why do food manufacturers introduce new...

Why Do Food Manufacturers Introduce New Products?

Cheryl Hill Lee and Gerald Schluter

Something interesting is happening with respect tothe number of new food products introduced eachyear. ERS monitors the number of new food prod-ucts introduced each year through New ProductNews; this service estimates that the number of newfood products introduced rose in five of the firstsix years in the 1990s, peaked in 1995 at 16,890,and has fallen since (Figure 1). Clear inflectionpoints like these intrigue economists. Clearly, some-thing happened here to change the incentive for foodmanufacturers to change the number of new prod-ucts they introduced. The size of the food marketdidn't shrink-the U.S. resident population roseabout 9.5 percent from 254 million to 272 million-and consumers certainly have not been demandingless variety of food products. Yet the number ofnew products introduced annually has fallensteadily after the 1995 peak.

Four potential explanations are

* Regulation of Food Labels-in the early 1990ssignificant new regulation of food labeling wasestablished through the Nutrition Labeling andEducation Act (NLEA) of 1990, which wasimplemented with regulations that took effectin 1994. The NLEA, its implementing regula-tions, and parallel regulations issued by FSISprescribe three aspects of package labeling:nutrient contents, nutrient content claims (suchas "low fat"), and diet-disease claims (such as"high fiber will reduce risk of cancer")(Aldrich). Perhaps restrictions upon claimsmade on food labels reduced the incentive forand/or raised the cost of introducing new foodproducts.

* Retail-food-sector consolidation-In recentyears, the U.S. food retailing industry has un-dergone unprecedented consolidation and struc-tural change through mergers, acquisitions, in-vestitures, internal growth, and new competi-tors. Could this consolidation have led to morestandardization of products carried in stores andtherefore less opportunity for new food prod-ucts to be carried in these stores?

* Slotting allowances-Slotting allowances-fixed fees paid to retailers by manufacturers inreturn for stocking new products on a trial ba-sis-help channel competition for limited gro-cery store shelf space and have become moreprevalent in recent years. While these fees maymake a retailer more willing to stock an un-proven product, the fees do raise the cost ofproduct introduction and thereby discouragemarginal products.

* Scanner data-The point-of-sale data availablefrom scanner data records may have increasedthe efficiency of new product introduction.There may be less need for experimentationbecause manufactures find out more quicklywhether a certain new product has stayingpower in the market.

While all four potential explanations are plausible,the supporting economic logic of the explanationsdiffers sufficiently that an initial step to understand-ing the recent pattern in new food-product intro-ductions is a review of economic literature for whatothers have identified as the economic incentivesfor food manufacturers to introduce new products.

Several factors may influence a foodmanufacturer's decision to introduce a new fooditem into the retail market. The lower the entry cost(e.g. the cost of developing the new food or thecost of introducing the new product into the gro-cery store), the more likely the product will be in-troduced. The more the manufacturer believes con-sumers will be interested in purchasing the item,the more likely the product will be introduced. Themore likely the firm feels the new product will helpits market share, the more likely the product willbe introduced. Bayus and Putsis found that a broaderproduct line makes it more likely that at least oneof the firm's products will match any individualconsumer's preferences most closely. However, thefirm must balance the positive demand effects of abroader line with potential negative effects on pro-duction costs when deciding on an optimal lengthfor its product line. Putsis (1997) examined the

Why Do Food Manufacturers Introduce New Products? 103

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Lee, C. H. and G. Schluter

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Journal of Food Distribution Research

number of brands sold in each of 59 geographicmarkets and over two hundred categories usingannual Information Resources, Inc. (IRI) market-level data on food products. He found that an in-crease in the number of brands increased the abil-ity of national-brand manufacturers to raise price.

