Is food innovation profitable?
A case study for yogurt and milk in Spain
Johanna Elena Trieb
August 2013 Summer School
Budapest, Hungary
FDI and Food Innovation

In 2006, global food and drink industry (FDI) retail sales
> 2 trillion US$, representing one of largest industries in the world
(Winger and Wall, 2006)

10-14% of total hh expenditure (high income) and
40-50% of total hh expenditure (low income) spent on food
(Winger and Wall, 2006)

Growing world population, increase in urbanization, increasing
environmental concerns, changes in lifestyle will require the FDI to keep up

Innovation is generally an important driver of economic growth, and in the
FDI will continue to be important to ensure the sustainability of
manufacturers and satisfaction of consumers
New product development

Currently, only 1% of the products found on shelves will be
there in 5 years…(Winger and Wall, 2006)

Many types of new food products:





new to the market,
new to the company,
new packaging,
reformulating of existing products
In general:
incremental (re-development of existing) vs radically novel
Functional food
“if together with the basic nutritional impact it has beneficial effects on one or more
functions of the human organism thus either improving the general and physical conditions
and/or decreasing the risk of the evolution of diseases” (EC)
Percentage of Functional Claims in
World Market
50
45
40
35
30
25
20
15
10
5
0
Source: adapted from Jago. 2009
The FF market
Food Classes with Functional Claims in
World Market
Dairy Products
2%
3%
Share of Global Functional Foods Market
(2003)
2%
Alcohol-free beverages
2%
8%
Childrens Food
4%
Others
4%
35%
Baked food
5%
46%
5%
Snacks
25%
Europe
Breakfast Cereals
Japan
Chewing Gum
6%
Rest of World
Desserts and Ice Cream
21%
Sauces and Dressings
Processed Fish, Meat, Eggs
United States
32%
Source: adapted from Giannetti et al. 2009
Source: adapted from Kotilainen et al., 2006

46% of FF are dairy products (Jago, 2009), brought 1.35 billion US$ in Europe in 1999 (Benkouider, 2005), mainly pro (lactobacillus/bifidus) and prebiotics

Probiotics = 5 mill to 419 mill US$ from 1995 to 2000 (5 years) in Germany alone (yogurt and milk) (Menrad, 2003)

Global FF market estimated revenue 33-48 billion US$ in 2003 (depending on definition) (Menrad, 2003)

European market was estimated between 8 and 15 billion US$ in 2003 and 2006, respectively (Menrad, 2003; Kotilainen et al. 2006)

Germany, France, UK, Netherlands
The cost of innovation

Steps in NPD




develop strategy
design and production
commercialization & launch
BUT:
 high costs associated with NPD (technologies, investment in R&D;
scientific and market research), especially in case of FF



Cost of development of new food 1-2 mill US$, Unilever invested over 50 milll US$ to
develop functional margarine Becel(Menrad, 2003)
high risks (Relatively high market failure rate, 25% of innovative food
products fail)(Hoban, 1998)
Most important to prevent failure of the product
= consumer acceptance
Objective of this study

Analyze consumer demand of various categories of
innovative food products (ie conventional vs reduced fat
vs functional) in Spain to study possible differences in
purchasing behavior and ultimately determine potential
profitability of food innovation
Data
Model
Results
Discussion
Procedure



1) Choose product(s) and categories
2) Find appropriate demand model to calculate
expenditure and price elasticities
3) Analyze influence of demographic variables
Source: own graphical depiction
Data
Data Set


Daily retail scanner data from a major discount
supermarket chain in Spain
4-month period (July 1, 2011 – October 31, 2011)
Focus on Madrid and Barcelona, 17 stores
Customers according to Residence
% Customers

