In the News: Part Time Work May Be the New Normal for a while...

This posting is of major interest to ECON 2301 Students.  However, some ECON 2302 angles may show up as well.  As always, any articles I have analyzed in this blog are OFF LIMITS to my students for use in their Article Analysis papers due later in the semester.  

On September 2nd (Labor Day), USA Today published an article entitled "Is Part Time Work The New Normal?" The article details how it's not just folks in their 20s, but folks in their 30s and 40s who are juggling part time jobs, many a mix of professional and so-called McJobs (thank you Douglas Coupland, author of Generation X for coining that brilliant term) in order to make ends meet.  Some of this is the result of our slow, anemic recovery from our most recent recession in the business cycle, some of it may be due to other factors. Per the article, involuntary part-time workers — those who are seeking full-time work or holding multiple jobs — remain between 19% and 20% of the nation's workforce, up from 17% in 2007.

While some folks are happily saying we are almost fully recovered, the details are saying "not so fast!"  As the article stated very directly "Of the nearly 1 million new jobs created this year (2013), 80% or 800,000 of them are PART TIME positions."  This then begs the question:  if the jobs created are only part time jobs, then why is the unemployment rate going down?  Shouldn't it not go down as much if the jobs created are part time?  Actually, as usual, things are a lot more complex than they seem.

First of all, the way most countries measure their labor force is by head count, not by workers working 40 hours per week or annual salary paid jobs.  According to the US Dept. of Labor's standards, all that a person has to work is 20 paid hours in the 4 week period prior to the day of record (2nd Wednesday of the month) in order to be counted as a fully employed member of the Labor Force.  This goes against the way many managers measure employment--FTE or full-time-equivalent, which is 40 paid hours in a week.  Someone who works 5 hours a week is one-eighth of an FTE, not counted the same as a full timer.

Second, anyone who has not had paid hours recorded (this is measured by Social Security or Tax ID) during the 4 week period before the Day of Record, but has been filling out job applications (again, SSN/TID tracks this) is counted as an Unemployed member of the Labor Force.  Anyone who has neither had paid hours nor has been applying for work is not in the Labor Force at all.

The unemployment rate is simply a percentage calculated from the total number of unemployed Labor Force members, divided by the total Labor Force Members both employed and unemployed.  There is no distinction made for small hour part time labor, 1/2 time, 70%ers or Full Timers.  All labor force members who are being paid and having FICA taxes coming up under their SSNs are fully employed by the government's measuring stick.  The government does an annualized measure of the unemployment rate every month and produces the official reading for each calendar year.

Typically during recession in the business cycle--the part of the downturn that's below the secular trend line, where production and spending start to drag the trend down and involuntary (aka cyclical) unemployment is on the rise--part time jobs start to become more commonplace.  However during recovery in the business cycle--the part following recession and trough where spending and production are rising, but are still below the trend line--there is usually a gradual increase in full time employment.  Although spending and production have risen, the question is why haven't the number of Full Time positions risen along with them?  There are several factors at work that need to be examined:

1.  Recovery is NOT the same as Expansion
Too many Economics Textbooks have dumbed down the business cycle and lumped recovery and expansion phases together.  The reality is that recovery is still below the secular trend in the business cycle, while expansion is above the secular trend.  Recovery means you're trying to get back to the position on the trend line you were at production/spending wise before the recession.  Expansion is where real economic growth is happening.  The reality is that the US Economy has had a SLOW ANEMIC RECOVERY and we are not at or above the secular trend line at present.  It's possible pundits and politicians are in such a hurry to declare the recession over they are ignoring reality.  They need a reality check.

2.  Businesses are trying to Keep Costs Low
Many businesses had to find creative ways to reduce their operating costs in order to survive the most recent recession.  For most owners and operators of businesses, labor costs are the easiest cost to control.  For one, hourly wage labor is an example of a variable cost--costs directly tied to quantity of output produced by a firm.  When a firm sells more output, variable costs are higher, and when a firm sells less output as is the case during a recession, the firm's variable costs are lower.  Some of these costs are easily controlled, like electricity and water usage, which are used instantly.  Some, like materials used to make products, are more difficult to control as usually these are bought in bulk and are used gradually, rather than instantly.  Labor is neither instant nor gradually used, but falls somewhere in between.  If a burger joint's manager checks the sales in the register and sees the revenue the firm has earned for a shift has fallen below costs, they can't suddenly get the price per pound they paid for the beef in the freezer or the potatoes in the cooler reduced, but the manager can send 2 people home, cutting his labor cost for the shift by 6 worker hours or about $60.00 in total in the Houston area.

