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This article compares the effectiveness of generic versus. brand advertising for fluid milk
and cheese. The analysis is based on estimated fluid milk and cheese demand equations and
on an analysis of optimal reallocations between generic and brand advertising expenditures.
The issue of generic versus brand advertising effectiveness is examined in two ways. First,
the advertising elasticities of demand for fluid milk and cheese are computed and compared.
Second, optimal reallocation levels between generic and brand advertising expenditures are
simulated.
From the elasticity point of view, in two of the three estimated demand equations, the
generic advertising elasticity is larger than its brand counterpart. However, it is erroneous to
just look at advertising elasticities. The optimality condition must also be considered. The
optimal results suggest that dairy farmers could achieve increases in sale volumes and
revenues by reallocating some of the generic dollars to brand fluid advertising. The increases
in the sale volume and revenues from doing so are about 3% for volume and 1% for revenues.
However, the simulation results should be interpreted with care because as one moves away
from the historical advertising levels, the estimated equations used in the simulation become
less reliable. This is relevant because the optimal solutions call for large percentage
reallocations.
Finally, the results also suggest that dairy farmers should not divert generic dollars to
brand cheese advertising. A strategic implication is that dairy farmers should consider
establishing some type of fund matching relationship with brand fluid companies.
F armers in the United States invest almost $1 billion annually in checkoff pro-
grams for advertising and promotion, nutritional research, new product
development, and education programs (Forker and Ward). Much of the checkoff
money is devoted to generic advertising, which is a collective marketing strategy
aimed at increasing the total demand for the commodity. In addition to generic
advertising, brand advertising by firms is also used for some commodities. Contrary
to generic advertising, brand advertising is intended to increase market share of the
firm through product differentiation. However, brand advertising may also increase
total demand especially if it reinforces characteristics common in the basic
commodity.
Agricultural economists have conducted numerous studies on the effectiveness
of generic advertising in increasing demand, prices, and profits to farmers.' Most of
these studies have measured the impact of generic advertising by including deflated
Background
Since Congress passed the Dairy and TobaccoAdjustment Act of 1983,dairy farmers
have been required to pay an assessment of fifteen cents per hundred pounds of
milk marketed in the continental United States to fund a national demand expansion
program.' The aims of this program, which exceeds $200 million each year, are to
increase consumer demand for milk and dairy products, enhance dairy farm revenue,
and reduce the amount of surplus milk purchased by the government under the
Dairy Price Support Program.
To increase milk and dairy product consumption, the National Dairy Promotion
and Research Board was established to invest in generic dairy advertising and
promotion, nutrition research, education, and new product development. Among
these activities, media advertising accounts for the largest expenditures (particularly
for fluid milk and cheese advertising). In addition to dairy farmers' generic
advertising efforts, fluid milk and cheese companies conduct brand advertising to
increase their own product sales. Currently, none of the dairy farmers' checkoff
revenues are used for brand advertising.
Generic vs. Brand Advertisingin U.S. DairyPromotion 71
Figures 1 and 2 present quarterly generic and brand advertising expenditures for
fluid milk and cheese, respectively, from 1975 to 1995.The expenditures are deflated
by the media cost index. Since there was no national program until 1984,the generic
fluid milk and cheese advertising expenditures prior to 1984 came exclusively from
state programs. It is worth noting that generic fluid advertising expenditures have
been substantially higher than brand fluid advertising. On the other hand, brand
cheese advertising expenditures have been higher than generic cheese advertising
levels.
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consumption quantity and maximizing sales revenues (or profit). If the objective is
to maximize sales revenues, the commodity group should concentrate on promoting
fluid milk (either via generic or brand scheme) so as to take advantage of the Class
I differential stipulated by federal milk marketing orders. In this case, it does not
make sense to shift generic fluid expenditures to promote manufactured dairy
products as long as the government is buying surplus dairy products.
The following two reallocation scenarios are considered: (1) a reallocation of a
portion of the generic fluid advertising expenditures to supplement the existing
brand fluid campaigns, and (2) a reallocation of a portion of the generic cheese
advertising expenditures to supplement the existing brand fluid campaigns. The
simulations need not include a scenario of reallocating a portion of the generic fluid
or cheese expenditures to brand cheese promotion, given the insignificant estimated
coefficient associated with the brand cheese advertising variable. The simulation
results are compared with those under the scenario of historical advertising patterns
(the base scenario) to determine the impact of the reallocation. For each scenario,
advertising expenditures are reallocated ranging from 10% to 90% (in 10%
increments) of the generic advertising expenditures in question. This procedure
enables one to compute the marginal sale volumes and marginal revenues from
reallocations, and identify the optimal reallocation levels. The analysis is conducted
Generic vs. Brand Advertisingin U.S. Dairy Promotion 73
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Year
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for the period extending from the first quarter of 1985 to the third quarter of 1995,
which corresponds to the life of the National Dairy Promotion and Research Board.
Scenario #1 Scenario #2
Generic Fluid to Branded Fluid Generic Cheese to Branded Fluid
Percentage Change in Class I
Quantity and Class I Revenue Percentage Change in
Reallocation Based on Fluid Based on Fluid Combined Class I Percentage Change in
Level Equation #1 Equation #2 and Cheese Quantity Class I Revenues
the first column of table 1. A 10% reallocation of the generic fluid expenditures in
favor of brand advertising will result in a 1.44% increase in the Class I quantity (i.e.,
milk used for fluid purposes). The percentage impact on Class I volume increases
with further increases in this reallocation, reaching a maximum impact of 3.35% at
the 50% reallocation level. The simulation results under the objective of maximizing
Class I revenue are identical to those under the quantity maximizing objective
because the dollar benefit to the additional Class I milk quantity (arising from the
reallocation) is simply the exogenous Class I differential.