Changes in consumer taste and demand for foodprovide opportunities for food manufacturers to in-troduce new products. Consumer demand hasshifted over the years from raw and unprocessedfood products to ready-to-eat and processed foods.For instance, there are many more complete mealsin the frozen food aisle of the grocery stores thanin the past. Even the produce sections of most re-tail stores have many more ready-to-eat salad vari-eties to choose from than ever before. There aremany different instant hot-cereal flavor varietiesto choose from with bold colors and exciting la-bels that tend to attract customers. This trend to-wards an expanded selection of ready-to-eat mealsand pre-washed-and-packaged chopped fresh veg-etables appears to be a direct response to changesin consumer demand. Many American consumerstend to be interested in how quickly a meal can beprepared, but some consumers also want nutritiousand nonfattening foods. Ready-to-eat foods havebecome more of the norm instead of the exceptionin most grocery stores today. The lifestyles of manyconsumers are very fast-paced and many house-holds are not sitting down to home-cooked mealsas frequently as in the past. Frozen dinners and pre-packaged salads may substitute for a meal thatwould normally take approximately an hour to pre-pare. Manufacturers are responding to the busylifestyles of today's consumers by providing foodsthat require only seconds or a few minutes in themicrowave for preparation.

For those consumers interested in low-fat, re-duced calorie, and low-sodium foods, food manu-facturers have responded by introducing more ofthose varieties. Some consumers are responding tohealth reports that stress the importance of a re-duced-fat and low-sodium diet. The fear of heartdisease, hypertension, and stroke has influenced theincreased demand for foods lower in fat and salt.Food manufacturers have responded to the demandfor these types of foods by offering an increasednumber of lighter varieties of existing foods. Gro-cery stores are stocked with several versions of afood item based on its fat content, caloric count, or

sodium content. Surprisingly, this increased avail-ability of healthy foods has not led to a significantdecrease in fat consumption and obesity for Ameri-can consumers.

Foods that may provide a health benefit beyondbasic nutrition are considered "functional foods,"as are foods that have nutritional ingredients addedto provide specific health benefits in addition tothe foods' basic healthfulness. While the overallfood industry is growing at only one percent peryear, Reuters indicates the worldwide functional-food market is forecast to grow nine percent annu-ally. This would make the functional-food marketa $27 billion business by the year 2010. Many shop-pers look to produce when choosing foods for spe-cific health benefits. For instance, consumers chosebroccoli, spinach, and carrots for the specific pur-pose of reducing the risk of cancer. Oatmeal waschosen by shoppers to lower cholesterol and in-crease fiber intake (Food Marketing Institute).

What is a New Food Product?

Some groups that monitor the introduction of newconsumer products, including new food products,call a new food product any new food product thatis unique enough-different from existing products-to be assigned a new UPC code. When it comesto new food products, there may only be an exten-sion of an existing product line-a slight variationin the size of the packaging, a new flavor, or achange in an ingredient. Should this extension beconsidered a new product? Obviously, deciding justhow different an introduced food product must befrom existing food products before it can be con-sidered a new food product calls for judgement andcan easily vary by individual. For example, theproduct Go-Gurt-"Grab-n-Go" Yogurt-has beenadvertised as a fun tube of yogurt for children. Tosome consumers this may not seem like a very in-novative product, but to a busy parent attemptingto pack a healthy lunch for her child it is a signifi-cantly different and convenient product. The prod-uct can be eaten refrigerated, frozen or thawed.Parents can freeze and pack it with their child'slunch and it will stay fresh until lunchtime, accord-ing to the manufacturer's advertisements. It doesnot require a spoon, so it is convenient for childrenand their parents.

How innovative Go-Gurt is depends on the

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consumer's perspective. To a busy parent who istrying to quickly prepare his or her child's lunch,Go-Gurt is one of the best new products on themarket. However, to a consumer who is not con-cerned with portability or whether a spoon is re-quired to eat the yogurt, Go-Gurt may not appearvery innovative. The consumer may not have anychildren, so he or she may be indifferent about anew portable yogurt product being introduced. In-novation is in the eye of the beholder. The successof many new food products depends greatly on howrelevant and useful the products are to consumers.As long as there is a large enough following forparticular types of products, new food-product in-troductions can survive and be successful. If thefood manufacturer can predict what consumers willwant to purchase and repurchase, then the likeli-hood of its new product succeeding is much higherthan if the food manufacturer have no prior knowl-edge.

As noted, some groups that monitor the intro-duction of new consumer products, including newfood products, call a new food product any newfood product that is unique enough-different fromexisting products-to be assigned a new UPC code.This is a convenient definition when one needsobjective counts of new food products. We used itin our introduction, in Figure 1, and when we giveestimates of the number of new food products fromnew-product monitoring. When we discuss newfood products in general, and the economic forcesbehind their introduction, we adopt a broader viewof a new food product: the new food product has todiffer enough from existing food products that somepart of the food market-competing manufactur-ers, food retailers, or food consumers-adjusts toaccommodate the new product.

