Wednesday, October 28, 2015

REPOST: Why are Turkey prices 9% lower at Thanksgiving?

Why are Turkey prices 9% lower at Thanksgiving?

The NY Times explains the debate among economists who worry about such things:

The most intuitive and popular explanation for a high-demand price dip is that retailers are selling “loss leaders.” Stores advertise very low prices — sometimes even lower than they paid their wholesalers — for big-ticket, attention-grabbing products in order to get people in the door, in the hope that they buy lots of other stuff. You might get your turkey for a song, but then you also buy potatoes, cranberries and pies at the same supermarket — all at regular (or higher) markups. Likewise, Macy’s offers a big discount on select TVs on Friday, which will ideally entice shoppers to come in and buy clothes, gifts and other Christmas knickknacks on that frenzy-fueled trip.

When you price complementary products (chapter 12) it makes sense to reduce the price.  An alternate explanation is from the demand side:

Consumers might get more price-sensitive during periods of peak demand and do more comparison-shopping, so stores have to drop their prices if they want to capture sales. Perhaps, during the holidays, the composition of consumers changes; maybe only rich people or people who really love turkey buy it in July, but just about everybody — including lower-income, price sensitive shoppers — buys it in November. Or maybe everyone becomes more price-sensitive in November because they’re cooking for a lot of other people, not just their nuclear families. 
“People are a little less picky about what they’re buying for other people,” explains Judith Chevalier, an economics professor at the Yale School of Management. “Let’s say I prefer Coke over Pepsi. If I’m buying for myself, I’ll probably buy Coke even if it’s more expensive. But if I’m buying soda for a party, I have no reason to think everyone else also prefers Coke, so I’ll go with whichever brand is cheaper.”

If turkey demand becomes more price elastic around Thanksgiving then we know that it makes sense to reduce price (Chapter 6).  A related explanation is that prices dont change, but rather the more price sensitive consumers substitute toward the cheaper brands. 
 One paper looking at canned-tuna prices argued that this kind of brand substitution was the primary case for an overall decline in price during Lent. It turns out that the cheapest tuna brands aren’t significantly discounted during Lent, but because the cheap brands temporarily accounted for a much higher share of overall sales, they dragged down the average price of a can of tuna.

HT:  Sam

8 comments:

  1. Obviously turkey sales spike during the holidays, especially Thanksgiving. With that in mind, the price of turkey being low is because the competion rises during these times. Super markets offer free turkeys, there are also coupons out weeks in advance, creating a buzz. If the turkey sellers did not lower their prices, then buyers would still pay whatever price because of the demand. So in short I believe that they lower prices to keep up with the promotions and possible the other alternatives, such as Ham or chicken.

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  2. Throughout the year, the elasticity remains consistent for turkey; however, the elasticity seems to peak during Thanksgiving. Consumers become more price sensitive during this time but is this the only reason for the decrease in price? Grocery stores as well as businesses will consequently lower the price for the iconic turkey for family’s to purchase. By lowering their prices, it will be more likely that consumers will be attracted to their store, which may lead to the purchase of additional items. The turkey prices may be near MC or lower than MC; however, the other items that the consumers may purchase while in the store will more than likely be MR > MC.

    All in all, there could be numerous factors to why it would be advantageous to both lower the cost as well as understanding consumers are carefully weighing the prices of turkey. A business innovative will price it right to hopefully increase consumers into their stores.

    http://managerialecon.blogspot.com/2015/10/repost-why-are-turkey-prices-9-lower-at.html#comment-form

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  3. In addition to lowering price when you are selling complimentary products, low priced turkeys are also a bit of psychological pricing. Many stores, in addition to lowering costs on some holiday items, will using promotional pricing. For example, spend $300 on groceries between November 1 and Thanksgiving, get a free turkey. So perhaps the margin on other products in the store is increased to cover the lost profit on the turkeys. This was the store is still making a profit by increasing sales on items with a larger profit margin and having buyers think they are getting a great deal with their free turkey.

