Badger Beat Investment in Potato Quality: Market Segregation

in Wisconsin

Potato shipper/packers develop premium and semi-premium potato products that were previously cost prohibitive

that previously were cost prohibitive to produce at scale.

By Paul Mitchell,

University of Wisconsin-Madison Department of Agricultural and Applied Economics, and Nurlan Utesov,

Ph.D. graduate student

The Wisconsin fresh potato industry has enjoyed several years of a higher grower return index and higher wholesale prices than Idaho, the Columbia Basin and Colorado’s San Luis Valley, the other major production regions for fall potatoes.

Figure 1 plots the wholesale price advantage for Wisconsin potatoes relative to these other regions, from 2006 to 2018, based on the U.S. Department of Agriculture (USDA) AMS (Agricultural Marketing Service) shipping point prices.

In 2006, wholesale prices in the regions were essentially equal, but then the Wisconsin price advantage began to grow, and by 2018, it reached around $1/cwt. (hundredweight) relative to Colorado, $2.75/cwt. relative to the Columbia Basin and $3.50/cwt. relative to Idaho.

Understanding the sources of Wisconsin’s comparative advantage has been a focus of research in the University of Wisconsin-Madison Department of Agricultural and Applied Economics, and this article summarizes current work in progress. Various hypotheses have been proposed for the sources of this advantage (e.g., lower shipping costs due to the state’s location and the Wisconsin Healthy Grown program). Based on our current research, we attribute some of this price advantage to early adoption of optical sorting technology in Wisconsin packing sheds combined

By segregating markets and developing quality fresh potato products that could command higher retail and wholesale prices, packing sheds were able to financially reward growers for producing potatoes better matched to consumer preferences.

Badger Beat

Our long-term goal is to estimate the social benefits generated by segregating this market using optical sorting technology and the distribution of these benefits among growers, shipper/packers, retailers, and consumers.

Headline:

Investment in Potato Quality: Market Segregation in Wisconsin

Subhead:

Retail Scanner Data

with improved coordination among potato growers and shipper/packers in the state based on higher average wholesale prices from market segregation facilitated by this sorting technology.

By Paul Mitchell,

Department of

Potato shipper/packers develop premium and semi-premium potato products that were previously cost prohibitive

Optical sorting technologies have become more widely adopted in the U.S. produce industry over the last 20 years, including some potato packing sheds in Wisconsin.

Our primary data source is Nielsen’s Retail Scanner Data for fresh potatoes, from 2010 to 2019, sold at select retail grocery stores. Specifically, the data set consists of weekly prices and volumes for fresh potato products by UPC code generated by point-of-sale systems from more than 90 retail chains across all U.S. markets.

Kay, the 5 figures fare placed within the text this time. (Kay, they don’t have to go so large, and you can play with design, of course I mean, that is your title, designer. Hee!)

The Wisconsin fresh potato industry has enjoyed several years of a higher grower return index higher wholesale prices than Idaho, the Columbia Basin and Colorado’s San Luis Valley, the other major production regions for fall potatoes.

We categorize potatoes into the three quality levels based on the retail price: 1) Typical potatoes with a price

Figure 1 plots the wholesale price advantage for Wisconsin potatoes relative to these other regions, from 2006 to 2018 based on the U.S. Department of Agriculture (USDA) AMS (Agricultural Marketing Service) shipping point prices.

The technology has reduced the per unit cost of sorting and grading potatoes, thus allowing potato shipper/packers to develop premium and semi-premium potato products continued on pg. 60 less than or equal to $0.60/lb.; 2) Semi-premium potatoes with a price exceeding $0.60/lb. but less than $1.50/lb.; and 3) Premium potatoes with a price exceeding $1.50/lb.

The preliminary analysis summarized here focuses only on Wisconsin and includes stores in four marketing areas defined by Nielsen based on television coverage: Milwaukee, Madison, Green Bay-Appleton, and La Crosse-Eau Claire.

Nielsen data does not include scanner data from all retailers. Missing retailers include Kroger, Aldi, Trader Joe’s, and Costco, while Walmart was not added until 2018. As a result, only one Wisconsin brand is identifiable in the Wisconsin stores included in this analysis.

