l N. n = the number of tore All other variable can be expreed in the aggregate a: n : i=l Q. and c = n n : i = c. Q = c = Q can be expreed in average number cutomer of plant old per average amount of a other cot tore term of the demand function a: n : f.(p ) i = thouand for all (9) From the form of the equation (8), net profit per thouand cutomer can now be expreed a: N = n n : i=l f. ( P ) [P - P - L P ] p p n c. (0) The objective of the firm will be to maximize N.

8 -62- Number of Plant Sold per Thouand Cutomer per Week In order to tandardize the data for comparion between tore, the data were expreed a the number of plant old per thouand cutomer per tore for each week. The high, low, and average volume of ale for all tore at the ix price are hown in Table. The high week wa. plant old per thouand cutomer when the price wa $0.99, and the low wa.8 plant when the price wa $.99. Average number of plant old per thouand cutomer wa lowet at the $.79 price. Table Number of Dew Freh Mum Sold per Week per Thouand Cutomer at Variou Price, Six Supermarket, New Jerey, 973 ~ Number of Plant Sold per Thouand Cutomer per Week High $ i/ Baed on 2-week market tet. Low Average Total Revenue per Thouand Cutomer The high, low, and average total revenue per thouand cutomer at variou price level are hown in Table 2. Thee figure repreent the amount pent per thouand cutomer per week. The larget total revenue of $3.80 wa at the $.59 price and the low of $.53, at the $.99 price. The highet average of $7.5 per tore wa at the $0.99 price. The figure for ale per linear foot of diplay pace are alo included. Analyi of variance wa performed to tet if t he time, price, and tore mean were ignificantly different (Table 3). There were ignificant difference in total revenue per thouand cutomer between tore. No ignificant difference exited for the ale between the two time block but there were ignificant difference in total revenue mean at each of the ix price at the 6% level. Thu, total revenue and number of plant old varied among tore and price.

9 -63- Table 2 Weekly Total Revenue per Thouand Cutomer and Weekly Total Revenue per Thouand Cutomer per Linear Foot of Diplay Space at Variou Price for Dew Freh Mum, Six Supermarket, New Jerey, 973 5/ Weekly Total Revenue per Weekly Total Revenue per Store Store per Thouand per Thouand Cutomer per Price Cutomer Linear Foot of Diplay Space per Plant High Low Average High Low Average $.99 $0.97 $2.88 $7.5 $2.74 $. 72 $.79 l " l l i/ Baed on 2-week market tet. ~Diplay unit equaled 4 linear feet. Table 3 Analyi of Variance on Weekly Total Revenue per Thouand Cutomer, Six Supermarket, New Jerey, 973 5/ Degree of Sum of Mean Source of Variation Freedom Square Square F-Ratio Store Y...,.~ Time 5/ Price ];'~ Store X Time Store X Price Time X Price l. 6 Reidual f2_ Total / The 2 tet week were divided into two block of ix week. ;': Significant at 6% level. Significant at % level. ;':---k

10 -64- Demand Curve Etimate A number of different pecification of the model were ued to obtain an etimate of the demand curve. Variable teted included lagged price, firt difference in price, a time trend, income, cutomer count, availability of other mum, availability of other freh plant material and flower, holiday, advertiing, and a lagged dependent variable. Although economic theory would indicate that thee variable can affect the quantity old, the effect could not be iolated from the data. The final model ued wa: A Q = P S S S 5 6 (.535 (.63) (.63) (.63) (.63) (.63).69 = 23.6 Standard error of the coefficient are indicated in the parenthee. The price coefficient i ignificant at the % level indicating that the quantity of plant old wa a function of price. The negative ign on the price coefficient wa a hypotheized. The coefficient indicate that a price increaed (or decreaed) by $ in the range from $0.99 to $.99, ale per thouand cutomer per week decreaed (or increaed) by 4.5 plant. The coefficient on the dummy variable are ignificant at the 5- percent level for all tore except Store 5, which indicate that the level of ale for thee four tore wa ignificantly different from Store 3. Given thi ituation of a different level of ale at individual tore, the quetion arie a to how a company can maximize profit when all tore charge a uniform price for the product. The maximizing net revenue ection i concerned with thi quetion. ( ) Maximizing Net Revenue The etimated regreion obtained previouly can be eparated into eparate tore demand curve by individually etting each dummy variable equal to one while all other are zero. The individual tore etimate are: Store : Store 2: A ~ = P ~2 = P Store 3: Q3 = P A Store 4: Q4 = P A Store 5: Q5 = P 6: - 4.5P Store % =.53