Why do Firms Introduce New Products?

While the introduction of new food products ingeneral appears to be driven by consumer demand,the incentives for individual firms to introduce newproducts into the market varies, as does the impactthat those new products may have on other firms.Competition among food manufacturers may in-fluence their decisions to introduce certain new fooditems when they do. For instance, the increasednumber of brands and choices available in the fro-zen-dinner section of the grocery store results not

only from food manufacturers continually innovat-ing to keep the interest of consumers but also fromefforts by individual firms to protect their marketshare from competitors by keeping a sufficient va-riety of food products available to consumers.

One food manufacturer may introduce a newproduct in an effort to discourage other companiesfrom entering the market. The introduction of a newfood item can serve as a barrier to entry. Once anestablished firm (a firm that has a secure positionand reputation within the marketplace) introducesan innovative food item, it may be more difficultfor new entrants to enter the market with a similarfood item. The most familiar brand may capturethe market for that particular type of food product.

Neither patents nor ownership of raw materi-als sources is generally important in the food in-dustry. Brand-specific production knowledge is ap-parently present, since established firms are some-times unable to duplicate each other's brands. Butthis has not prevented many from producing, pro-moting, and distributing successful new brands(Schmalenesee).

Despite consumer interest in the product, a newfirm will introduce a product only when the ex-pected revenues from doing so are greater than theexpected costs. If an established firm's cost of pro-ducing its current product is raised by the intro-duction of a new product, the firm will be less likelyto innovate. Aron and Lazear discuss how the tim-ing of product introduction is crucial. While estab-lished firms are sometimes reluctant to open up newmarkets, it may be to a firms' advantage to followinto the new product line. If the first-mover advan-tage is not great enough to deter entry of other firmsinto the market, then being a first mover is actuallya disadvantage. Since entrants do not take into ac-count the effect of fixed costs and diseconomies ofscope borne by established firms, they tend to en-ter too often. Provided entry by outsiders, the es-tablished firm's decision to follow into the newmarket is efficient, but only relative to remainingin the old product while the entrant produces thenew one. This action would cause the new entrant'scosts to be sunk, and the existing firm's decision isan efficient one.

Firms decide in which market to operate de-pending on the payoffs in each market. The deci-sion to enter a new market, however, involves sev-eral steps after the initial move. The new product



must be developed, personnel must be trained, con-tracts must be written with new suppliers and ter-minated with old ones, and plants must be restruc-tured.

The survival of firms is contingent on the con-ditions of the market in which they enter. Entry,exit, and the survival of firms in terms of evolu-tionary changes in the market from the first intro-duction of a product to maturity of the market arecritical to the introduction of new products. Datafrom the Thomas Register of American Manufac-turers consisting of a complete inventory of allentering, surviving and exiting firms in each oftwenty-five new-product markets has been used totest the survival of firms. Survival rates depend onboth stage of development and individual firm at-tributes. The development of a market for a newproduct may follow a systematic sequence ofchanges, or the changes could be a product of ran-dom shocks. Entry rates appear to be affectedgreatly by stage-related changes in both the rate oftechnical advance and the form that innovationstake (Agarwal and Gort).

One reason firms may introduce products is toexpand their potential markets by varying the char-acteristics of their products to fit those most likelyto sell in a particular market. For example, if themarket is a particular area, the firms may engagein spatial competition, the simple mechanism inwhich firms try to capture the largest number ofcustomers from their neighboring competitors.They do this by choosing a particular position inthe geographical space. Horizontal differentiation,or spatial competition, relates to the idea that con-sumers will prefer to shop at a supermarket withintheir own neighborhood and firms may have toexpand their product line to ensure that their prod-ucts appeal to customers in this area. Firms mayalso expand their product line to compete by verti-cal differentiation. With vertical differentiation-differentiation based on quality differences-prod-uct diversity arises because consumers are differ-entiated by their income. In a vertically differenti-ated product space, all consumers agree over themost preferred mix of characteristics and over thepreference ordering (Tirole). The market is seg-mented according to consumers' ability to pay:high-quality products are purchased by rich con-sumers, standard-quality products by middle classconsumers, and low-quality products by poor con-

sumers. Based on these conditions, the disparitiesin income distribution bind the number of qualitiesthat can coexist on the market; higher income dis-persion implies a larger number of qualities with apositive market share. The entry of new products(of given qualities) may be accompanied by the exitof some existing products (Phlips and Thisse).

