vegetables

36
Economic Update
The importance of
understanding the consumer
R&D
Drive Train
THE CONSUMER PLAYS A VITAL ROLE IN DETERMINING THE SIZE OF FARM
PROFITS EVERY FINANCIAL YEAR. AUSVEG ECONOMIST ANDREW KRUUP
EXPLAINS HOW GROWERS CAN OBTAIN AND COLLECT CONSUMER INFORMATION
AND USE THIS TO IMPROVE THEIR OVERALL FINANCIAL PERFORMANCE.
Percentage Change
Growers are extremely
knowledgeable of their
product’s cost structures and the
margins they would like to make,
but often underestimate the
consumer’s level of power and
influence on the final price that
is received from the market. After
all, it’s the consumer who pays
for the vegetables that are being
produced.
Given this, it is important for
producers to know about their
customers’ tastes, preferences,
willingness-to-pay or the general
consumer trends within the
market place.
Why is the consumer
important?
The human body requires
vegetable nutrients for survival.
The average annual Australian
consumption of vegetables
is estimated to reach 162kg
per capita and this statistic is
expected to rise further into the
future.
A key determinant of growth
in the vegetable industry is the
domestic demand for vegetables,
which is inextricably linked to
Australia’s population growth.
Figure 1: Australian Population Growth by State
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
-0.50%
-1.00%
Population growth
Figure 1 presents a time
series of Australia’s population
growth by state. Most states are
experiencing population growth
of around one per cent or
greater per year, with Australia’s
national population expected to
increase by an estimated 1.7
per cent annually.
Australia’s growth in vegetable
production (around two per
cent per annum) is consistent
with this population increase,
illustrating the key relationship
between population growth and
vegetable production.
To capitalise on this
information, several questions
need to be answered. For
example, what vegetables
are these Australians likely to
purchase in the future? It is
well-known that over the past
five years, there has been a
stronger demand for healthier
foods, but is this trend likely
to continue? What vegetables
does the consumer perceive
to be healthy? How can your
business use this information
to find a niche within the
market? These questions can
be answered through a deeper
understanding of how the
consumer thinks and operates.
Jun-1982
Nov-1983
Apr-1985
Sep-1986
Feb-1988
Jul-1989
Dec-1990
May-1992
Oct-1993
Mar-1995
Aug-1996
Jan-1998
Jun-1999
Nov-2000
Apr-2002
Sep-2003
Feb-2005
Jul-2006
Dec-2007
May-2009
Oct-2010
Mar-2012
Aug-2013
Jan-2015
NSW VIC QLD SA WA TAS
Source: Australian Bureau of Statistics, Australian Demographic Statistics, March 2015
Figure 2: Vegetable Price Index
Price Index
160
140
120
100
80
60
40
20
0
2005–06 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13 2013–14
Price Index Potatoes Pumpkins Onions Carrots
Source: Australian Bureau of Statistics, Australian Demographic Statistics, March 2015
Cost of vegetables
Figure 2 illustrates that
vegetable prices can fluctuate
often. One explanation is
that consumers can have
a significant impact on the
market prices for vegetable
commodities. If consumers
value a commodity less than
the market price, they would
be unwilling to purchase that
commodity. The absence of
customers wanting to purchase
the commodity would translate
into losses for both producers
and retailers.
In this case, the typical
response by retailers and
producers is to decrease the
price to generate sales and
regain profits. For example,
if the average consumer
values carrots at $2.00kg
yet the asking price is set at
$3.00kg, the likely outcome
is that consumers would not
buy carrots. If producers and
retailers set the price below
what the consumer is willing
to pay, they are more likely to
generate sales.
It is through this market
mechanism that the consumer
is able to influence vegetable
prices and therefore reduce
(or improve) grower margins.
The key to unlocking greater
profitability is to research and
understand what commodities
are in high demand, how
much consumers are willing to
pay for them, and how these
characteristics are likely to trend
into the future.