On a larger scale, there is a huge difference in costs between full time and part time workers, whether they are hourly wage or salaried workers.  Besides the paycheck differences, full time hourly wage workers who work 40 hours per week or more must be provided health insurance per federal law prior to Obamacare (see below).  However, in some states, the law is 20 to 25 hours.  Additionally, providing retirement savings, professional development training, disability insurance and other such benefits are common, even where not mandated by law.  In order to reduce the costs of employing workers, many companies reduced the hours of the majority of their staff to under 40 hours in order to cut the extra costs of benefits, the most expensive of which is Health Insurance.

3. Worker Attitudes are changing about Part Time Employment
Per the article:

"The number of jobs that need to be done by full-time employees continues to diminish," said Carl Camden, president and CEO of Kelly Services, a global temporary staffing agency, based in Troy, Mich. "Work has become more fragmented, and more people are willing to work in non-traditional environments." Since 2008, the percentage of people in the workforce regarding themselves as free agents has grown from 26% to more than 40%, according to a Kelly survey. Employees — especially Generation X workers in their 30s and 40s — want more freedom to set their own hours and create their own enterprises, and older workers — baby boomers in their 50s and 60s — are retiring slowly and taking on part-time jobs

I've heard it said by the Silent Generation (those born 1925 to 1945, my parents' generation) and some of the OLDER  Baby Boomers (Born 1946 to 1964, talking of those born in 1950s and earlier) that too many young people--Generation Xers (born 1965 to 1979, my generation) and Millenials (Born 1980 to 2000) have no sense of company loyalty and change jobs almost as fast as we change Facebook friends.  This is not entirely accurate, but there is good reason for this perception to prevail.  Look at the last 5 years, plus the first few years of the 1990s (when I completed my degree):

2007 to present feels A LOT like 1991 to 1995.  These were years of Recession, slow economic growth and limited opportunities.  During both these time frames you had people finishing advanced college and graduate degrees with very few job opportunities out there.  I personally knew 3 people who were doing everything they could in 1992 to get scholarships to earn another Master's Degree so they could work as a Teaching or Research Assistant since there was no demand for their degrees in the private sector.  I recently met a young Barista at Starbucks who changed his major from Accounting to Engineering because as a junior in college, he was not finding any internships, and friends who were graduating were finding no jobs out there for them.  However, he'd found there were lots and lots of jobs out there for engineers and he was having to extend his degree plan from 4 to 6 years in order to graduate with a degree that was employable.  It's kind of hard to do that midstream but the Economy and society change at an accelerated pace these days and those who don't adapt fast can get left far behind before they realize it.

I personally had 3 part time jobs between 1992 and 1994--weekdays banking, 2 evenings a week as an adjunct professor and weekend sales in a health food store.  I had to do these 3 jobs in order to pay rent, utilities, buy food and pay my car note & student loans.  I did not have the option of moving back to my parents' house because the economy where they lived was even worse than it was in Houston at that time and I had to stay where there were opportunities to get ahead.  After 2 years of that, I obtained a full time position in the bank, ditched the Health Food store sales job, but did not stop teaching Economics part time because I'd seen too many coworkers in banking lose their job over something trivial or due to cost cutting procedures by the bank.  I can also tell you for a fact that many of the faculty at HCC, Lone Star College, San Jacinto College, Wharton College, University of Phoenix, Devry and Strayer University are Adjunct Faculty (part time) at 2 or 3 other institutions of higher learning in the Houston area.  This is because these colleges, in order to keep costs and tuition down, hire mainly part time faculty.

Additionally, the amount of offshoring of skilled jobs like accounting, tech support and customer service to foreign countries like India, the Philippines and Taiwan has put degreed professionals in fear of their livelihood and has made them feel they have to keep looking for the next job while they are employed in their current job.  There's also the feeling that if the job that you do well can be easily replaced with a cheaper alternative over Skype, the company is not showing you any loyalty, so why should you show them what is not reciprocated?

Other workers want to give themselves flexibility by working multiple part time jobs instead of one full time job.  I personally know people that work a morning part time job and an evening part time job, but are off from 2 PM to 6 PM to pick up their kids from school and work with them on Homework, whereas a full time job of 8 to 4 or 9 to 5 doesn't offer this kind of flexibility. This also frees up their time to pursue other ventures.  I know a number of part time employees of restaurants, colleges, accounting firms and law firms who have side businesses they are developing.  There have been more than a few entrepreneurs who used their spare time to start businesses while working part time, making their own opportunities when job opportunities fail to show.

