The big secret in the food industry that consumer organizations and other public-interest groups don’t seem to fully grasp or appreciate is that, economically, the retailers and fast-food companies are in control. Meatpackers and processors don’t operate on single-digit (and sometimes half-digit) profit margins out of charity. They do so because that’s all the room they’ve got between the proverbial rock and a hard place: the cost of raw materials and livestock on one side and the price their customers are willing to pay on the other.
In pure capitalism, price is established within the supply-and-demand equation by a calculation of the cost of production and doing business measured against the competition’s, taking into account brand loyalty, the effectiveness of marketing, and a few other miscellaneous factors. But that’s not how it works in the food industry. The price food companies get for their products is what the supermarket and fast-food chains offer. Over decades of mergers and acquisitions coupled with growth, the chains have accumulated enormous power, to the point where the largest of them – Wal-Mart, Safeway, McDonald’s, etc. – dictate rather than negotiate food prices, cost of production be damned. They say the prices they offer their suppliers are keyed only to the prices consumers are willing to pay, but I don’t believe it.
Every time I see an ad on television for a 99-cent fast-food burger or a store flier in my mail for ground beef less than a buck a pound, my heart sinks. Sure, I love buying cheap – when the price isn’t ruining someone’s business or an industry’s reputation. I don’t like being manipulated by some big chain’s attempt to buy market share. A 99-cent burger means there’s a meat company – probably a whole bunch of meat companies -- that can’t afford to pay better wages to production employees, can’t afford to invest in new technology, can’t afford better training, can’t afford more product development, can’t afford better care of livestock, can’t improve environmental protections and can’t improve returns to shareholders. All they can afford to do is increase production to pump up volume to make money the only way the system allows, through "economies of scale." Don’t you love that phrase? It’s used as a justification but it’s really just a cover-up.
As market analyst Frank Luby has pointed out, the retailers have gained still more power in the current recession from the increasing popularity of value-priced store brands, which they now use as a hammer to threaten brand-name suppliers with. They can threaten their store-brand suppliers, too, because where else are those companies going to go if a contract is suddenly canceled?
So what can processors do? They can take it to the streets – meaning, they can appeal directly to consumers. How retailers became the de facto spokesman for what consumers want and are willing to pay for, I don’t know. Don’t let them make your case for you. As counter-intuitive as it may seem, an economic downturn is one of the best times to increase advertising and promotion for brand-name products. Recessions don’t last forever, and when consumers finally return to a spending mood you want them to buy your brand. Spend your marketing dollars now reminding them why they should. They’ll remember.
The worst thing ever to happen to the meat industry was the commoditization of its products. Commodities are ruled by price, nothing else, and the commodity price race is always to the bottom. So many of the ills and issues the industry wrestles with can be traced precisely to that. The fresh meat sold in supermarkets and by fast-food chains is a commodity. A recession may seem like a strange time to encourage the industry to start working itself out of the commodity trap. But we already know the present recession is deep enough to cause portions of the U.S. and global economy to be remade; we will be a different world coming out of this mire than we were going into it. With consumers retrenching and refocusing, now is the time the industry can grab some of their attention and, just maybe, take back a bit of the power to decide its own fate.
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