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  4. The turkey itself is most likely the most expensive item in the traditional Thanksgiving menu (which does not include Turkducken). The rule of thumb is you want to get a pound of turkey per person, and of course, everyone wants some meat left over. So if you have a typical party of 10-15 people, then you’re looking at a 20-pounder. Retail, that could cost around $25-$30. The price conscious shopper is likely to shop around for this item spate from their regular trip to the grocery store to get the other items on the list.

    It would therefore make sense for stores to want to have promotional pricing to make their turkey sales more attractive. This price sensitivity will therefore make the demand more elastic. As the blog suggests, using turkey sales as loss leader and focusing on complementary products does make logical sense. However, with turkey being a big-ticket item, consumers are going to be watching the prices for sure.

    There could even be some psychological pricing at play here as well. If consumers feel that they are getting a decent deal on the turkey, they are likely to overpay on the smaller complementary products.


    References:
    http://qz.com/151204/four-reasons-why-frozen-turkeys-are-so-cheap/

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  5. Macy’s!!! Black Friday, “that frenzied fueled trip”, entice the buyers to come!

    There is (or probably is) a book entitled, “The Joy of Cooking”; a long time ago, the book. “The
    Joy of Sex” was published; surely someone has written, “The Joy of Driving” (for the driving
    Enthusiast). With a little encouragement I could easily pen, “The Joy of Shopping at Macy’s on
    Black Friday”.

    Since the very first Black Friday event held at Macy’s, I have been exceptionally enthusiastic in participating in the frenzy. (My target, the Macy’s at the Short Hills Mall in NJ)
    Helen and I get up early, a quick cappuccino and into the vehicle, faster than Donner & Blitzen we are parking at Macy’s, 7am is our (my) target time.

    Directly to the Men’s Store, rarely another customer at that time, only the sales personnel, restocking, sorting, tidying up after the midnight to 3am rush, some dragging and ready to go home. Some are just starting the early day shift. The regulars with twenty years of Macy’s experience, the holiday part timers helping, and the white & yellow flowers (floor managers).

    On a good Friday, nearly two hours enjoying the department for myself. If you know how to prepare, and know the floor plan layout, and (!!!) know the regular sales people, you can stand a fair chance of winning. For two days the newspapers have coupons and the special holiday fliers (coupons) were mailed earlier in the week. If I have not opened (or used) one of (his, hers, ours) Macy’s account for two or three years, a willing, able salesperson will happily open a new one for me, with the attending additional overall 10 – 15% discount on all purchases.

    There are the early morning specials of course, but if you know the name brand sections (Tommy Hilfiger, Ralph Lauren, others) may be moving their two month old stock onto the floor at substantial discount, depending how busy they are at any particular moment. Merchandise must be moved, sometimes the last of the summer stock with two or three stacked discounts seem like they’re nearly free. If you can find your size, and don’t mind running the racks, (I make it a game) great deals can be found. Just finish before the 10am crowds start. If you sign up for the charity benefits card, extra discounts for a small fee ($25 or so) that count toward your final total purchases registered in Macy’s accounting system.

    Rather than the big screen HDTV (I’ve purchased through Tiger Direct and taken the very last of the end of year clearance special by negotiating a few dollars more off to “move it” in a famous appliance store), focus on the clothes. The straight dollars off coupons sometimes are good on non-sale items (ask yellow or white flowers when the part time salespeople are stymied). Know what you need, what you want, and the usual selling prices of those items, and formulate your game plan.

    While I don’t pay list price unless it is an emergency, on my great Black Fridays at Macy’s I’ve scored $2500 worth of regular discounted clothing for about $1100 final. Good to keep me happy for most of the year. I let everyone else enjoy shopping for the turkeys.

    Lee Lichtenstein (personal experience)

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  6. K Novick, ESC Managerial Economics FALL 2015
    Post #10
    What a great time to talk about Thanksgiving and turkey. My family is getting ready to celebrate the holiday (the only one that matters equally to each of us) and, thankfully, it is a pot-luck affair. A bittersweet time as my father’s (who passed an unbelievable 13 years ago) birthday was November 23, which is close to the Thanksgiving holiday, and it was the only holiday we celebrated as a family when I was a young child. My job is not the turkey, but rather two homemade cheesecakes, so I don’t pay much attention to the cost of the turkey…

    Moving on… “If promotional expenditures make price more elastic, reduce the price when you promote the product” (p. 157). Consumers focus on prices, and are generally sensitive to price differences – especially around this time of year – so a reduction in price will attract more consumers. Think about it.. Someone knows they need a 15 pound turkey so they look around and find one store that sells the turkey for 69 cents per pound and one that sells for 89 cents per pound. Chances are they will visit the store that is 69 cents per pound, believing they can save about $3. I have noticed that different items are cheaper at different stores. You cant have a Thanksgiving dinner without stuffing, potatoes, gravy, etc.

