Sort & Cull

How Inelastic is the Convenience Component of Meat Demand?

John Harrington
By  John Harrington , DTN Livestock Analyst

I've said it before and I'll say it again. Meat demand in the United States is essentially determined by three factors: 1) price, 2) quality, and 3) convenience. It's that simple.

Depending upon shifting political agendas, many professional and amateur economists (past, present and futures) insist that demand is much more complicated, significantly shaped, stretched, and shrunk by realities ranging from country of origin to the latest rap sheet published by the food police to appetites based on sustainability and animal rights.

While I concede a myriad of factors could inch the demand meter one way or another for a minute or so, all such considerations pretty much remain in the shadow of the big three. On the other hand, the exact priority of this trinity is a question that leaves me far less certain.

For example, does price always trump both quality and convenience? I used to think so. Yet the proliferation and expense of gourmet burgers over the last decade has occasionally caused me to wonder if quality always rules the day.

On the other hand, who can't make the case for convenience? Given today's ridiculously fast and furious pace of life, an incredible number of food decisions turn on the combined speed of preparation and consumption with incidental considerations of price and quality coming in a distant second.

This debate over the exact nature of demand has intensified in recent months thanks to the falling price of meat counter beef on one hand and the stubbornly firm price of menu entrees on the other.

According to the Bureau of Labor Statistics, food-at-home prices declined by 1.6% overall last month, compared with a 1.3% decrease in June -- the seventh sequential decline over the last nine months. More specifically, the average grocery price for ground beef in July was down 10.2% from a year ago

Such realities have increased pressure on restaurant chains at a time when many are facing margin pressure because of higher labor costs. As the price gap between food at home and food away from home has widened into a gulf this year, restaurant industry same-store sales have taken a hit.

Restaurant traffic fell 3.9% in July, according to Black Box Intelligence. And restaurant industry same-store sales slowed by nearly 2 percentage points in the second quarter, according to Nation's Restaurant News research.

Is all this a sign that meat prices are starting to drive convenience into the backseat? Some students of the market are drawing that exact conclusion.

Shane Higgins, an analyst at Duetsche Bank, believes the contrasting results among food stores and restaurants could drive traffic away from restaurants and toward supermarkets.

"The gap between prices in the food away from home and food at home channels has been steadily widening for the past several months and is now at 440 [basis points] -- the widest level in almost seven years," Higgins points out. "As this gap persists or widens further, grocers' relative value proposition should continue to improve, which could help drive grocery traffic."

While I appreciate the logic, it would probably be wrong to demote the sex appeal of convenience too quickly. Many consumers not only don't have the time for at-home meal preparation, they also lack the necessary knowledge and skill.

Judging by the glacier rate by which grocers are lowering beef prices this summer, I am not alone in my skepticism regarding a new frontal assault on the meat counter anytime some.

According to the most recent meat spread data released this week, the average retail price of choice beef last month totaled $6.09, only 4.3% below July 2015. At the same time, the 5-area steer averaged $117.50 in July, a staggering 21.1% below midsummer 2015.

Such a shameful disconnect boosted July's farm-to-retail spread to a new all-time record of $3.54, 14.3% greater than 2015 and 24.8% fatter than the three-year average.

Beef profit margins at Safeway alone look ample enough to feed the entire Olympic Village for the duration of the games. And if most of the paper hats in the retail biz truly believed a significant amount of former restaurant traffic is ripe to move their way, wouldn't they be aggressively putting on their featuring pants?

Maybe such a strategy shift is right around the corner. For the good of the live cattle market, we can only hope.

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