Good Point - Desmond O'Rourke
How Will the Recession Affect Fruit Markets?
Most economic slowdowns have little measurable impact on the demand for fresh fruits. In rich countries like the United States or Canada, consumers are already spending a small proportion of their total income on food, so that small changes in income have little effect on what consumers pay for fruit. In contrast, the average price of fruit at the grower level responds quite sharply to small changes in supplies. So, the prices that growers receive are more affected by the available supplies in any season, than by the phase of the economic cycle.
However, there are reasons to believe that the current economic slowdown is not just another blip in the economic cycle, but could bring major income changes for many consumers. As a result, it could represent a major turning point in consumer behavior that will present apple marketers with unprecedented challenges.
Between 1985 and 2007, the U.S. economy experienced a period of increasing populations, incomes, wealth, affluence, credit, and choice of lifestyles and gratification. For example, grocery store produce sections featured an expanding mix of new varieties of traditional fruits, such as apples, grapes, and strawberries, and new strains of tropical or exotic fruits, nuts, and berries.
The era of unlimited abundance and constant gratification has come to a crashing halt. Consumers have seen the value of their homes, pensions, and other assets crumble. Unemployment is climbing rapidly in both the government and private sectors. Access to credit has shriveled, and bankruptcies risen for both businesses and consumers. Many consumers face shrinking income and cash flow, while costs of food, gasoline, utilities, health care, and other necessities are rising.
Consumers have already shown dramatic changes in their behavior. Overall retail sales for the first ten months of 2008 were down 3 percent in real terms from the previous year.
Consumers have been driving less, shopping less, and patronizing sit-down restaurants less. They have been concentrating much more of their buying in discount stores such as supercenters, club stores, dollar stores, and limited selection discounters. Even within grocery stores, consumers have been snapping up special offers, using more discount coupons, choosing store brands instead of national brands, or choosing mundane items instead of upscale items. Many are buying in smaller quantities or curtailing their purchases later in each month as their paychecks run out.
The length of the current recession will play a key role in determining how big the changes in consumer behavior will be, and how lasting they may be. Of past recessions, that of 1980-1982 appears to offer the best clues as to how this current recession will evolve. The 1980-1982 recession was preceded by a big run-up in oil prices as in 2004–2008. The graph "Growth during major recessions" shows the changes in real gross domestic product for the years before, during, and after the average U.S. recession and the 1980 recession, and the trajectory so far in the present recession, assuming that 2009 is the bottom of the current cycle.
Note that the plunge into past recessions has been steep, while the recovery has been slower, taking three years to regain the ground lost in one year. Note also that the U.S. economy appeared to be recovering in the first year after the 1980 recession, but fell back into recession again in 1982 before rebounding strongly in 1983. It now looks as if the bottom of the current recession will be longer than usual, at least four quarters.
Impacts on apple market
Based on past experience, the major direct impacts of recession on the apple market will be the loss of some regular apple buyers as their incomes shrink or they become unemployed, and the tendency of other buyers to be influenced more by price. This will lead to shrinkage in demand for premium varieties and for specialty items like organic apples and presliced apples. The impact on upscale products may be more pronounced in the present recession because more upper income consumers than usual are in financial trouble.
Most of the impact on the apple market will be indirect as shoppers in general chase lower prices or special offers or move more of their shopping to hard discounters. If a retail price war breaks out, as it has in the United Kingdom, some traditional grocery chains could be bankrupted, bringing increased risks for marketers and their growers. Consumers will be more inclined to curtail their impulse buying and to plan menus before they shop. So, apple suppliers need increased promotions to get on consumers' menus and shopping lists before they go to the store.
Retailers will have further justification for leaning on suppliers to offer additional price breaks that can be passed on to struggling consumers. For example, under its Operation Main Street program, Walmart promised to lower food prices every week until Christmas 2008, bringing consumers added savings of $200 million over and above its everyday low prices. Competitors are likely to respond in kind. Regional, if not national, grocery price wars are quite possible. Retailers, in general, will be less willing to stock slow-moving items. Apple varieties with weak consumer appeal will be under particular pressure to stimulate movement with lower prices. Retailers will also be inclined to soft-pedal their demand for local supplies, socially responsible certifications, or other cost-increasing requirements, in the interest of keeping prices low.
Similar situations are developing in many of the main apple export markets. Trade credit could also be a problem into some export markets.
The key for apple marketers will be to remain flexible. There are many unusual features of the current economic slowdown. The Federal Reserve Board, the Treasury Department, the U.S. Congress, and other governments are in uncharted territory in engineering fixes for the economic problems. The downturn has already brought major breaks in long-standing consumer attitudes and behavior. If the downturn is prolonged and painful, it could solidify major, permanent changes among both retailers and consumers. The key for apple suppliers will be to quickly recognize the new realities and adjust to them more rapidly than competitors.
Dr. O'Rourke is president of Belrose, Inc., Pullman, Washington, publisher of the monthly World Apple Report.