Source:adapted from Cataño, 2013
Data
Product Choice
Unflavored Normal Whole Milk
Milk Consumption
2% 1%
5%
Unsalted Butter
7%
Low-fat Milk Enriched
25%
Whole Milk without Lactose
Low-fat Milk wo Lactose
17%
31%
6%
37%
20%
Flavored Milk&Drinks
Unflavored Normal Soja Milk
Salted Butter
19%
Non-fat Milk wo Lactose
6%
Joghurt (&Drinks) Consumption
Butter/Margarine Consumption
Unflavored Normal Low-fat (semi) Milk
Whole Milk Enriched (Calcium, Fiber,
Energy, Bifidus, Omega3)
Non-fat Milk Enriched
2%
6%
5%
Unflavored Normal Non-fat Milk
4%
Flavored Soja Milk
3%
Normal Joghurt (Whole&Non-fat)
7%
Normal Mayonnaise
Joghurt Drinks
37%
Mayonnaise with Olive Oil
29%
Bifidus Joghurt + Drinks (Whole&Non-fat)
14%
Light Mayonnaise
Lactobacillus Joghurt + Drinks (Whole&Non-fat)
24%
Greek Joghurt
7%
Low-Sugar Mayonnaise
64%
Margarine Light
Enriched Margarine (Omega3,
Vitamins, Proactive, Gourmet)
Olivespread-Margarine
7%
Unflavored Normal Low-fat (semi) Soja
2%
11%
Normal Margarine
Salted Margarine
Mayonnaise Consumption
Other (with Mustard)
2%
Other (Mouse, Creams, Dessert Joghurt, Soja,
Babies)
Soja Milk Enriched with Calcium
20493*
182404*
243724*
Breakfast Cereal Consumption
Egg Consumption
2% 0,003%
13%
41%
44%
21%
Eggs L
Sweetened Kids Breakfast Cereal
(Sugar, Honey, Chocolate)
Eggs M
Unsweetened Breakfast Cereals
Freerange Eggs M
Eggs Enriched w Omega-3
28%
51%
Fruit, Fiber, All-bran Breakfast
Cereals
Sugar/Sweetener Consumption
Canned Tuna Consumption
1%1%
10%
1%
Eggs XL
21975*
Canned Tuna in Water/Natural
14%
Canned Tuna in Olive Oil
27%
5%
Canned Tuna in Vegetable Oil
5%
8%
White Sugar
Brown Sugar
Canned Tuna in Sauce
46%
Canned Tuna in Water Low Salt
Sweetener Solid
82%
Sweetener Liquid
Canned Tuna in Olive Oil Low
Salt
Other (Tuna Belly, Tunameatballs, pickled Tuna)
71021*
29022*
55588*
35940*
*purchases
Source: own calculations
Data
Yogurt consumption
Total Yogurt Expenditure
Total Expenditure by Category
(in 1000€)
Gender Distribution
Consumer Age Range
80
14%
38%
22%
Drinkable
241
(18%)
70
Female
Male
Enriched
Whole-fat
Low-fat
26%
1088
(82%)
2%
13.42
60
34%
50
7.74
40
30
20%
8.33
61.00
43.51
20
Male
Female
18-25
26-40
41-60
61-95
44%
4.92
33.59
21.41
10
0
Drinkable
Enriched
Low-fat
Whole-fat
Source: own calculations
Data
Fluid milk consumption
Total Milk Expenditure
Gender Distribution
Total Expenditure by Category
Consumer Age Range
4000
3%
3500
27%
21%
28%
24%
Enriched
Semi-skim
Skim
Whole
71
(23%)
3000
Female
729
939
878
2500
Male
236
(77%)
41-60
Male
2707
1000
2887
2346
18-25
26-40
2000
1500
21%
31%
683
61-92
Female
45%
2117
500
0
Enriched
Semi-skim
Skim
Whole
Source: own calculations
Research Questions and Hypotheses

RQ1: Are there differences in the price/expenditure elasticities of demand
between the various categories?


RQ2: Are there potential differences between products?