4. Obamacare is the Elephant in the Room
It is a favorite argument of some folks that the reason why Full Time jobs aren't making a comeback despite the recovery is due to Obamacare becoming law in the next couple of years.  The major provisions of the law:

• Full time as defined by this law is 30 hours per week or more 
• Those employers with at least 50 full time employees per that definition must provide “qualified” health coverage for all of their full-time employees
• Those who don't must pay an annual penalty of $2,000 per full-time employee (after the first 30) if they don’t provide such coverage. If they do provide coverage but it’s not affordable, the penalty is $3,000 per employee who finds it unaffordable (with a cap at the penalty they’d pay for not offering coverage at all)
• “Affordable” is defined as less than 9.5% of the employee’s family gross income

The penalty is assessed on a monthly basis. In other words, if an employee works 121 hours in a given calendar month, that 121st hour costs the employer $166.67 (one-twelfth of $2,000), in addition to the employee’s pay for that hour and the payroll tax on that amount. That’s a hefty charge, and it’s much more than the hourly rate typical for part-time employment in most industries.

• If the employer decided to let the employees work more than 30 hours (and pay the penalty), the money to pay the penalty would have to come from somewhere. 
• It could come from reduced profits, higher prices – or lower pay for workers. Many business run at very slim profit margins, so it’s unlikely that they could take the entire hit to their profit and stay in business. 
• Business‘ ability to raise prices is limited by customers’ willingness to pay. Chances are, employees would have to absorb some of the penalty – perhaps most of it – in the form of lower wages.
• For workers making at or near the minimum wage, there is even less flexibility. The wage cannot be reduced by federal or state law if the state minimum wage rate is higher than the federal, so the employer’s only option is the reduce work hours to avoid having to pay the penalty.

The easiest way for many businesses to avoid these penalties is to do what Hobby Lobby, Wal-mart, Restaurants and even some colleges have done:  reduce the majority of their staff's paid hours to 25 hours per week or less in order to avoid the penalties Obamacare would charge them for not providing health insurance to their employees who work in the 30 to 40 hour per week range.

The irony of all this is that the number of jobs created would increase, while the average workweek for employees would be reduced by 25 to 30%, along with the average paycheck for those employees.

However, defunding Obamacare or not enforcing it won't magically make full time jobs reappear.  
If you re-read my earlier statement, businesses have had to cut costs rigorously well before this oncoming federal law due to the state of the economy.

A Reality Check to All of us 
The reality is the only thing that will bring about growth in the number of full time jobs will be a combination of dropping production costs, rising sales of goods and services and an increase in the rate of real economic growth within the economy due to a real increase in production and sale of goods and services.  While our economy has experienced some growth during this recovery, the rate of growth has been slow.  Looking at the chart below, we had negative growth in real GDP for a few years, at one point as bad as 4.1% drop.  The recent 2 years had a growth rate that was much better, but the average rate of growth in GDP has been 1.00% for the past 5 years.  Usually for healthy growth, real GDP has to grow by 3% or more each year, and that's not what we've been having lately.  The past 3 years have basically offset the losses of the previous few, which means we've moved back to where we were when the recession was underway, but are nowhere near positive growth.

As always, any one of my students who makes a good, thorough, well-reasoned comment MIGHT earn an extra point on an upcoming test.  Non-students, I welcome similar comments from you.  Stick the the economics, check your politics at the door (especially the extreme Liberals and extreme Conservatives)!

Success to you all!!!

Professor Hank

In the News: The Problem with Highly Skilled Young Workers

This article is of interest to both Macro and Micro students, as it deals with issues surrounding Employment on the National Level, as well as costs to businesses.  

As Fall Semester 2013 begins and I begin to see new fresh faces of students coming in to take Economics classes towards their degrees, an article I read this past summer about issues that have come up in Canada have given me pause and made me take a look at the American Labor Markets as well.  In this uncredited CBC article "Is Canada becoming dependent on temporary foreign workers?" It talks about how filling more commonly skilled jobs has become a problem in some parts of Canada and how many businesses are relying on Temporary Foreign Workers to fill in those gaps.

The article is very thorough and looks at what is happening from several angles, showing some of the complexities going on in our neighbour to the North:

• The Western provinces have experienced tremendous economic growth while the Eastern provinces have been suffering during the recent recession.  There has been a tremendous need for tradespeople at many skill levels but not enough of them in those localities to fill the jobs.  