Supporting our earlier discussion of the impor-tant role of changing consumer tastes as an impe-tus for new food-product introductions, Weston andChiu find consumers' demand for variety requiresfirms to keep a high rate of introduction of newfood products to maintain their competitive posi-tion. Because of these forces, new industry seg-ments continue to emerge: quick snacks for busypeople who want to buy time more than nourish-ment; ready-made meals for heating in the micro-wave; low-fat, low-calorie foods for dieters; spe-cial foods for babies and the elderly; health foodsfor the fitness oriented. Food manufacturers havecontinually responded to the needs of consumersby introducing food items that are innovative andreflective of the current times.

How Do Firms Introduce New Products?

The way in which new products are introduced tothe market can be as important as what is intro-duced. Firms use various methods of securing theirproducts on the market. Innovation and productdifferentiation within the retail food market are dis-tinctive compared to other types of product mar-kets. For instance, brand names on food items areessential for identification purposes and serve as asignal to consumers for a particular level of qual-ity. When consumers can differentiate productsbased on the manufacturer's labeling and the brandname provides key information to the consumer,the potential success of future introductions and thevalue of these introductions for securing the firm'scompetitive position increases.

The effort of learning about new products canbe costly, and consumers are assumed to vary intheir ability and willingness to expend such effort.Consumers tend to be loyal to established firmsdespite the entry of lower-priced rival goods be-cause such goods are rationally expected to be oflower quality. Loyalty to known brands is a reflec-tion of consumer uncertainty about new untestedgoods. There appear to be consumer brand-loyalty

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advantages to the first entrant's new product. Basedon the results of a study conducted by Gabszewiczet al., brand loyalty remains an important first-mover advantage. Certain brand-name food prod-ucts have a reputation of good quality and highnutrition value, and new entrants may therefore findit difficult to introduce a competitive new food item.Consumers may identify with particular brand-name items, and they will be inclined to continueto purchase the products with which they are fa-miliar.

Product innovation refers to the decision by thefirm to supply a new product, as opposed to pro-cess innovation, which refers to the adoption of anew production technology. Firm-specific learningis expected to play a major role in determining in-novation costs, and it is assumed that a firm withexperience in production has a cost advantage inupgrading the product compared to a firm that isnot producing. This "learning by doing" effect of-ten explains the declining fixed costs of innovation(Gruber). Once a firm has established the technol-ogy needed to produce certain types of products, itwill cost much less for that food manufacturer tocontinue to introduce similar products.

Entrants are more likely to introduce more-ef-ficient production processes that make firms morecompetitive within a market, which can lead tolower prices. Established firms tend to use not onlyprice but also advertising and new product intro-ductions as a way to deter or limit entry. New prod-uct introductions can make entry more difficult ifconsumers are more likely to buy new productsfrom established firms rather than from new en-trants. In the ready-to-eat cereal industry, estab-lished firms accommodate other established firmson price and new product introductions but use ad-vertising to limit the scale of entry (Thomas).

Advertising and new product introduction canbe construed as substitute forms of entry-deterringconduct practiced by producers of more differen-tiable food products. Zellner studied the effects ofadvertising and whether it is a barrier to or facili-tates entry. Using a sample of seventy-five five-digit food-product classes in 1977, empirical analy-sis was conducted to study the effects of advertis-ing as an entry barrier. The study supports the ar-gument that advertising functions more to persuadeand raise entry barriers than to inform and facili-tate entry. The study suggests that two modes of

conduct-the intensity of advertising and new prod-uct introduction-are affected by industry struc-ture and have an important influence on industryperformance. Firm growth is typically accompa-nied by the introduction of new products andheavier advertising.