H1: Low-fat more inelastic in demand than whole-fat; functional food demand more
inelastic than conventional; enriched and drinkable more expenditure elastic than
conventional
H2: Expect comparable changes in demand with changes in price/expenditure for milk
and yogurt.
RQ3: Do age and gender influence demand of innovative food products?

H3: Age and gender play a role in demand of FF (since majority of studies show for
example that females and consumers over 60 years have increased demand in FF) (Urala
and Lähteenmäki, 2007)
Model
Model specification: QUAIDS

 x 
wi   i   ij log p j  i log
 i
a(
p)


j 1

Restrictions
Adding up:
 x  i   x 
w i   i    ij ln p j  i ln
ln

  i
a( p)  b( p)  a( p) 
j 1
k
k
k
b( p)   pi  i
where
wi 
piqi
x
i
0


i1
k

ij

i
0
i1

Homogeneity:
k
k
 
ij
Symmetry:

 ij   ji
is the expenditure share for good i

pi is the average price of good i = 1….k (4), x the total expenditures on yogurt/milk

When i  0i the quadratic income term in each expenditure share falls away = QUAIDS = AIDS

0
j 1
k
i1
i1

1

2
1
lna(p)   0   i ln pi   ij ln pi ln p j
2 i1 j 1
i1
i
i1
k
(Banks et al., 1997)
k
k

Quadratic AIDS (QUAIDS)
k


(Deaton and Muellbauer, 1980)
k


Almost Ideal Demand System (AIDS)

Demographics age and a gender dummy were included via a demographic scaling technique
j 1
ij
0
Model
Expenditure and Price elasticities

Expenditure Elasticities

Uncompensated (Marshallian) Price Elasticities

Compensated (Hicksian) Price Elasticities
Results
Descriptive statistics & Wald-test
Source: own calculations
Results
Expenditure Elasticities

Increase in consumer expenditure results in greater increase
in expenditure on drinkable and enriched yogurt (above unity;
luxury) than low- or whole-fat (necessity)

Low-fat greater expenditure elasticity (near unity) than wholefat yogurt (Davis et al 2010, normal nondrinkable yogurt 0.998
vs 1.000 drinkable)

Again, increase in consumer expenditure results in greater
increase in expenditure on enriched/functional milk (above
unity; luxury) compared to skim- or whole-fat milk (necessity)

Again, skim-fat greater expenditure elasticity (near unity) than
whole-fat yogurt (Glaser and Thompson, 2000; Dhar and Foltz,
2004; Li et al 2012)
Note: conditional (wrt total yogurt/milk expenditures)
Source: own estimation results
Results
Uncompensated Price Elasticities

Yogurt: all relatively inelastic. Enriched functional yogurt most sensitive to price changes (Bonnano, 2009: functional drinkable yogurt more sensitive
than conventional). Low-fat yogurt demand most inelastic. Whole-fat yogurt more sensitive than low-fat (Bonnano, 2009). Drinkable less sensitive
than enriched, whole-fat (Davis et al., 2010: drinkable -1.103, refrigerated – 1.012)

Milk: Enriched and semi-skim demand more inelastic than skim and whole. Whole-fat more elastic than low-fat. Contradicts with yogurt where
enriched was most sensitive to price changes. But Di Giacomo 2008 showed than functional drinkable yogurt more inelastic than conventional
drinkable.
Source: own estimation results
Results
Compensated Price Elasticities

Yogurt: All compensated smaller in value than uncompensated (consumer shld have same utility before and after price increase;
consumer gets “compensated” for price increase with rise in income); thus effect will be less severe. Since different suggests
that the income effect on demand is significant. CPE positive = substitutable products. Drinkable and enriched demand more
inelastic than low and whole-fat yogurt (Davis et al., 2010: -0.159 drinkable, -0.605 conventiional). Again, whole-fat more elastic
than low-fat (Milk studies: Boehm, 1975; Gould, 1996 (-0.803 whole, -0.593 1%/skim))