• There were not enough people with the needed levels of skills available so a program was developed to attract mid-level skilled employees, agricultural workers and live-in caregivers in order to address temporary labor shortages.  These are not common skills, but are ones that are acquired with some training and experience, but aren't top level skills requiring advanced degrees or certificates either.

• The program was expanded to include lower level skills in order to address labor shortage issues in those areas--retail, hospitality and service industries. 
  

• Employers found hiring temporary foreign workers was a good deal easier than hiring domestic young workers, because domestic workers would push for higher wages if they remained in that position for a long time or only work for a season until they completed higher education and then left for a better job, leaving employers to have to hire and train new young employees and the process would repeat itself.  

• Canada has one of the highest educated populations in the world. Many young Canadians earning college degrees feel that bussing tables, cleaning toilets, servicing customers in retail stores or other such industries are beneath their educational status and do not want to work these jobs, so employers want to look elsewhere to fill those jobs.

• The Economic Boom of the past few years has not been so great in Eastern Canada--the article cites that in St Catharine's, Ontario, there have been hundreds of people applying for single job positions in lower to mid-level skilled jobs.  Some folks are arguing that employers should be going into the eastern provinces and hiring from workers who need jobs there, helping them move to the West rather than hiring temporary foreign workers.  The counter argument is that people with established roots and families are less likely to move across the country, and if things don't work out shortly, the sunk cost is higher than with a temporary foreign worker who has the job skills to begin with and has their return ticket already established.  

Troubled RBC Executive having to explain why he
laid off Canadian Staff in Branches, Replacing them with TFWs

• One example cited in a related article revealed that in January 2012, Albertan employers received positive confirmation for 1,261 TFW (Temporary Foreign Worker) positions for food counter attendants. At the same time, nearly 350 people made a claim for EI (Employment Insurance, what we call Unemployment Insurance in the US) who had cited significant experience in the same occupation and province.  In other words, 350 locals in Alberta with experience in Food Service were drawing unemployment benefits when they could have been working instead.  It's argued that the restaurants & hotels who hired that staff felt the foreign workers would not push for higher pay, would not complain as much about long hours or poor treatment as would Canadian workers, and they could be sent home if they got out of line. 

• The program has been subject to abuse before with skilled workers.  Royal Bank of Canada (aka RBC Bank) replaced a large number of their branch staff with Temporary Foreign Workers instead. 

In the US we have similar programs--H2B Visas are Business Immigration Visas for Skilled workers who are working in places such as the Medical Center, Universities, Oil Companies and Engineering Firms.  These programs have been expanded due to their being very high demand for Nursing and Medical Staff, Engineers, Academics and Researches, and Workers with strong STEM (Science, Technology, Engineering & Mathematics) Skills/Degrees/Experience; combined with a very lower supply of Americans who have skills like that.  Similar to Canada, employers have to justify this by showing they are having great difficulties filling those jobs with Permanent Residents/Citizens and at the same time have a pressing need for workers with those skills (i.e. causing economics losses to businesses, even business failure due to inability to hire enough workers).  

These articles illustrates several economic concepts that we need to look at in more detail  Consider the following questions and please RESPOND IN THE COMMENTS SECTION:

1.  What are factors affecting the Supply and Demand for Temporary Foreign Workers (TFWs)?  

2.  What are some potential effects on Domestic Wage Rates for industries that hire TFWs?

3.  How does hiring TFWs affect a business's Total Revenue, Total Costs, and Economic Profits/Losses?  

4.  What is Economics problems are possibly created when businesses rely too much on TFWs?

As always, stick to economic analyses, stay away from partisan politics and use SOUND REASONING based on Economic Theory.  I look forward to seeing replies!

Success to you all!!!

Prof. Hank Lewis  

ABinBEV and the Beer Brewing Industry

Note:  This topic may be more appealing to the Microeconomics Students.  However, since some of the complexities of International Trade are involved, Macroeconomics Students should feel free to add to the blog

What ias ABinBEV?

It was created in 2008 when InBev, the Leuven (Belgium)-based owner of Beck’s and Stella Artois, swallowed Anheuser-Busch, the maker of Budweiser, in a $52 billion hostile takeover. Today, AB InBev is the dominant beer company in the U.S., with 48 percent of the market. It controls 69 percent in Brazil; it’s the second-largest brewer in Russia and the third-largest in China. The company owns more than 200 different beers around the world. It would like to buy more.

Why have they been considered bad for the Beer Industry as a whole?