Not all new food products are introduced bythe food manufacturer. Many food manufacturersproduce food products for others as well as pro-ducing their own brands. Supermarkets tend to stockleading national or regional brands as well as theirown store label in adjacent shelf locations. Thisoccurs for most types of foods and beverages andis an interesting aspect of the market for manufac-tured food products. Private-label goods' share byvolume of total supermarket sales of packaged gro-ceries increased from 15.3 percent in 1988 to 19.7percent in 1993 and 20.2 percent in 1996 ("Make ItYour Own"). Supermarket chains learned that pri-vate labels provided higher profits than nationalbrands (Harris et al). High levels of sales concen-tration and product differentiation characterize in-dustries that manufacture national food brands. Thefour leading national-brand manufacturers ac-counted for approximately 85 percent of retail salesof all branded food products in the United States(Connor and Peterson).

Benefits of Introducing New Products

The introduction of new food products can benefitfood manufacturers in several ways. Of course, asuccessful new food item will raise itsmanufacturer's profits. The success of new foodproducts is contingent on the product's availabilityand on consumers responding to the promotionsand consistently purchasing the new items. Foodmanufacturers with name brand items familiar tocustomers are more likely to be able to success-fully introduce new food products. Once a foodmanufacturer has established a positive reputationwith its new food products, it will be able to intro-duce other new items with more ease.

Branding may be one important way to addvalue to the food product. Branding differentiatesthe food item and provides an alternative to pricecompetition. Brands have the ability to create con-sumer franchise-consumer awareness of, positiveattitudes toward, and willingness to frequently buya brand. Njssen and Van Trijp suggest that, despite



the fact that fresh food products have been on themarket for many years, it may be easier for a first-mover brand in the product category to develop astrong consumer franchise. For example, Perduechicken has a reputation among consumers as high-quality poultry, and people will most likely con-tinue to purchase it even at a higher price.

Branding can be an important way for a firm toprotect its market share. For example, if a new fla-vor becomes popular, an existing ready-to-eat ce-real manufacturer may introduce that flavor to anexisting cereal, and that minor innovation maymake it difficult for other firms to enter the mar-ket. The established firm already has brand loyaltyin many instances, and it is therefore much easierfor that firm to introduce the new flavor of cereal.New entrants who attempt to compete with estab-lished firms that have consumer loyalty will havedifficulty entering the market. For example, if Gen-eral Mills decided to add a new flavor of Cheeriosto grocery store shelves, a manufacturer consider-ing the introduction of a new product may struggleto compete with the reputation of the General Millsbrand-name products.

In a multi-product retail firm, profits normallyare maximized if some type of price discrimina-tion is practiced. The fact that supermarkets handlea multitude of products is enough to suggest thatthe opportunity to price discriminate does exist.Consumers of staples-goods that are purchasedfrequently and in considerable quantities by house-holds-tend to be more responsive to price changes.Because all supermarkets carry staples, consumerscan easily make price comparisons. Price compari-sons on non-staples, however, are more difficultbecause they are purchased less frequently and be-cause the money spent on any single non-staple istoo small relative to the total food budget to callfor price-consciousness with respect to that item.Manufacturers' development of new products-such as cake mixes, frozen foods, and so on-hasincreased the opportunity for price discriminationby retailers. Retailers have welcomed the new prod-ucts because many of them are purchased by high-income consumers, who are less sensitive to prices,or by middle-income consumers who are equally in-sensitive to price because of the infrequency of thepurchase. There does appear to be evidence of exten-sive price discrimination in supermarkets (Holton).

Costs of Introducing New Products

When manufacturers of food products introducenew products they face additional costs such as re-search and development (R&D), advertising, andtraining for employees. The R&D costs are not greatcompared to other industries. The National ScienceFoundation reports that during 1994 the amountspent by companies in the U.S. on basic and ap-plied research and activities aimed at translatingresults of these investigations into products or pro-cesses (development) averaged four percent of thesefirms' net sales. For firms making food, kindred,and tobacco products the R&D expenditure sharewas less than one percent of these firms' net sales(NSF). This expenditure, however, is likely to varyby type of new food product. For example, com-pare two new products, cholesterol-free egg prod-ucts and a new flavor of instant oatmeal. The re-search and development involved in creating theegg products may be more costly and involved thanthe new flavor for the hot cereal. Also, comparedto other industries, firms making food, kindred, andtobacco products spend more on research than theaverage of all firms (42 percent vs. 28 percent ofR&D on research compared to 58 percent vs. 72percent on development) (National Science Foun-dation). While estimates of advertising costs fornew food products are not available, the food in-dustry as a whole is a large user of advertising-four cents of the consumers' food dollar goes foradvertising (Elitzak). Similarly, separate estimatesof employee training costs associated with new foodproducts are not available. The wide range and num-ber of food products available suggests the indus-try technology and cost structure do not providesignificant cost savings from large production runsof homogeneous products compared to severalsmaller production runs of differentiated products.

