Thursday, January 20, 2011

Healthy Foods and Walmart

There is an interesting article in the New York Times today that talks about some new strategies on food sales that will be adopted by Walmart.  Walmart's stated goal is to work the improve the public's health after discussions with Michelle Obama.  What is Walmart's underlying goal?  I suspect that the underlying goal has not changed: maximize profits.

In light of that, we can use economics to evaluate the decisions that it has made.  First, it plans to reduce the price of more healthy foods.  What does this tell us?  Well, it may tell us that they are not pricing different types of foods to maximize profits at present.  That is not likely.  However, reduced prices can be associated with increased profits if there ius also a shift in the demand curve.  Walmart can lower the price and market the health foods to shift the demand curve and to make sure that the profits go up even after spending money on marketing.  Firms that are operating at a profit maximizing price cannot change price and expect to increase profits without also influencing the demand in some way.

Walmart has also said that change the recipes for its house brand products to reduce salt, sugar, and fat, and that it will pressure other food suppliers from which it buys to do the same.  If the threat is to keep the products that do not change off the shelves, then this may make a real difference.  It is similar to the way in medical care that large insurers can influence pharmaceutical companies by threatening to keep a product off a formulary.  When a retailer that buys a manufacturer's goods to sell can exclude the manufacturer from  a large share of the market, the retailer can exert a large amount of control over the manufacturer.  Thus, Walmart can use its power as the largest grocery seller to influence the market for food manufacturers.

This interesting interplay is a great example of how profit motivated firms can be influenced to do things for the good of consumers,  Some may argue that consumers should still have the right to purchase as unhealthy products as they would like.  For them, these changes may not be viewed as favorably.

4 comments:

  1. "I suspect that the underlying goal has not changed: maximize profits."


    yes, well said. profit is something thats running US economy.





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  2. Wow, Fantastic Blog, it’s so helpful to me, and your blog is very good,
    I’ve learned a lot from your blog here, Keep on going, my friend, I will keep an eye on it.

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  3. Well, that's good. They now included HEALTH concern on their business strategy unlike before, it was only profit and delicious food.

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