Consider the experience of Becks Beer fan Brian Rinfret:

Brian Rinfret likes imported beer from Germany. He sometimes buys Spaten. He enjoys an occasional Bitburger. When he was 25 years old, he discovered Beck’s, a pilsner brewed in the city of Bremen in accordance with the Reinheitsgebot, the German Purity Law of 1516. It said so right on the label. After that, Rinfret was hooked.

One Friday night in January, Rinfret, who is now 52, stopped on the way home from work at his local liquor store in Monroe, N.J., and purchased a 12-pack of Beck’s. When he got home, he opened a bottle. “I was like, what the hell?” he recalls. “It tasted light. It tasted weak. Just, you know, night and day. Bubbly, real fizzy. To me, it wasn’t German beer. It tasted like a Budweiser with flavoring.”

He examined the label. It said the beer was no longer brewed in Bremen. He looked more closely at the fine print: “Product of the USA.” This was profoundly unsettling for a guy who had been a Beck’s drinker for more than half his life. He was also miffed to have paid the full import price for the 12-pack.

Rinfret left a telephone message with AB InBev (BUD), the owner of Beck’s and many other beers, including Budweiser. Nobody got back to him. He had better luck with e-mail. An AB InBev employee informed him that Beck’s was now being brewed in St. Louis along with Budweiser. But never fear, the rep told Rinfret: AB InBev was using the same recipe as always.

He wasn’t satisfied. In March, he posted a plea on Beck’s official Facebook (FB) page: “Beck’s made in the U.S. not worth drinking. Bring back German Beck’s. Please.” He had plenty of company. “This is a travesty,” a fellow disgruntled Beck’s drinker raged. “I’m pretty bummed,” wrote another. “I’ve been drinking this beer religiously for over 20 years.” Rinfret kept trashing Beck’s on Facebook. Until, he says, AB InBev unfriended him in May. “They banned me from their site. I can’t post anything on there any longer.”

Rinfret was only temporarily silenced. He now complains on a Facebook page called Import Beck’s from Germany. AB InBev may be paying a price for disappointing Beck’s loyalists like him. According to Bump Williams, a beer industry consultant in Stratford, Conn., sales of Beck’s at U.S. food stores were down 14 percent in the four weeks ending Sept. 9 compared with the same period last year. “They are getting their proverbial asses kicked,” Williams says. “Too many customers were turned off when the switch was made.” Sales of Budweiser in the U.S. have fallen recently, too. And yet AB InBev is extraordinarily profitable.

For Further Details please read the full article "The Plot to Destroy America's Beer" published by BusinessWeek.  

Questions for Discussion:

ECON 2302

1.  In what output market structure is ABinBEV producing in?  Support this with evidence from teh article or other sources that you cite.

2.  What technical elements from Microeconomics has ABinBEV's CEO Carlos Brito managed to do very well in working?  What qualitative elements has Brito and ABinBEV handled poorly?

3.  Who are the Competitors of ABinBEV?  How can they benefit from possible mistakes that Brito is making in how they are brewing beer?

ECON 2301

1.  What economic phenomenon has led to such a company as ABinBEV?  Be specific and explain how it fits that definition.

2.  What are the possible regulatory issues ABinBEV may run into for brewing Becks beer in St. Louis, MO rather than Bremen, Bavaria, Germany?

3.  What other choices do consumers have and how can that influence ABinBEV to change its business practices?  

As always I want to see well thought out comments posted, with your name, class, campus, days and times.  You may earn 1 or 2 extra credit points applied to your Final Exam if the comments are top notch.

Success to you all!

Prof. Hank

Meet a Houston Entrepreneur: Chef Chris Williams of Lucille's in the Museum District

Chef , Caterer, Restaurateur
Chris Williams

Econ Students and Readers:

One of the things that I enjoy about my food-blogging hobby is the opportunity to meet local entrepreneurs who own and operate restaurants (aka "restaurateurs") and ask them for some nuggets of wisdom from their experiences in starting up their businesses.  If there is anything useful to be gained, I like to pass it onto my students (and I tell them as such) because experience is a better professor than I can be.  I've had students tell me they wanted to start up a  restaurant or other such business, so this is something you may find useful or interesting if you are so inclined.

Chef Chris Williams is a native of Southwest Houston who has student at Le Cordon Bleu's Austin school and has traveled the world, working in Canada, the UK and Lithuania, among other places.  In the Houston area, he worked at Max's Wine Dive, ran a catering business for a number of months before establishing Lucille's in the Museum District.  I got to attend a tasting of some of their representative dishes, which you can read about here.  The catering business was used to raise funds to start the brick and mortar restaurant and to survive on until the restaurant was ready to open to the general public.