When manufacturers of food products make de-cisions about introducing new food products, theymust consider the retail market. Introducing newfood products is not costless to food retailers, andmanufacturers' products must compete for limitedshelf space in grocery stores. As a result, most gro-cery retailers require some type of slotting allow-ance from food manufacturers as a form of pay-ment for the shelf space. The slotting allowances-fixed fees paid to retailers by manufacturers in re-turn for stocking new products on a trial basis-

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help channel competition for this space. Slottingallowances may also improve product selection bydownstream retailers who are uncertain of demand.

Slotting allowances stem from retailers' imper-fect information surrounding new-product demand.Today's retailers face many product categories andvarious brands in each category. The retailer makesan implicit agreement to stock the manufacturer'snew product for a trial period-usually sixmonths-in exchange for the slotting allowances.The major debate in the industry centers on whetherthe fees are anticompetitive or serve as arrange-ments to cover increases in retailer costs. Manu-facturers have complained that slotting allowancesare a form of price discrimination used by retailersto extract manufacturer profits. Retailers claim thefees are necessary to cover the costs of stockingnew products.

Slotting allowances can serve as a risk-sharingmechanism where all new products pay a fee andthe successful products subsidize the ones that fail.The slotting allowances can also be used as a sig-nal to identify the good products. To date, slottingallowances have been widely adopted in grocerystores and sometimes in drugstores. Apparently,trends in new-product activity and sales per storehelp explain the absence of slotting allowances inother consumer nondurable retail markets. Shafferprovided an anticompetitive argument that slottingallowances make manufacturers no worse off buthelp retailers reduce competition at the retail level.Theoretically, to reduce consumer search costs, slot-ting allowances should be used by any retailer whostocks multiple products, but the fees are mainlyadopted by grocery retailers (Sullivan). Kroger wasthe first supermarket to officially admit to charg-ing slotting allowances. Kroger justified the feesby stating that they pay for the one-time costs ofentering product information into the computer,putting new products in the warehouse, and plac-ing them on the shelves (Sullivan). Many foodmanufacturers are faced with the additional costassociated with slotting allowances when they in-troduce new food items into the retail market. How-ever, manufactures who sell in supercenter retail-ers, such as WalMart, do not have to pay slottingfees- these supercenters increase the supply ofshelf-space to match the demand from proven prod-ucts, so the price of shelf-space is essentially zero(Richards and Patterson).

Food product suppliers who are willing to payslotting fees or promotional allowances give retail-ers a signal that they are confident about the suc-cess of their product. The risk of a new productfailing is high. If a product fails, retailers mustshoulder the costs of physically removing the prod-uct and reshelving an alternative, and the opportu-nity cost of lost sales from other potentially suc-cessful products that could have been sold from thesame shelf space.

Retailers may use practices other than slottingallowances to handle increased competition amongmanufacturers. Retailers compete amongst them-selves to obtain customer favor, and manufactur-ers compete with each other for limited shelf space,which in turn affects manufactures' costs and prices.Resale price maintenance (RPM) occurs when amanufacturer sets the price at which its product canbe resold by independent wholesalers or retailers.Maximum RPM lowers the retail price if manufac-turers cannot use franchise fees. Minimum RPMraises the retail price if manufacturers cannot set awholesale price above marginal cost and must useonly a franchise fee. RPM may correct for serviceexternalities and protect against information free-riding, and slotting allowances may improve prod-uct selection by downstream retailers who are un-certain of demand (Shaffer).

Many economists believe that maximum RPMis unlikely to harm consumers, mainly because itlessens the problem of successive markups whenthere is imperfect competition at two stages of theindustry. Retail differentiation-the presence ofseveral retailers within a market-is important be-cause each manufacturer can increase its sales byhaving more retailers carry its product. Retail dif-ferentiation ensures a variety of retailers for a manu-facturer when marketing its products. Each new re-tailer brings new customers for the manufacturer'sbrand. Without retail differentiation, manufactur-ers would have no reason to compete for retailers(Perry and Besanko).