Milk: Again, low-fat less sensitive to price changes than whole-fat. Enriched though insignificant, appears most inelastic.
Source: own estimation results
Demographic variables

Yogurt:



Increase in age increases demand for drinkable yogurt,
decreases demand for low-fat yogurt
Gender (female) influences demand of whole-fat yogurt
negatively
Milk:

Gender positive and significant impact on semi-skim milk
demand (Females increased demand)
Discussion
Discussion

Based on this study, would be “un-academic” to assume that
investing in development of functional products is profitable

But; suggest that functional yogurt and milk products in Madrid
and Barcelona in general are relatively inelastic in demand.

Also low-fat varieties in both cases appear less sensitive to
price changes than whole-fat varieties

Further and continuous consumer demand/market research
crucial…
Discussion
Limitations and Future considerations






Larger data set, ie including retail scanner data from other supermarket to get
full overview
Longer time period, to decrease probability of zero-consumption and analyze
possible seasonal effects
Further disaggregation of the products (by functionality and fat-level, flavored or
plain)
Look at more products
Conditional (wrt to yogurt/milk expenditure) vs Unconditional (wrt to total
food expenditure) to take direct and indirect effects of price changes on
yogurt/milk demand into account; conditional will likely be larger in absolute
value than unconditional…
Analyze influence of further demographic characteristics on demand




presence, number and age of children;
education, labeling
advertising
household income
References

Annunziata, A. & Vecchio, R. (2010). Italian Consumer Attitudes Toward Products for Well-being: The Functional Foods Market. International Food and Agribusiness
Management Review, 13(2), 19-50.

Banks, J., Blundell, R., & Lewbel, A. (1997). Quadratic Engel Curves and Consumer Demand. The Review of Economics and Statistics, 79(4), 527-539.

Bech-Larsen, T. & Grunert, K.G. (2003). The perceived healthiness of functional foods—A conjoint study of Danish, Finnish and American consumers’ perception of
functional foods. Appetite, 40, 9–14.

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
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
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http://www.ffnmag.com/NH/ASP/strArticleID/770/strSite/FFNSite/articleDisplay.asp.

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
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
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
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
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
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
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
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References continued..

Gould, B.W. (1996). Factors Affecting U.S. Demand for Reduced-Fat Fluid Milk. Journal of Agricultural and Resource Economics, 21(1), 68–81.

Hoban, T. J. (1998). Improving the success of new product development. Food Technology, 52(1), 46-49.

Jago, D. (2009). Functional foods, market trends. Functional foods symposium, Amsterdam, 2009.

Kotilainen, L., Rajalahti, R., Ragasa, C., & Pehu, E. (2006). Health enhancing foods: Opportunities for strengthening the sector in developing countries. Agriculture and
Rural Development Discussion Paper 30. World Bank.

Martinez, M.G., & Briz, J. (2000). Innovation in the Spanish Food & Drink Industry. International Food and Agribusiness Management Review, 3, 155-176

Menrad, K. (2003). Market and marketing of functional food in Europe. Journal of Food Engineering, 56, 181–188.

Monár, J. (2007). The Spanish functional food market: Present and future perspectives. European Functional Food Net (FFNet) network meeting, IATA-CSIC.

Siró, I., Kápolna, E., Kápolna, B., & Lugasi, A. (2008). Functional food, Product development, marketing and consumer acceptance – A review. Appetite, 51, 456–467.

Stewart-Knox, B. J., Vaz De Almeida, M. D., Parr, H., Pinhao, S., Bunting, B., & Gibney, M. (2007). Consumer uptake of functional foods in Europe. International
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
Urala, N. & Lähteenmäki, L. (2007). Consumers’ changing attitudes towards functional foods. Food Quality and Preference, 18, 1–12.

Winger, R. & Wall, G. (2006). Food product innovation: A background paper. FAO Food and Agriculture Organization of the United Nations: Agricultural and Food
Engineering document 2.
Thank you for your attention!