Entrepreneurship is clearly in Chef Williams's blood.  His Maternal Great Grandmother Lucille Bishop Smith created a hot roll mix that she marketed and sold, and also started one of the first commercial food service and technology programs at Prairie View A&M University here in Texas.  The recipes Chef Williams served, such as the Fish Fry and the grilled Pork Shank and Beans, were inspired by his Great Grandmother's recipes, but were modified by his years of experience cooking different kinds of high end cuisine all over the world.

I asked Chef Williams for some advice he would give a student of mine that wanted to start his or her own restaurant.  Here is a paraphrasing of several key points he made:

• Do your due diligence before you begin.  Research all the legalities you have to work with in order to start up and operate your restaurant or any other business.  Learn about zoning, structure regulations and liquor laws.  Apply for your permits sooner rather than later.  

• Be aware the process is slower than many realize, especially in acquiring building permits from the city.  It took 10 months of paperwork and back and forth action with the city, county and state before I could start building up the property.  

• You need to be aware that you will have to have other income to pay the bills until you get under way. I paid my bills by catering, and you need to plan accordingly.   

• As you are constructing and preparing to open, MAKE FRIENDS WITH THE NEIGHBORHOOD.  Good relations with the neighbors will make the difference in approval or denial, if you are applying for some kind of zoning variance or license.  

• Be conscientious about managing costs.  Shop around for distributors for wine, beer, liquor where you can get a good deal, and always be looking for a better one.  Don't cut corners, but save money where you can and not compromise on quality.  

• Above all else BE DISCIPLINED.  Have a solid business plan, get it vetted by an attorney and an accountant, and stick to it, no matter what. 

I'd be hard pressed to argue with any of these points, students.

Success to you all!

Prof. Lewis

In the News: Greek Yogurt succeeds as Greece Fails Financially

As a bit of a foodie, I have had Greek and Bulgarian style yogurt, as well as the standard North American Style yogurts. Truth to tell, American Style yogurt does not taste like it did 30 years ago. Somehow the slightly sour taste and thickness has given way for a blended smoothie style that is easier for many to eat, but lacks some of the nutritious benefits of traditional style Yogurt. However, thanks to a confluence of conditions, things have taken off in a strong positive direction for Greek style Yogurt. 

This article would be of interest to both Macro and Micro students.




Canada's Metro News Daily gives details of this in this article telling Why Greek Yogurt is flying off the shelves in Canada--similar to what it's doing here in the US, but at an even faster rate!  Several of the non-price determinants of Demand and Supply are at work here, and are worth further investigation.

Per the article:

"Greek yogurt is flying off supermarket shelves in Canada after conquering the U.S. market. The high-protein content, natural ingredients and creamy taste have made it a hit with consumers in a health-conscious culture...

“I can’t remember the last time I’ve seen anything this strong. It’s been explosive in growth, unbelievable,” said Carlo Noce, category manager, dairy and grocery, at Longo’s. Sales have tripled and quadrupled in some locations, he said. Greek yogurt is low in sodium and can be used in cooking and instead of sour cream, said Noce.... Dieters like it because it is natural, nutritious, filling and convenient.

Chobani created the Greek yogurt market in the U.S. The company has gone from boot-strap start-up to $1-billion worth of business since launching out of an old Kraft plant in upstate New York in 2007. The number of employees has increased from five to 1,200. “It’s a real Cinderella story,” said Kyle O’Brien, executive vice-president of sales for Chobani. Chobani founder Hamdi Ulukaya got the idea when his parents visited from Turkey when he was a student in New York and complained the yogurt available in the U.S. wasn’t rich and creamy enough. “It’s not like we invented something. We just brought it to life in the U.S.,” said O’Brien. The timing was right, O’Brien said. Pitched as healthy, natural and nutritious, it hit a sweet spot in the American food market.

It didn’t hurt that Dr. Oz recommended eating Greek yogurt as part of a healthy diet.

A report by UBS Investment Research in the U.S. in 2011 said Greek yogurt brands captured market share more quickly than almost any segment ever in a major food category – at the time 13 points in three years. But it also concluded the growth in Greek yogurt could spell trouble for existing yogurt makers who fail to innovate and capture market share.

Chobani is now third in market share in the U.S., behind Yoplait and Dannon, sold as Danone in Canada. General Mills, which bought Yoplait in 2011 for $1.2-billion U.S., has seen sales decline in the category because it wasn’t ready for the Greek invasion, according to U.S. analysts.