When we expand the geographic coverage of our analysis, we anticipate having data for other Wisconsin brands.

The final analysis summarized here uses data from five major grocery chains in these four regions of Wisconsin, with the number of stores ranging from a low of 208 in 2010 to a peak of 240 in 2018.

These five chains together accounted for roughly 90% of the potato sales volume in the Nielsen data for Wisconsin over these years.

Fresh Potato Retail Trends

Figure 2 summarizes retail trends for fresh potatoes sold in the four Wisconsin regions in the five major chains available in the Nielsen data, for 2010 to 2019.

The volume for generic store brands slowly declined over the study period, falling from 11 million pounds in 2010 to less than 5 million in 2019.

On the other hand, the major national brand sold in these Wisconsin grocery stores chains held steady at about 2 million pounds per year. The only state brand sold in these stores increased its sales volume from 1.2 million in 2010 to more than 4 million pounds per year by 2019.

On the other hand, the major national brand sold in these Wisconsin grocery stores chains held steady at about 2 million pounds per year. the only state brand sold in these stores increased its sales volume from 1.2 million in 2010 to more than 4 million pounds per year by 2019.

Average retail prices showed similar trends over these years for all three brand types. However, the national brand typically received the highest price, the generic store brand received the lowest price, and the price for the state brand was somewhere in between.

Overall, the green bands for typical potatoes decline in size, indicating a decrease in sales of typical (generic) potatoes (mostly russets) during these years.

Average retail prices showed similar trends over these years for all three brand types. However, the national brand typically received the highest price, the generic store brand received the lowest price, and the price for the state brand was somewhere in between.

The state brand’s sales in this category grew from 2011 to 2016, but eventually followed the national trend and have been in decline since then.

Figure 3 looks only at fresh potatoes (primarily russets) and segregates Wisconsin sales volumes first by quality into premium, semi-premium and typical quality potatoes, and then further into those from the state brand and all other brands (both store brands and national brands combined).

Figure 3 reports the market share— the percentage of sales volumes—for each quality-brand combination.

The blue bands show the growing market share for semi-premium brands, for both the state brand and all other brands.

Finally, the red-orange bands show the market shares for premium brands, which are growing in magnitude but very small. The share for premium products sold by the state brand remained less than 0.5% throughout this time.

Premium, Other Brands

Premium, State Brand

Semi-premium, Other Brands

Semi-premium, State Brand

Typical, Other Brands

Typical, State Brand anticipate that the trends will appear elsewhere as well. Additional evidence of the success of these higher value premium and semi-premium potato products is the success of the Little Potato Company, Tasteful Selections, and similar products in stores around the United States. demand and the structure of the fresh potato supply chain in Wisconsin and elsewhere.

The blue bands show the growing market share for semi-premium brands, for both the state brand and all other brands.

The markup distribution for store brands is much tighter than for the state and national brands, ranging from about 2 cents to 18 cents per pound during this time.

Finally, the red-orange bands show the market shares for premium brands, which are growing in magnitude but very small. The share for premium products sold by the state brand remained less than 0.5% throughout this time.

Consumers buying these brands are more price sensitive. The brands cannot support a large markup, otherwise sales would fall, and stores would have excessive unsold volume.

Note that the decline in the total share of the Wisconsin retail potato market for the state brand is offset by geographic expansion into other states for a net increase in sales volume for this brand during this time.

Overall, these trends mirror national trends. Sales of fresh russets have been declining for some time, as have sales of red varieties, with this decline offset to some extent by an increase in consumption of yellow varieties.

Note that the decline in the total share of the Wisconsin retail potato market for the state brand is offset by geographic expansion into other states for a net increase in sales volume for this brand during this time.

The segmentation of the fresh potato market into higher quality premium and semi-premium products that can command higher prices has been the change in the market in recent years.

The state brand and national brand show similar markup distributions, from slightly less than zero (when sold as a “loss leader” to bring in shoppers) to about 35 to 40 centers per pound, with the national brand slightly higher.

These higher quality potatoes have not seen their demand fall off like generic fresh potatoes have. Consumers are willing to pay for higher quality fresh russet potatoes with more consistent sizing and fewer defective tubers.

