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Agrimarketing : April 2013
22 Agri Marketing April 2013 When the pink slime report from ABC News aired last March, retail food suppliers were faced with a risky decision. Pink slime is the common name for lean finely textured beef (LFTB), a food additive to ground beef that is controversial because it is exposed to ammonia to kill bacteria. Consumers were responding negatively to the report, and retailers needed to decide whether to announce the removal of LFTB from their products, do nothing, or offer their customers a choice. Which decision would have the best chance of maintaining the company's share value? In their paper, "Did the Pink Slime Controversy Influence Publicly Traded Agribusiness Companies," Louisiana State University Professor Josh Detre and Purdue Professor Mike Gunderson surveyed 15 publicly traded agribusiness companies that issued reactionary statements regarding LFTB, including McDonald's, Red Robin, Kroger, Wal-Mart, Kraft and ConAgra. Detre and Gunderson examined these companies' stock returns for the five days before and after the ABC News report, looking for abnormalities when compared to the normal rate of return. BACKGROUND ABC News' "Pink Slime" report was not the first time the process of producing LFTB had been questioned in the media. LFTB production was criticized in the 2008 documentary "Food, Inc." as well as a December 2009 New York Times article, but it wasn't until April 2011, when Jamie Oliver highlighted the LFTB production process on his show, "Food Revolution," that more action was taken. Upon the public outcry via social media, several companies issued media releases stating they would no longer be using LTFB in their products. The ABC News report led to the USDA announcing schools would be allowed to opt out of using LFTB in their lunch programs. Following suit, restaurants, grocery stores and packaged food companies began issuing statements indicating they would not use LFTB or would offer customers an option of purchasing beef without LFTB. THE OUTCOME Although many publicly traded food supply agribusiness companies reacted, to what degree was it warranted? Detre and Gunderson's paper shows short-term evidence the ABC News report did not negatively affect earnings for the retail grocery stores, restaurants and packaged food companies investigated who issued reactionary statements. This suggests in the short-term, shareholders and investors did not view the ABC News report or the companies' practices as a threat to their value. A WINNING STRATEGY? In the LFTB event, companies' reactionary responses didn't really boost share value. But you can also think about their reactions in terms of damage control --- preventing negative public reaction. In that light, the responses were effective, because stock share value was maintained. Ideally, promoting the safety of industry practices should be a sound strategy to prevent consumer misunderstandings, but it isn't easy to predict how consumers will react to information. Being aware of recent news stories and industry practices can enhance effective communication with those outside the industry. Just because a marketing decision doesn't yield immediate visible results doesn't necessarily mean it is a bad decision. It's important to consider externalities and how they can be handled. Keep in mind that each decision might require a tradeoff. After the pink slime event, companies weighed the value of their customers' and shareholders' responses against their relationship with their beef suppliers in deciding to issue statements about their use (or lack thereof) of LFTB in their products. LONG TERM VS. SHORT TERM In the short run, companies like Beef Products Incorporated (BPI) and AFA Foods incurred the most significant losses. If long-term effects exist for the publicly traded food companies Detre and Gunderson investigated, they will be visible in reduced earnings and cash flows due to declines in sales demand or higher beef prices. The firms that chose to make announcements regarding LFTB lost no ground in terms of share value after the ABC News report. Decision makers cannot always predict how individuals will react in these risky situations. But in the case of LFTB, retail food companies made a choice amidst their options. Without a doubt, the biggest challenge for LFTB decision-makers was how consumers would respond. This uncertainty played a major role in any decision the companies made. Every business makes decisions amidst uncertainty. Structuring Decisions, a program offered by the Center for Food and Agricultural Business at Purdue University, teaches decision makers a process for clarifying their decisions, listing alternatives and managing risk. For more information, visit http://www.agecon.purdue.edu/cab/ programs/sdit. AM Jacquie Holland and Melissa McKendree are graduate students at Purdue University. RISKY BUSINESS: RESPONDING TO PINK SLIME by Jacquie Holland and Melissa McKendree Insights from Purdue University