Sofia Klotz
Bus 1.0
Professor Lamel
11/6/2012
Blog #4
There are many
current trends and events in the grocery industry that both help and hinder the
success of certain companies in the industry. Rising commodity prices, the
increase in quality of private label (generic) goods, increased competition, the
demand for healthy products, and new safety regulations are all examples of
current events and trends that are impacting the grocery industry.
Rising commodity prices
sparked my interest because they affect the entire industry in a negative way.
This increase in basic food commodity prices has caused the price of many
products that grocery retailers carry to increase as well. This causes a huge
dilemma for retailers in the grocery industry because there are only three ways
to deal with the problem other than shutting down or discontinuing certain
products and all of these solutions end in a decrease in the retailer’s profit
margins.
The first way
retailers can deal with the cost increase is to offset some of it by charging
consumers slightly more and then take a loss in profit margins to account for
the rest of the costs. The second alternative would be to pass the entire price
increase onto the consumers, which would only make their profits drop even
lower. This is due to the basic theory that if a good has many close
substitutes, price rises, demand falls drastically because the good is considered
elastic due to the close substitutes. The
final option that retailers have is to take on the full cost of the price increase
and not increase the price to consumers whatsoever. As shown here all three
options end with a decrease in profit for the retailor.
In most cases the first option will result in the smallest decrease in profits, if a store
happens to be more inelastic for whatever reason, then the second option may
suit that store better. Similarly, if a
retailer is very elastic then the third option may be the way to go as long as
there is still a profit margin after the price increase is factored into the cost.
Rising commodity prices affect the entire industry greatly because all grocery services cater to commodities. I think that it is very difficult to take on the final option that you mention where retailers have to take on the full cost of the price increase and not increase the price to consumers whatsoever. To me that sounds as if it would completely fail because the retailers are not being compensated for the rise in price and instead settle for the drop in profit.
ReplyDeletein most cases this would be the case! however the exception could be if a firm like i said in the last paragraph happen dot be very elastic. this means that if the firm increased the price even a little the drastic decrease in demand could potentially cause a bigger loss then if the firm were to simply take on the the total amount of the cost increase.
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