The adoption of optical sorting has allowed the development of these premium and semi-premium fresh potato products that can command higher prices, so shippers/packers offer better prices to growers who can produce them

Preliminary Results

We have yet to expand this analysis beyond Wisconsin grocery store chains in the Ni elsen data, but we anticipate that the trends will appear elsewhere as well.

Additional evidence of the success of these higher value premium and semi-premium potato products is the success of the Little Potato Company, Tasteful Selections, and similar products in stores around the United States

Overall, these trends mirror national trends. Sales of fresh russets have been declining for some time, as have sales of red varieties, with this decline offset to some extent by an increase in consumption of yellow varieties.

The segmentation of the fresh potato market into higher quality premium and semi-premium products that can command higher prices has been the change in the market in recent years. These higher quality potatoes have not seen their demand fall off like generic fresh potatoes have. Consumers are willing to pay for higher quality fresh russet potatoes with more consistent sizing and fewer defective tubers.

The adoption of optical sorting has allowed the development of these premium and semi-premium fresh potato products that can command higher prices, so shippers/packers offer better prices to growers who can produce them.

We have yet to expand this analysis beyond Wisconsin grocery store chains in the Nielsen data, but we

The analysis of the Nielsen scanner data for this work involves substantial econometric study based on understanding the underlying economic model of consumer

Thus, we are combining the statistical analysis with interviews and discussions to understand the history and current state of the Wisconsin potato industry, how it coordinates the growing, packing, shipping, and retailing of fresh potatoes, and how it differs from other regions.

Technically, the analysis focuses on estimating consumer demand elasticities (demand responsiveness continued on pg. 62

Badger Beat. . . continued from pg. 61 to price changes) and the substitution patterns among the different brands, types of potatoes, and package sizes. This work will constitute a substantial part of Nurlan Utesov’s efforts to earn a Ph.D. in Agricultural and Applied Economics from UWMadison. Work is in progress, and here we summarize some of the preliminary results based on an analysis of russet potato retail markets.

We will expand the analysis to include other types of potatoes (reds, yellows, little potatoes) and expand geographically.

Our overall goal is to better understand the sources of Wisconsin’s comparative advantages in growing and marketing potatoes and to quantify the benefits generated by the industry and the distribution of these benefits to those along the supply chain.

Scanner Data Analysis

The analysis uses a method developed by Berry, Levinsohn, and Pakes (BLP), which has become a common way to analyze scanner data to estimate demand elasticities and substitution patterns by consumers among similar products, as well as to estimate retailer markups above wholesale prices.

Here we present initial results on retailer markups, or how much retailers add to wholesale prices to cover their costs and earn a profit.

Consumer price sensitivity drives the markup that retailers can add to each product. For products with high consumer price sensitivity, sales will decline a lot if a retailer adds a high markup, but for products with low consumer price sensitivity, sales will remain steady even if a retailer adds a high markup.

In general, it seems that consumer price sensitivity is relatively lower for higher quality potatoes, so brands focused on providing higher quality can support high retail markups.

Economists measure consumer price sensitivity with elasticities, and the BLP model allows estimation of elasticities for similar products using scanner data. From these elasticities, we can then estimate retailer markups assuming retailers and wholesalers are maximizing their profits and face a competitive marketplace.

The markup for the store brand shows little trend, varying between 4 and 8 cents. The markup for the state brand shows a rapid increase from around 3 cents in 2010 to almost 15 cents in 2016, and then it stabilized at around 10 to 11 cents thereafter.

The markup for the national brand shows little trend, varying around 9 to 12 cents for many years until increasing to about 14 cents in 2018 and 2019.

INTERPRETATION & CONCLUSIONS

Based on the analysis of the Nielsen data for Wisconsin grocery stores, we see additional evidence of the state’s comparative advantage in potato production and marketing.

Figure 4 reports estimated retailer markups for fresh russet potatoes in Wisconsin grocery stores from 2010 to 2019 for three major brands: generic store brands, a major state brand, and a national brand.

The state brand and national brand show similar markup distributions, from slightly less than zero (when sold as a “loss leader” to bring in shoppers) to about 35 to 40 centers per pound, with the national brand slightly higher.

