The Organic Food Trend

I never was into the organic food craze until my wife became a personal trainer and figured we needed to eat healthier. We swung by Whole Foods one day and at first it didn't seem any different than any other grocery store. That was until we started looking at the prices. Whoa!  Whole Foods is able to charge higher prices for their products than the average neighborhood grocery store because of their differentiated products.

Whole Foods competes as a monopolistically competitive market, where many stores compete in the same industry. However, for years Whole Foods enjoyed a particular "nitch" in the market by providing natural and organic products.

For the past few years, over 70,000 new stores opened, not including those already existing competitors, that offer natural and organic products due to the increased demand. This increase in demand and few barriers to entry is causing Whole Foods to change their strategies. The overload of competition is going to force the price downward and Whole Foods will earn zero economic profits in the future.   

But, let's get real. Is what they say organic, really organic?


Dr. Tufte said...

John: 100/100.

I think there are two dimensions to distinguish here. One of the toughest things to get across to students is that a business can look like, and operate like, one form of market structure when you look at it from a certain direction, and a different one from a different direction. John has focused on the dimension of Whole Foods vs. other grocers. But there is also organic produce sold inside any store vs. non-organic produce in the same store.

For that one, it isn't enough for the products to be differentiated. High prices either result from high costs or high mark-ups over lower costs. I think it's probably the latter, and in order to get those demand has to be more inelastic. But that makes sense, doesn't it? It seems pretty reasonable to me that the buyers of organic goods do have more inelastic demand.

John's snarky one-liner at the end motivated these next two bits.

True Story 1: the last woman I dated before I got married lived in Minneapolis, which can be a very lefty sort of city. This was in the mid 80's, Organic produce was a new and rare thing at the time. My girlfriend and her circle of friends could not understand why organic produce was more expensive, when less stuff was actually being put on the crops. I was a second year graduate student at the time, and I pretty much gave the explanation that John did in his post. I was probably right, but this did not earn me friends in that group ;-)

True Story 2: I am waiting for some documentary to come out some day and expose this. In the meantime, there are at least some people (myself included) who believe that the beginnings of the organic produce craze are in the illegal drug market circa 1970. The marketing gimmick of drug dealers at the was that hallucinogenic mushrooms and peyote were "organic" and this was supposed to make them better than LSD which was a chemical made in a lab.

Vickie said...

I was never much into the organic food trend myself. I had little desire to spend more money on fruits and vegetables that were significantly smaller and didn’t taste any different.

However, after I had my son and all of the sudden, I became obsessed with providing him the healthiest of options. I went out and bought a baby blender (I obviously couldn’t use the same blender that the rest of the family used for smoothies). I bought him all organic fruit and vegetables for the first several months once he started eating solids. But, I never once went to Whole Foods.

On that note, Dr. Tufte brings up a good point regarding organic produce being sold inside any store. Local grocers, such as Albertsons or Smith’s, have increased their market power by offering differentiated products (organic fruit and vegetables). Thus, these other grocers are encroaching upon Whole Foods niche. Although some people may pronounce it “nitch,” the spelling should be niche. I’m surprised Dr. Tufte let you get away with that one John!

Dr. Tufte said...

Vickie: 50/50

So what you're saying Vickie is that your demand for organic foods got more inelastic after having a child. As a result, the mark-ups that seemed unreasonable before, now seem more reasonable. There's nothing wrong with that, and actually it's fairly common. Preferences aren't right or wrong, they just ... are. As economists, we just try and measure how those preferences get converted into more concrete variables.

FWIW: I didn't let John get away with nitch. I missed it myself. I know the difference, but I have a common bad habit: when I proof read my internal voice says the words. Studies have shown that error rates on things like homophones go way up if you can't break that habit. Frankly, I used to be better on that pitfall, but I try and be aware of it. Let that be advice to all of you. ;-)

LightningMcQueen said...

There is also a continually growing trend of changes in demand at certain times of the year due to home gardening. What is more economically priced than the tomatoes, carrots, and cucumbers you grow and harvest?