Canadian consumers eat three times as much yogurt as American consumers, a fact O’Brien attributes in part to the popularity of yogurt among Quebecers, who take an artisanal approach to food and prefer natural products. According to Danone’s Canadian website, yogurt was introduced to Montrealers at the turn of the 20th Century.

What we see at work here are several factors involving the non-price determinants of demand and supply shifting in the yogurt market.  The most obvious one is changes in consumers tastes and preferences.

For Your Discussion:

1. What has happened to Demand for Greek Yogurt in North America?  What factors other than tastes and preferences account for it?

2.  What has happened to Supply of Greek Yogurt in North America?  What factors have led to this?

3.  What is the resulting effect on equilibrium price and quantity (P* & Q*)?  

First 5 students to post correct, intelligent comments with correct answers will get a bonus point added to their unit 1 test.

Success to you all!

Prof. Hank Lewis

In the News: Price of Beef and Cattle

As a man who loves a good ol' char-grilled steak, the price of Beef and Cattle are of great interest to me.  As an Economics Professor, I also recognize the work of market economics in driving the price and availability of good steaks and beef.  Cattle are the resource that produces beef.  The cost of cattle drives the cost of beef and ultimately affects the price you pay for a steak in a steakhouse, a pot roast at a local grocery store or a burger at a local burger joint.  Texas is one of the largest producers of cattle and beef, and the markets for both of these have been affected by a number of factors.

In the Houston Chronicle, back in May of this year, it was stated that Cattle prices were rising as ranchers began rebuilding their herds.  2011 was a severe drought in Texas and much of the North American Midwest from Manitoba through the Dakotas, Nebraska, Texas and all the way down to Sonora and Chihuahua.  These are regions where a lot of agricultural products--especially grain and cattle--are produced in North America.  Per the article:

A quality cow that sold last year for no more than $1,800 now fetches about $3,000. The
average price for a bull is up $500. And a cow with a 300-pound to 400-pound calf by her side is selling for about $2,800, sometimes more than $3,000 — almost double the $1,700 they commanded two years ago. 

Last year's historic drought forced ranchers to cut their herds because they had no grass and couldn't afford high hay prices. Hundreds of thousands of cattle were slaughtered or sent out of the state, leaving Texas, the largest livestock producer in the nation, with its smallest herd since the 1950s.

All of these factors are pointing to shifts in Market Supply and/or Market Demand.  

Lets break this down one step at a time:

2011 Market for Beef

In 2011, there was a severe drought.  As a result of this, the cost of maintaining cattle being raised for beef went up since ranchers had to buy hay or grain, and pay more for water in order to raise cattle.  The end result was an increase in the slaughter of cattle, making the supply of beef (meat produced from cattle) increase.   This particular factor (the excessive, unexpected drought of 2011) is called Supply-side Sunspot activity.  The fact that weather is beyond the control of ranchers and that it affected their cost of maintaining cattle led to the thinning of the herd at that point in time.  (Consider: what does thinning of the herd do to the ranchers' operating costs AFTER their herds are thinned?) The Graph to the right shows that the equilibrium price of beef last year dropped due to the extra cattle slaughter, flooding the market with cheap ground beef, steaks and other prime cuts of meat--equilibrium quantity of Beef rose while equilibrium price of Beef dropped.

2012 Market for Live Cattle

Now fast forward one year.  During the past winter, we had plenty of rain, watering ponds on ranches filled up, the grass grew thick, lush and green again and now Ranchers are looking for cattle to restock their herds.      As a result we see the price of cattle increasing due to the Ranchers wanting and being able to buy more cattle to restock their herds.  (Consider:  which curve is moving for cattle?  Why is it making the price of cattle rise?)  Since many ranchers are considering this to be a better year and many are optimistic, they are buying up more cattle.  Ranchers are the buyers in the market for live cattle, and therefore this is a case of a shift in market Demand, caused by a change in consumers' expectations of the future.    The graph on the left illustrates how when market Demand increases with no change in Supply, equilibrium price and quantity increase.

Jason Cleere, a rancher and beef cattle specialist with Texas AgriLife Extension at Texas A&M University, believes that while ranchers are restocking, they remain cautious. The rains have slowed significantly in the past month, and many ranchers are heeding climatologists' warnings that the next decade in Texas will be relatively dry. They're keeping herds small so they're better prepared for the next, inevitable, dry spell. 

"Ranchers in general have been a little bit more conservative on going out and rebuilding because they want to see what happens as we move into the summer," Cleere said. "Ranchers went through a lot of cash reserves last summer, and they can't do that again this year." With cattle prices high, cash reserves low, the weather uncertain and calves taking nine months to be born and several years to be ready for slaughter, many estimate the beef industry may need five years to fully recover. 