Summary

Changing consumer demands provide food manu-facturers many opportunities to introduce new foodproducts. The rapid pace of many consumers' livesprovides marketing opportunities for more frozendinners, ready-to-eat cereals, and prepackaged sal-



ads. We are living in more of a microwave society,and food manufacturers are continually develop-ing new food products that cater to consumers' busylifestyles. The recent introduction of "rice bowls"that combine several food groups (meat, starch, andvegetable) into one simple container makes it veryeasy for children and adults to enjoy a meal in min-utes. The preparation of many of these ready-to-eat meals has become simpler, and consumers canmaintain their busy schedules and still eat whatappears to be a balanced meal. So many opportuni-ties exist for new food products to be introducedbecause there are so many variations of existingfoods that have yet to be developed. If a reduced-fat, low-sodium variety of every existing food wereintroduced in the market today, we would havemore new food products than consumers could pos-sibly handle.

Several factors may influence a foodmanufacturer's decision to introduce a new fooditem into the retail market-the cost of developingthe new food, the cost of introducing the new prod-uct into the grocery store (e.g. slotting allowancesassociated with shelving the product), and, ofcourse, whether or not consumers will be interestedin purchasing the item.

Established firms tend to compete for marketposition not only with price but also by using ad-vertising and new product introductions to deter orlimit entry. A food manufacturer may introduce anew product in an effort to prevent other compa-nies from being able to enter the market. Once anestablished firm introduces a new food item, it maybe more difficult for new entrants to enter the mar-ket with similar food items. New products may helpfirms engage in spatial competition, in which firmsattempt to capture the largest number of customersfrom their neighboring competitors. Spatial com-petition, or horizontal differentiation, relates to howconsumers shop at a supermarket within their ownneighborhood. Traditionally, growth has beenachieved in the food industry through a high rateof new product introductions and promotion meth-ods to develop strong brands.

Food manufacturers with name-brand items fa-miliar to customers are more likely to be able tosuccessfully introduce new food products. Once afood manufacturer has established a positive repu-tation with its new food products, it may be able tointroduce other new items with more ease. Brand-

ing differentiates the food item and provides an al-ternative to price competition. Brands have the abil-ity to create consumer franchise-the awarenessof, positive attitudes toward, and willingness to fre-quently buy a brand.

A testament to the benefits of new food prod-ucts is the fact that despite the slotting allowancesfood manufacturers must pay whenever they intro-duce new food items into the retail market, manynew food products are still introduced each year.Food manufacturers who are willing to pay slot-ting fees or promotional allowances provide retail-ers with a signal of a successful product. There-fore, the grocery retailers have more confidence inthe new food items that the food manufacturers areintroducing to the retail market. And, of course, ifthe expected gain to the manufacturer did not coverthe slotting fee, the manufacturer would not intro-duce the product.

Introducing new food products may be a partof a retail differentiation, because each manufac-turer can increase its sales by having more retailerscarry its product. Retail differentiation allows foodmanufacturers choices when marketing their prod-ucts. Each additional retailer brings new custom-ers for the manufacturer's brand. Similarly retail-ers can benefit from manufacturers' activities.Manufacturers' new product developments can in-crease-the opportunity for price discrimination byretailers. In many cases, retailers will welcomesome high-priced new food products because high-income consumers, being less sensitive to prices,are willing to purchase them. The fact that grocerystores handle numerous products suggests the pos-sibility that price discrimination would exist.In short, food consumers want and will support avariety of similar food products. Food manufac-turers find it relatively easy to supply a variety ofsimilar food products because development costsare often low. Industry technology and cost struc-ture do not provide significant cost savings fromlarge production runs of homogeneous productscompared to several smaller production runs of dif-ferentiated products, and the retail food distribu-tion system is structured to facilitate the introduc-tion of new food products.

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References

Agarwal, R. and M. Gort. 1996. "The Evolution ofMarkets and Entry, Exit and Survival of Firms."The Review of Economics and Statistics (Au-gust) 78:3, pp. 489-498.

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