    I have noticed that Butterball tends to participate in advertising a “more moist, higher quality turkey” which allows them to increase the price due to promotional campaigns where the intent is to reduce sensitivity to price and increase sensitivity to attractiveness and quality.

    I also find that I now refuse to pay ‘full price’ for clothing/shoes, etc. The prospect theory that implies consumers are motivated not by the actual price level, but rather by a comparison to the reference price allows the consumer to feel like they have “won”. This is true of the Black Friday sales and the clearance rack. If you see a ticketed price of $100 for the MOST AWESOME pair of boots, and next to it a 25% off sticker, together with an “all discounted products enjoy a 15% discount off final price”.. can anyone say sign me up? Im guilty of falling for this psychological pricing mechanism. $100*.25-$75.00 *.15 = $63.75 for a $100 pair of boots. .. “Honey, I HAD to buy them … they were on sale” :P

    Froeb. Managerial Economics. Cengage Learning.

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  7. When Wal-Mart opens a supercenter, for certain individuals of the community it’s an opportunity to save a lot of money on groceries and other goods. But for Businesses within the community it’s like a Godzilla is in town.

    One major complaint is that Wal-Mart’s operation destroys other local businesses, and its enormous wealth has been generated at the expense of other retail businesses. The community asserts that they have grown so big in a way that they have developed the power to determine suppliers' prices. By putting pressure on suppliers they lower their prices, and because Wal-Mart has such a big market share of retail sales, they are able to deliver low prices to consumers.

    Also many complain about downtown deterioration or decline when Wal-Mart established a supercenter in their communities. For example, Wilmington, a community of about 10,000 in North Carolina saw a decline in their downtown when Wal-Mart moved in. Traffic and business moved to the western edge of the town toward the shopping center of Wal-Mart away from the other downtown shopping centers in the east. Not only K-Mart, the biggest retailer on the eastern side had to shut down because of the competition, other downtown businesses experienced problems and eventually had to shut down.

    Certainly the growth of Wal-Mart and its indomitable performance are evidence of what the American public value – quality goods at cheap prices. Although by giving Americans what they want, it has put other retailers out of business. But that is how marketing in a free society works. Over the years, the automobile has replaced the horse and buggy on the roads, and sound-motion picture has eventually replaced the silent. No one has a right to business success or a right to be protected from competitors.

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  8. Turkey prices are 9% lower at Thanksgiving for two main reasons: to get more people into the stores to shop and to get rid of any excess. Most people know that if they wait a few days before Thanksgiving they will get a better price. “By focusing consumers on prices, you make them more sensitive to price differences, which makes demand more elastic. When you make demand more elastic, you want to reduce price to attract more customers” (Froeb, et al., 2016, p. 157). Over the past years during Thanksgiving holiday, I am certain that I have never gone into a store and walked out with just a turkey. Nine times out of ten, I have walked out with more items than I originally went in to buy. This is what stores want to see. They want consumers to purchase more complementary items at raised prices. Pricing the turkey low is the hook that stores use to get people into the stores to shop. When a consumer pays 9% less on a turkey which is the staple dish at Thanksgiving, they don’t mind spending an extra dollar here and there on other complementary food items. The second reason is that most people seldom buy a turkey after Thanksgiving unless the price is a giveaway. After Thanksgiving, the demand for turkey is low. Therefore, during Thanksgiving, stores try to reach as many elastic demand consumers as possible. “Price elasticity measures the sensitivity of quantity to price” (Froeb, et al., 2016, p. 72).

    Froeb, L.M., Shor, M., McCann, B.T. and Ward, M.R. (2016). Managerial economics: A problem solving approach, 4th ed. MA: Cengage Learning.

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