California is the world leader in prune production, accounting for about 99 percent of U.S. production and 70 percent of the world's supply. The industry, through the California Prune Board (CPB) and its various packers, especially Sunsweet Growers, the largest marketer of California prunes, has invested substantially in the promotion of prunes to consumers. This study analyzes the effectiveness of these expenditures in increasing consumer demand for prunes and, thereby, in raising industry revenues. The results from this project are useful for decision makers in the California prune industry as well as to researchers studying the effects of promotion on market demand. The analysis used to derive the results is also pertinent to other California commodity groups, in light of increased scrutiny surrounding generic promotion programs. The study was conducted under an agreement between the CPB and the University of California, and was carried out by a research team of faculty and graduate students in the Department of Agricultural and Resource Economics at the University of California, Davis.
The study involved econometric analyses of U.S. domestic demand for California prunes. Economic theory implies that, to be effective, expenditures on promotion must increase consumers' demand for the product being promoted. Other factors generally considered to influence demand, and which need to be incorporated into a demand study, include the price of prunes, the prices of close substitutes or complements, measures of consumers' purchasing power, and factors to account for any time trends or seasonality in demand.
Three data sets were assembled to study prune demand. The main data set consisted of 51 observations on retail prune consumption and prices in the United States, reported in monthly intervals for the period September 1992 to July 1996. Expenditures on promotion by the California Prune Board and by Sunsweet Growers were closely matched to the four-week observations on sales for this period. A second data set consisted of annual observations on domestic prune shipments and prices for the period 1949 to 1995. The measure of promotion in the annual model consisted of annual real expenditures by the CPB and Sunsweet on all types of domestic promotion. A third data set consisted of the results of a test market analysis of television advertising for prunes conducted in six U.S. cities.
Results from analysis of the monthly data indicate that prune promotion has increased the demand for prunes. Across several alternative model specifications examined and reported in part 3, prune promotion consistently had a statistically significant, positive impact on retail prune sales. For the various models estimated using ordinary least squares (OLS), the elasticity of sales with respect to promotion generally ranged from 0.17 to 0.22, while the promotion elasticity in the model estimated using 2SLS was 0.21. This means that a 10 percent increase in expenditures on promotion would have increased sales about 2 percent, holding price and other explanatory variables constant.
The models based on the annual data series did not perform as well. Promotion, measured in this case by annual real expenditures by the CPB and Sunsweet on all types of domestic promotion, generally did not have a statistically significant effect on demand. Such results were not believable, however, in light of diagnostic tests that we performed to evaluate our specification of the structure of these annual demand models. The tests led us to conclude that—either because of poor or missing data or an incorrect model form—the models were not specified correctly. Thus, we were unable to use the annual data in any meaningful way.
The television advertising test-market campaign was conducted for 12 weeks in Fall 1990, with three cities selected as test markets, and three used as controls. The advertisements featured generic advertising of dried prunes. Our analysis of the test-market data indicates that the television advertisements had a positive and statistically significant effect on prune demand both during the period of the advertising campaign and during the post-test period. The model we developed indicated that in-store displays, by themselves, had no impact on prune sales.
A simulation approach was used to translate the effects of promotion on prune demand into estimates of the resulting marginal benefits (the increase in industry revenues from an incremental increase in promotional expenditures) to prune growers. Because of our greater faith in the data underpinning the monthly analysis of demand, the superior statistical performance of models estimated using the monthly data, and the congruence of these model results with the results from the test-market analysis, we based our simulation analysis on results from models estimated from the monthly data. Because the statistical analysis was restricted to demand modeling, while the simulation analysis required a complete model of the industry, including supply response, it was necessary to construct a synthetic supply model and conduct simulations for a variety of alternative supply specifications.
The marginal benefit-cost ratio for promotion of California prunes was calculated. This ratio refers to the net revenues generated from incremental expenditure on promotion, and hinges importantly on the value of the price elasticity of supply, and on whether growers bear the entire burden of funding the expenditures or some of the burden is shifted to consumers in the form of higher prices. Returns to growers from allocating expenditures to promotion would be maximized by expanding expenditures until the marginal (last) dollar spent on promotion yields just a dollar back in revenues. The analysis suggests that the industry stopped short of this optimizing condition during the 1992-1996 period covered by the monthly data. The calculated marginal benefit of an additional dollar spent on promotion, given the amounts actually expended, ranged from $2.65 to almost $30.00, suggesting that additional promotion expenditures would have generated positive net revenues to producers. Only when producers are (implausibly) assumed to bear the entire cost of the promotion is it possible to derive average benefit-cost ratios less than 1:1, and to do so requires an elasticity of supply of 1.0 or more, which is only likely to be relevant for longer-run changes.
We conclude that promotion of California prunes conducted by the CPB has increased the demand for prunes and returns to producers of prunes. Over the four-year period analyzed in the monthly model, investments by prune growers in promotion yielded them marginal returns of at least $2.65 for every dollar spent. Moreover, marginal benefit-cost ratios in the range of 2.7:1 and higher indicate that the industry could have profitably invested even more in promotion during this period.