11 -65- \ The average value for etimate of all Q. can be ubtituted into the form of equation (0). N = fl0.4z- 4. 5P ] [P - P - L P ] -C p p (2) The objective of the company i charge the ame price P The value to maximize N, given that all tore for a N : ap at-j = a"p P P + 4.5L P p p ( 3) At a maximum, the firt derivative i equal to zero o the elling price which maximize N i: P = $.26 +.SOP +.SOL P p p ( 4) For a maximum to exit i < 0 and thi i the cae a the value P i the price that the tet tore hould charge to maximize net revenue. Larger amount of total revenue could be obtained by elling at a lower price but the net profit would be lower~ The interpretation of equation (4) above i traightforward. The contant term of.26 indicate the minimum price to charge if there were no procurement cot or hrinkage loe. The poitive ign for P and L indicate that the p elling price mut increae a thee factor increae. Either higher wholeale cot for the product or greater in-tore loe neceitate a higher elling price for the product. The profit-maximizing price for a range of hypotheized procurement cot and in-tore loe are hown in Table 4. Thee profit-maximizing price vary from $.54 to $.76. Uing conventional upermarket pricing technique, i.e., price ending in 7 or 9, the price would range from $.49 to $.79, baed on the etimated demand curve. At each procurement price, the profit-maximizing gro margin percentage are larger than the traditional 33 to 50 percent gro?.margin charged by upermarket. Baed on procurement cot and in-tore loe a hypotheized in thi tudy, the percentage range from 67.5 percent to 52.9 percent. For thee tore to have maximized profit under thee condition, gro margin hould have been increaed by approximately 8 to 20 percent over conventional practice.

12 -66- Table 4 Net Revenue Maximizing Selling Price and Gro Margin Percentage for 4-lnch Pot Mum for Variou Hypotheized Procurement Cot and In-Store Loe, Six Supermarket, New Jerey, 973 Percent In-Store Loe 2./ 0"/o 5% 2l% 25% ll% 5% 2l% 25% $0.50 $ % 67.7% 68.f% 68. Z'/o.Procurement Price $0.60 $0.70 $0.80 Selling Price $.59 $.65 $ Gro Margin Percentage 62.3% 57.6% 52. 9'/o 62.7% 57.8% 53.5% 63.f% 58. J'lo 54.f% 63.4% 58.8% 54.6% i/ Available information indicated that loe would range from ll% to 25%. Store with proper management can reduce loe to le than 0"/o. Summary and Concluion The allocation of helf pace among alternative product i an economic problem for the ma merchandier. Any deciion to add or expand a product line mut be conidered in light of available pace and it contribution to the profit of the tore. New product mut contribute an amount to profit which i greater than exiting product to jutify their incluion in the product mix. Thee principle apply to the conideration of packaged pot mum by the ma merchandier. To warrant the introduction of thi product, the ale per linear foot and profit generated mut be equal to, or greater than, item that preently exit on the helve. The ale repone indicate that conumer will purchae prepackaged mum in upermarket. The ale per linear foot of diplay pace which ranged from $8.95 to $3.95 compare favorably with minor vegetable item like bean, broccoli, corn, cucumber, pinach, quah and yam, but not with the larget volume vegetable like iceburg lettuce, dry onion, tomatoe and potatoe. The tet flower did not have the ame level of ale a thee high-volume item, but ale movement can be expected to be equal to or greater than ale of many of the medium and low volume i tern.

13 -67- Sale varied inverely with the elling price a expected. Sale per thouand cutomer decreaed by 4.5 plant a price increaed by $.00 in the range from $0.99 to $.99. The elaticity of demand wa greater tha~ l over mot of the etimated demand curve. The number of plant old per thouand cutomer varied ignificantly among different tore. Store difference were probably attributable to income level, age of conumer, geographic location, and other factor that could not be iolated from the data. Baed on the etimated demand curve, the elling price which would maximize the profit of the ix tore ranged from $.54 to $.76. Thi i baed on etimated procurement cot ranging from $0.50 to $0.80 per plant, and in-tore hrinkage loe etimated to range from 0 percent to 25 percent. For the tet tore, the gro margin percentage that maximized profit ranged from 55 percent to 68 percent, which i 8 to 22 percent higher than the cutomary 33 to 50 percent indutry gromargin target. Limitation The tore ued in the tudy were not elected from a random ample, o the reult cannot be extended to the indutry in general. However, the reult will provide an indication of poible reaction. The 2-week duration of the tet wa not long enough to determine if ale could be utained over a long period of time. Seaonal effect were not determined, a the tet wa conducted during the winter month. Sale will be likely to vary during different eaon of the year. Reference Baker, Maurice and Dana Goodrich, Flower Retailing by Ma Outlet, New Jerey Agricultural Experiment Station Bulletin 87, March 968. Gatty, Ronald and Donald Wolf, Merchandiing Prepackaged Cut Flower in Supermarket, Bulletin 799, New Jerey Agricultural Experiment Station, 96. Harrion, Malcolm R., Dominic Durkin, and Frank B. Hanlon, The Effect of Preurized Sealed Packaging on the Keeping Quali~and Shelf Life of Three Chryanthemum Cultivar, Department of Horticulture and Foretry, Rutger, Mimeo, 972. Kelly, R.A., Floricultural Sale in Ma Outlet, Univerity of Illinoi, Agricultural Experiment Station.

14 -68- Kirchling, Patrick J. and Farrell E. Jenen, Preliminary Market Tet for Packaged Potted Chryanthemum, EIR 32, Department of Agricultural Economic and Marketing, New Jerey Agricultural Experiment Station, March, 973. Zawadki, M.J., W.F. Laramie and A.L. Owen, Selling Flower in Supermarket, Univerity of Rhode Iland, Agricultural Experiment Station, Bulletin 355, June, 960.