Why the organic food industry hates inflation (probably more than anyone else)
Why the organic food industry hates inflation (probably more than anyone else)
#41
The organic grocery store close to where I live fights bravely for its customers.
In its latest campaign, the company asks their customers to remain loyal to the organic sector even in times of soaring prices. The display at the shop entrance says, "The scarcer the resources, the more long-term we think". Another: "Gasoline bills are getting long; our delivery routes stay short."
I don't know if the advertisement helps the company. But I know that the organic sector generally suffers enormously from current inflation.
Food prices in Germany increased by 20.3 per cent between October 2021 and October 2022. So you would think that the turnover has also increased, simply because of the rocketing prices (if the same products in the same numbers had been bought, sales should have increased by about the same size). But to the contrary, in the second quarter of 2022, Germany's organic food industry sales fell by 15.3 per cent compared to the previous year.
For comparison: Throughout retail, sales are increasing slightly in 2022. However, if you adjust the prices for inflation, sales have dropped there, too. But no comparison to the organic sector.
Why the big difference?
A bit of economics.
Customers in the organic sector are price-sensitive. Price sensitivity is commonly measured in the form of the price elasticity of demand. Expressed mathematically, it is:
Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change in Price
If price elasticity is greater than 1, the good is elastic (if less than 1, it is inelastic). With an elastic good, demand for the good will change significantly if the price changes. When prices go down, people buy significantly more of that good. When prices go up, people buy significantly less. So people do with organic products. They might buy fewer groceries overall, or perhaps they buy more conventional groceries instead.
Can advertising help to stop this trend?
Maybe most likely if you address the sore point yourself. Like another organic grocery store does. "The brake on inflation" is written on flyers (have a look here) from the Berlin organic food retailer LPG. The prices there are more or less in line with those of conventional food retailers. From my point of view, such advertising makes sense. When customers pay attention to prices, they will love products that meet this need.
By the way, there is a positive effect of soaring prices. Since purchasers of organic food are price-sensitive, inflation forces companies to cut their costs. Cost reductions often remain in the long term. Inflation may then be history.
Onwards,
Johannes Eber
Sources:
https://www.tagesschau.de/wirtschaft/konjunktur/einzelhandel-umsatz-inflation-101.html
https://www.braunklaus.de/2022/08/01/herkulesaufgaben-für-den-fachhandel/
https://www.investopedia.com/terms/p/priceelasticity.asp
https://www.lpg-biomarkt.de/2022/10/inflationsbremse/#pid=1