It's a layered business. There are those who raise cattle for breeding. They sell to ranchers who raise cattle for beef and breed their herds to restock. Livestock dealers buy cattle from those ranchers and sell the animals to feedlots, where they are fattened up before heading to slaughterhouses.  The drought impacts each layer of the market differently.  

 Of course, what most of us who consume beef want to know is how will this affect the price of our favourite steaks, burgers, ribs and brisket?  And you students need to speculate on how each layer of the market as affected and how it ultimately plays out for the consumer of the final good.

Questions for the Comments Section:


1.  What does the increase in the price of cattle do the the costs of raising them to the ranchers who breed cattle?  The ranchers who raise cattle for beef?  The ranchers who raise cattle to produce milk/dairy products?


2.  How do these events affect Livestock dealers and the price of cattle sold to feedlots?  


3.  How do all of these things ultimately affect the price of a steak or a burger to the consumer?  


Remember:  Although both S & D curves may shift usually one shifts by a greater magnitude than the other, dominating the effect.  


Success to you all!!!

Prof. Hank Lewis

Social Media: Consumer's Revenge or Tool of Extortion?

Students and Readers: As a Foodblogger running HankOnFood.com, I know many restaurants like to get good reviews and some will offer food discounts, free food, etc. if you give them some publicity.  If you read my food blog description, you will note I have a code of ethics I follow based on my Grandma's old adage "If you can't say something nice, then don't say anything at all!".  Even if I'm given a free meal or product, I don't write about it if I don't like it.  This is the only way I feel I can be fair and maintain my lack of bias.

In this day and age where everyone has multiple blogs, many consumers have found they can be great tools in dealing with poor customer service.  United Airlines, as an example, had luggage handlers mishandling guitars which led to musician David Carroll's guitar being broken into pieces.  See the video below as his response:



The fact of the matter is the World Wide Web has become a great sounding board for customers who have not been able to get satisfaction from large corporations wielding the word "policy" and shutting them down when they've been abused and given no end of disservice.  Much like a rumour mill or the town gossip, the Internet has enabled bad word of mouth to spread like wildfire on a global level, way beyond what was possible even 10 or 20 years ago.  This has also led to many libel suits over false claims, a faster spread of Urban Legends to the point that even Snopes can't keep up, and so on down the line.

However, what has become more and more common these days is a sense of entitlement and even arrogance in the use of Blogs, Facebook and other social media, and some individuals have decided to use them as a means to extort free products from companies and notably, free food and drink from restaurants.  One such individual had an issue with Ricky Craig, the owner of The Hubcap Grill  here in Houston and basically said that he'd give them a bad review on Yelp* if he wasn't given free product.  Ricky Craig would have none of it and went into a Twitter Battle with Yelp* and the customer over the issue.  He even took Yelp* to task over several false reviews, but Yelp* basically replied by saying they'd remove the reviews *if* he'd advertise with them.  Craig refused and retaliated in an event called #YuckFelp which I attended in a show of support for this local entrepreneur.  There have been several similar clashes between Craig and disgruntled customers over his not accepting credit cards due to how expensive the fees are and the fact that their kitchen won't cut a burger for the customer, but will give them a plastic knife to do it themselves.  The Anvil Bar and Refuge had a similar such dispute back in 2011 and owner Bobby Heugel took some liberties with a Yelp* sticker to voice his opinion.

And now we have another case of this that was reported on KIAH-39's NewsFix.


At it's best, the Internet and so-called New Media can be a source of income and a wealth of information that helps consumers and businesses alike.  At its worst, it is a source of misinformation that can clearly do serious harm to businesses that employ people who need those incomes and can even lead to scams/extortion such as these three examples here.

So let's hear from you.  Consider the following

1.  How likely are you to consider a review of a restaurant on Yelp*, Urban Spoon or a well known local Food Blogger in choosing a restaurant? 


2.  What would you need to know to consider if the reviews or opinions are valid or are just something petty?  Is there a litmus test we can use?


3.  Would you make use of YouTube, a blog, Twitter, or some other social media to get some sort of satisfaction if a business gave you poor service or if you felt they ripped you off?  How far would you be willing to take it?


4.  How much revenue could a firm lose due to these kinds of actions by customers?  How much would it cost the company to do damage control after the fact?  Would it be cheaper to just give in?  


As always, any well thought out and supported responses are welcome.

Success to you all!

Prof. Hank Lewis