Does this lead to peak-load pricing? Maybe. It would be interesting to examine this and see if Whole Food’s revenue increases in the colder months of the year.

I think the Market Stores will help increase sales overall but Vickie is right with her point of local grocers. In areas of the country where there are produce farms there is an increased presence of local organic produce. These local products are typically less expensive and fresher because the time it takes to get from farm to store is very short.

David said...

I believe that “organic food” is truly a trend. We are frequently persuaded by the media and other leading organizations as to what is good for us and what is not. While they all have their own agendas, the products and types of foods we are encouraged to consume consistently change. Whether it is a low-carb diet or a new miracle drug created to curb your appetite—it is all just another fade.

According to organic.org, the jury is still out on any potential benefits organic food may have over conventional food. With that said, I don’t feel that organic food is necessarily bad. I also don’t believe that the benefits outweigh the potential cost of time or money required to seek out these products. By the way, does anyone remember when orange juice was considered good for you? :-)


Jordan Johnson said...

I agree that "organic food" is also a trend. I grew up on a farm and my dad recently started to package and sell our own wheat. It was amazing how willing consumers were to pay a premium for organic wheat. Many consumers really didn't care how much they had to pay for organic wheat. A few consumers were willing to pay the premium and would use it for chicken feed so their eggs were organic. I learned that regardless of the price, there would be consumers who prefer organic wheat.

Reddish Day said...

I agree with David and Jordan that "organic food" is a trend, and that when people are looking for an easy way to maintain a "healthy" lifestyle, it's easy enough to go to Whole Foods or their competitors and spend far more money on food than they otherwise would in the name of a "healthy" lifestyle. Most consumers' lack of knowledge about what they are actually paying a premium for allows organic food companies and stores to capitalize and reap greater profits. The organic food trend will eventually slow down, but there will surely be a shift toward another trend along the same lines. So companies would be wise to research those trends, such as the marked increase in persons consuming gluten-free diets when they don't have a medical need to do so, and shift their product base accordingly to match the next consumer trend. With the use of technology in purchasing decisions increasing, companies are increasingly able to deliver any message they wish to convince consumers that what they are offering is healthy. And if you charge a high enough price, consumers will believe it must be healthier.

Dr. Tufte said...

Lightning McQueen: 50/50
David: 47/50 (you meant "fad" not "fade")
Jordan Johnson: 50/50
Reddish Day: 50/50

I think Lightning McQueen has it mostly backwards. I'm not sure where to get data on this, but I'm pretty sure actual consumption of vegetables and other produce from one's own property peaked several decades ago.

Now, I think the bit about peak load pricing is a good addition, but also, almost completely backwards. Peak load pricing is similar to what used to prevail in local agricultural markets, before cheap refrigeration, shipping, and pesticides. Those technologies came apart, at least somewhat, in response to people losing a lot of revenue because of price volatility.

Could we go back to that with more local organic production? Maybe. But I don't think it would be a positive for society.

David: I'm not sure if it matters to the economics whether organic produce is a trend or a fad.

Jordan Johnson: It would be helpful (for the class) if you broke that down into the features discussed in the text. It seems to me that you're saying that demand is more inelastic for organic produce, and that this makes your father's mark-up bigger. Of course, I also think "organic" is not a form of differentiation that can't be copied by others: so this is monopolistic competition, and the long-run outcome is zero (economic) profits.

Reddish Day: so your comment isn't connected with what I just wrote in response to Jordan's comment, but I think we're going in the same direction. What all of you are calling "trends" or fads (the latter is better, because the word trend presumes you just go in one direction — usually up) are really just forms of product differentiation. Of course, it helps if your differentiation is both real and noticeable to consumers. Without accusing farmers of anything ... it seems to me pretty easy to fake organic status since it isn't very noticeable to consumers (which is why the labeling and certifying is so important). This makes me think that the value of this sort of differentiation, in the sense of getting persistent mark-ups, is pretty low. It also makes me think that there's a big need for organic certification, and we're going to see a lot more of that in the future. (This is actually kind of cool, because in reading this thread several times over the last few weeks, linking this to the chapter on guarantees and warranties just occurred to me).