The market share and the retail markup for the Wisconsin brand in the Nielsen data set increased noticeably beginning about 2010. This packing shed installed an optical sorting line in 2008 -’09 to improve potato grading and then began shifting from packing generic store brands for others to marketing its own higher quality and branded russet potatoes with new package sizes.

Figure 5 reports the annual average markup for each brand to track the mean of the markup distribution over these years.

This shift allowed the brand to expand sales in both the typical and semi-premium categories in the state (Figure 3), the brand was able to command high retailer markups in stores (Figure 5).

Estimates are from 200+ grocery stores in the state and based on weekly scanner data sales, and so the markups have distributions because they vary over time and across stores.

The markup distribution for store brands is much tighter than for the state and national brands, ranging from about 2 cents to 18 cents per pound during this time.

Consumers buying these brands are more price sensitive. The brands cannot support a large markup, otherwise sales would fall, and stores would have excessive unsold volume.

The markup for the store brand shows little trend, varying between 4 and 8 cents. The markup for the state brand shows a rapid increase from around 3 cents in 2010 to almost 15 cents in 2016, and then it stabilized at around 10 to 11 cents thereafter.

The markup for the national brand shows little trend, varying around 9 to 12 cents for many years until increasing to about 14 cents in 2018 and 2019.

INTERPRETATION & CONCLUSIONS

Based on the analysis of the Nielsen data for Wisconsin grocery stores, we see additional evidence of the state’s comparative advantage in potato production and marketing.

The market share and the retail markup for the Wisconsin brand in the Nielsen data set increased noticeably beginning about 2010. This packing shed installed an optical sorting line in 2008-’09 to improve potato grading and then began shifting from packing generic store brands for others to marketing its own higher quality and branded russet potatoes with new package sizes.

This shift allowed the brand to expand sales in both the typical and semi-premium categories in the state (Figure 3), and the brand was able to command high retailer markups in stores (Figure 5).

In recent years, the brand has faced more competition from a major national brand in the state, so that its market shares and markups have declined (Figures 3 and 5). Nevertheless, though not shown here, this brand’s total sales have continued to grow as it has expanded sales geographically.

Automatic potato grading using optical sorting has facilitated the segregation of fresh potato marketing into higher quality products and generic products.

We find evidence that at least one of the state’s packing sheds was able to capitalize on this opportunity and establish a brand supporting higher retailer markups and prices. Likely other packing sheds in the state have as well, but the Nielsen data do not allow us to document it.

The Wisconsin potato industry has used this technology combined with marketing and better contracts for growers providing quality potatoes to generate additional value.

Based on interviews with growers and packing sheds, and data analysis, we believe that this value has been shared in part with growers as higher average prices for their production to incentivize them to produce and deliver higher quality potatoes supporting this and other brands.

We have not yet estimated this benefit quantitatively, but we believe it is part of the state’s comparative advantage and contributes to Wisconsin’s higher grower return index.

RESEARCH-BASED ADVANTAGE

An added part of the state’s comparative advantage is the research-based problem solving and troubleshooting provided by UW-Madison faculty, staff, and graduate students that help growers and packers produce and store high quality potatoes.

The industry support of researchers and research capacity at UW that helps provide these benefits is higher in Wisconsin than in other states and regions. Quantifying the value of this partnership and the rate of return from these investments is beyond the scope of this project, but they seem tremendous.

It seems that other regions and national brands have caught up in their adoption of automatic grading based on optical sorting technology, so that the market share of the state brand has decreased, as has the retail markup it can support.

We want to explore trends in market shares and markups for brands from other states in other markets beyond Wisconsin to better understand the uniqueness of these advantages to Wisconsin and potatoes.

Consumer demand for yellow varieties continues to grow, even as demand for russets and red varieties declines.

A more recent development has been the entry of The Little Potato Company and other brands selling small potatoes that will also continue to erode market shares and markups for fresh russet potatoes and semi-premium brands produced in Wisconsin.

We are in the process of expanding our analysis of the russet potato market to include these little potatoes, as well as red and yellow varieties, to better estimate the effects of these changes.

The overall goal is to understand how these shifts in consumer preferences are likely to affect the Wisconsin potato industry and our comparative advantages, and whether we can take advantage of these changes to maintain or enhance our industry.