Today’s microeconomics question, brought to you by the fine people at Kellogg’s: How will Americans respond to the great Eggo shortage?
According to CNN Money.com (ht Michelle):
Grocery stores will be experiencing a shortage of the waffles until mid-2010 due to problems at two bakeries, a Kellogg’s spokeswoman said on Wednesday.
Flooding at an Atlanta bakery during heavy rains in October forced Kellogg, which makes Eggo products, to shut down production temporarily, said company spokesman Kris Charles. Plus, equipment at Kellogg’s largest waffle facility, based in Rossville, Tenn., needs extensive repairs.
“We are working around the clock to restore Eggo store inventories to normal levels as quickly as possible,” Charles said in an e-mail.
Remaining inventory will be rationed to stores across the country “based on historical percentage of business.”
All you armchair economists will immediately recognize that the looming Eggo shortage exists not only because of Kellogg’s production problems, but also because it’s decided to ration the delectable waffles, rather than raise prices.
My question: How will stores and shoppers respond to this shortage? Will grocery stores raise Eggo prices? If they do, will they be denounced as Eggo price gougers? And if not, will there be empty shelves in the refrigerated breakfast section?
And what about consumers? Will they rush out to hoard Eggos today, thus exacerbating the near-term shortage? Will a black market in Eggos emerge?
I’d be interested to hear what you see when you are next doing field research in a grocery store. Of course, in this day-and-age, there’s an even faster way to gauge the Eggo-consciousness of America: check out the stream of Eggo tweets over at Twitter (btw, you can follow me here). Judging by a quick skim of the several hundred Eggo-related tweets in the past few minutes (!), I would say that (a) some consumers will indeed hoard Eggos, (b) some are joking about hoarding Eggos and then putting them up on eBay, and (c) a few consumers are looking at the bottom of their freezers to see if they have any Eggos to sell. Ah, a good old supply response in the face of a shortage.
My prediction: More violent “Leggo my Eggo” incidents.
I don’t think supermarket chains will dramatically hike the price. Not worth the bad signals. And if one chain does, another can maintain price and use it as a loss leader to build traffic (well, while supplies last! If they advertise it, they better have enough units to avoid a “bait & switch” charge, legally or in P.R. terms).
Convenience stores might be another matter. After all, after smoking a few joints the average high teenager with a craving for Eggos at midnight will probably pay anything.
By the way, I wonder if the Eggo shortage will put a significant dent in sales of syrup (obviously a complementary product), particularly that crappola stuff that’s not real maple syrup. I have no idea what market share Eggos have for the broader frozen crappy waffles and pancakes category or for the even broader crappy plus decent category (including mixes). And also by the way, perhaps some of those competitors/substitutes will sell more — if I were the brand manager on a competing product or close substitute, I’d promote (via coupons) during the Eggo shortage to gain trial by new users who could end up switchers.
“I don’t think supermarket chains will dramatically hike the price. Not worth the bad signals.”
Precisely.
“And also by the way, perhaps some of those competitors/substitutes will sell more — if I were the brand manager on a competing product or close substitute, I’d promote (via coupons) during the Eggo shortage to gain trial by new users who could end up switchers.”
Even more precisely. Consumer brand preferences are extremely sticky. A significant chunk of GDP is spent on attempts to get consumers to switch preferences.
Putting a price on a product that signals “this costs too much” can do long-lasting brand damage. Leaving an empty spot on the shelf that signals “too many people want this” may even help the brand.
“All you armchair economists will immediately recognize that the looming Eggo shortage exists not only because of Kellogg’s production problems, but also because it’s decided to ration the delectable waffles, rather than raise prices.”
It’s exactly this type of “armchair econ 101” analysis that gives economics a bad name.
“Neener, neener, econ rulez!”
No, economics does not rule. Behavioral psychology rules. Economics is just along for the ride.
Michael,
Easy there, fella’. Economics points out something valid and potentially useful: that in the case of shortage at the current equilibrium price, a supplier has the choice of maintaining price and allowing the shortage (i.e., quantity demanded at that price will exceed quantity supplied) or raising price to align quantity demanded with quantity supplied. The fact that strategic considerations often outweigh the benefit of short-term profit maximization from a price increase doesn’t render what economics tells us as misguided or useless, and I don’t think many economists would suggest that short-term profit maximization is the only consideration.
Economics in this case (and generally) helps us by identifying and quantifying trade-offs; it’s up to us (managers, consumers, government, etc.) to apply some holistic and rational judgment in choosing among trade-offs, and I doubt many economists would disagree on this point.
As a father of four with a 10-year old who eats frozen waffles at least 4-5 times a week (she doesn’t like breakfast cereal), I believe I’m in a good position to comment on this. I first noticed the Eggo shortage a few nights ago when I was assigned to pick up some chocolate chip waffles on the way home from work. All the Eggos were gone, which I chalked up to slow restocking or a delayed shipment at Harris Teeter; I had no idea it was part of a larger shortage.
In my particular case, I went with the store brand waffles as a substitute (though, having fewer varieties available, I couldn’t get any chocolate chip ones). My impression is that these are the primary substitute for Eggos that are available in most stores. What I don’t know is whether these are typically also made by Kellogg’s (as is the case with store brand cereals), in which case they would also be subject to the shortage. Conversely, would their makers be able to temporarily ramp up production in light of the supply problems at Kellogg’s?
In terms of pricing, keep in mind that these are one of those products that seems to be perpetually on sale using your store’s loyalty card, though it is typically limited to one or two varieties at a time. What I would expect to under shortage conditions is that such sale prices become rare or nonexistent, thereby raising the average price without necessarily changing the posted price.
I forwarded this post to my Colorado daughter (w/3 kids, 6 & under who are BIG frozen waffle fans), and she says, “They’ve actually been short for at least 6 weeks now at my stores with Target posting information about the reason for the shortage. Store brands must not be produced by the same places as they have had fine stock this whole time. Also, pricing hasn’t changed on any items… Target brand are better anyway (Walmart’s are no good)!
FWIW.
…forgot closing quotes after exclamation point. Sorry. I myself have no idea whatsoever how Target waffles compare to WalMart’s! 😉
I found this article on the great eggo shortage and thought you might enjoy it.
http://ezinearticles.com/?The-Great-Eggo-Shortage-of-2009—A-Christmas-Without-Waffles&id=3300707
Thanks Victor, fun article.