Marketing GMLabeled Food Products in the United Kingdom: Can American Agribusinesses Do It Profitabi

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Marketing GM-Labeled Food Products in the United
Kingdom Can American Agribusinesses Do It
Profitability?

• By
• Nathan S. Hill and DeeVon Bailey
• Royal Agricultural College and Utah State
  University
• Presentation at the
• 15th Annual World Food and Agribusiness Symposium
  and Case Conference
• Chicago, Illinois, USA
• June 26, 2005

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Background

• Large U. S. food companies have invested in
  foreign markets for decades
• These firms rely on foreign markets for much of
  their sales and profits
• These were long-term, now-irreversible strategies
• GM-labeling requirement may threaten these markets

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GM Food Products

• Marketing GM foods has become a major issue in
  international trade
• Although declared safe by USDA and FDA, many
  other organizations believe that GM food should
  be segregated and labeled
• Segregation and labeling is not mandatory in the
  United States
• However, these types of products must comply with
  European laws when marketed in Europe including
  segregation and labeling laws

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Potential Impact

• Added expense for segregation and labeling
• Consumer acceptance is a question (image and
  brand equity)
• If American agribusiness firms continue to
  include GM material in their food products, how
  will it affect who will buy their products and
  the companies profit margins?

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Methodology Discussion

• Attitudinal survey conducted in England to
  determine market characteristics of people who
  dont care whether they consume GM-labeled food
  products or not (indifference)
• Case study of a hypothetical American firms
  profit margins for GM-food products
• Basic results
• GM-labeled food product demand is a low-end
  market in the UK (knowledge and income levels
  negatively impact demand)
• Selling GM-labeled food products might still be
  profitable

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Attitudinal Survey

• Conducted in May 2004
• 65 individuals
• Mall-intercept method
• Cirencester and Bilbury, England
• While many hypothetical market studies about GM
  products have been conducted, this study
  identified the demographic characteristics of
  persons willing to buy GM-labeled food products
  at the same price as non-GM products
  (indifference).

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Test for Indifference

• Indifference expressed willingness to pay the
  same for GM-labeled and non-GM food products
• Stated behavior is whether or not the consumer is
  indifferent
• Logit and probit models used to estimate the
  parameters of the variables explaining the
  behavior (Greene indicates that an index
  function can be used to explain this behavior)

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Variables Used to Explain Indifference With
Expected Signs

• Familiarity with GM products (FAMGM) (i.e., the
  less familiar with GM issues the more likely to
  be indifferent)
• Purchased GM food products before (PURCHASE)
• of children at home (CHILDREN) -
• Age (YOUNG (under 25)) -
• Gender (FEMALE) ?
• Married ?
• Income -

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Parameter Estimates for Logit Model Together with
Marginal Effects
Independent Parameter Marginal Variable Estimate
Effects Intercept -2.497 -0.614 F
AMGM 1.119 0.275 PURCHASE 2.347
0.577 YOUNG -0.883 -0.217 FEMALE
-0.437
-0.107 MARRIED 0.668
0.164 CHILDREN -0.117 -0.029 INCOME
-0.468 -0.115
Predictions Predicted Actual 0 1
0 24 6 1 9 26
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Conclusions from Indifference Test

• Over half of the sample (35 of 65) were
  indifferent (market is relatively large)
• Unfamiliarity with GM products or prior purchases
  contribute to indifference
• Lower income contributes to indifference
• Overall conclusion GM-labeled foods appear to
  considered a low end market (for people with
  relatively little knowledge about GM food and
  with relatively low income
• Issue of brand image and equity

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Profitability Analysis (Can GM-Labeled Food
Products Be Sold Profitably in the EU?)

• Economic theory indicates profit maximizing firms
  will behave such that
• Assuming constant returns to scale and that fixed
  costs approach zero then

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• Markup Gross profits

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Estimated Profit Margins for Selected GM Foods
in the Netherlands
Source Marks, Kalaitzandonakes, and Vickner,
2004.
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Gross Profitability for Selected American Food
Companies
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Conclusions for Profitability Analysis

• For this set of GM-food products, the results
  indicate that selling GM-labeled foods in the EU
  may be about as profitable as the current average
  profitability of major U. S. food manufacturers
• Costs of segregation and labeling are probably
  less than the gross profit margin (based on
  research by Buckwell et al. and Wilson et al.)

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Conclusions

• GM-labeled food products will likely be viewed
  more favorably by consumers with relatively low
  incomes than by consumers with high incomes
  (problem of perception and brand equity)
• GM-labeled food products might still be sold
  profitably in the EU
• Results based on a small sample so need to be
  interpreted with caution