It is interesting and insightful to see whether the above policy prescription will
change dramatically if Fluid Equation #2 is adopted instead. Recall that this
alternative fluid equation resulted in the brand advertising elasticity being lower
than its generic counterpart. The ratio of the brand to generic advertising elasticity
based on this equation is 0.8, suggesting that a reallocation of generic fluid
expenditures to brand campaigns might not be profitable. However, this turns out
not to be the case because, as mentioned, a 10% reduction in the generic expenditures
is equivalent to a 35% increase in the brand expenditures. Specifically, the positive
demand impact of the 35% increase in the brand expenditures will be 2.8 (3.5 * 0.8)
times larger than the negative demand impact of the 10% reduction in the generic
expenditures. The second column of table 1 reports the simulation results using
Fluid Equation #2. A 10% reallocation of the generic fluid expenditures in favor of
brand campaigns will result in a 0.56% increase in the Class I quantity and revenue.
The maximum impact is 1.03% reached at the 40% reallocation level. This result is
surprisingly similar to the one under Fluid Equation #1.As such, only Fluid Equation
#1 will be used in the next scenario involving both fluid and cheese demand
equations.
equation, the elasticity ratio of brand fluid advertising to the generic cheese
advertising is about 0.6. Thus, on the surface, the proposed reallocation calls for a
shift to an inferior advertising scheme. Again, this need not be true.
Notice that the ratio of generic cheese expenditures to brand fluid expenditures
during the simulation period is about 2.0; a 10% reduction in the generic cheese
expenditures will be accompanied by a 20% increase in the brand fluid expenditures.
As such, the positive fluid demand impact of the 20% increase in brand fluid
expenditures is going to be 1.2 (2 * 0.6) times larger than the negative cheese demand
impact of the 10% reduction in generic cheese expenditures." So one expects the
Board would want to closely monitor such a program to ensure that dairy farmers'
brand investment motivates additional expenditures rather than merely replaces
the existing brand expenditures.
Endnotes
1See Ferrero et al. for a thorough review.
2 Several exceptions include a yogurt study by Hall and Foik; a New York cheese study by Kinnucan
and Fearon; and a Florida orange juice study by Lee and Brown.
3 For more detail on the national generic dairy promotion program, see the 1996 United States
Department of Agriculture: Report to Congress on the Dairy Promotion Program.
called the Class I differential, between Class I milk and milk used for manufactured products purposes.
5 In working this simple calculation, it is assumed that the ratio of fluid quantity and cheese quantity
is one. The actual ratio is 1.1 for the simulation period.
6 The result of reallocating all generic cheese expenditures (i.e., 30% of them) to fluid campaigns is not
surprising. Under Revenue Maximization Objective, the commodity group should concentrate on
promoting fluid milk in order to take advantage of the Class I differential.
References
Ferrero, J., L. Boon, H. M. Kaiser, and O. D. Forker. "Annotated Bibliography of Generic Commodity
Promotion Research (Revised)." Cornell University Department of Agr., Res., and Managerial
Economics NICPRE 96 (3): 96-103, February 1996.
Forker, O. D., and R. W. Ward. Commodity Advertising: The Economics and Measurement of Generic
Programs. New York: Lexington Books, 1993.
Hall, L. L., and I. M. Foik. "Generic vs. Brand Advertising for Manufactured Milk Products-The Case
of Yogurt." N. C. J. Agr. Econ. 5 (1982): 19-24.
Kaiser, H. M., O. D. Forker, J. Lenz, and C. H. Sun. "Evaluating Generic Dairy Advertising Impacts on
Retail, Wholesale, and Farm Milk Markets." J. Agr. Econ. Res. 44 (1994): 3-17.
Kinnucan, H., and D. Fearon. "Effects of Generic and Brand Advertising of Cheese in New York City
with Implications for Allocation of Funds." N. C. J. Agr. Econ. 8 (1986): 9-107.
Leading National Advertisers, Inc. (LNA). AD & Summary. New York. Selected Issues, 1975-1995.
Lee, J. Y., and M. G. Brown. "Economic Effectiveness of Brand Advertising Programs for United States
Orange Juice in the European Market: An Error Component Analysis." J. Agr. Econ. 37 (1986): 385-94.
Liu, D. J., H. M. Kaiser, O. D. Forker, and T. D. Mount. "An Economic Analysis of the U.S. Generic
Dairy Advertising Program Using an Industry Model." N.E. J. Agr.and Resource Econ. 19 (1990): 37-48.
U.S. Department of Agriculture, Economic Research Service. Dairy Situation andOutlook. Selected Issues,
Washington DC, 1975-95.
U.S. Department of Agriculture, Economic Research Service. USDA Report to Congress on the Dairy
Promotion Program. Washington DC, 1996.
U.S. Department of Labor, Bureau of Labor Statistics. Consumer Price Index. Selected Issues, Washington
DC, 1975-95.
U.S. Department of Labor, Bureau of Labor Statistics. Employment and Earnings. Selected Issues,
Washington DC, 1975-95.
Ward, R. W., and B. L. Dixon. "Effectiveness of Fluid Milk Advertising Since the Dairy and Tobacco
Adjustment Act of 1983." Amer. J. Agr. Econ. 71 (1989): 730-40.
Wohlgenant, M. K., and C. R. Clary. "Development and Measurement of Farm-to-Retail Price Linkage
for Evaluating Dairy Advertising Effectiveness." J. Agr. Econ. Res. 44 (1994): 18-27.
QFLUID Commercial fluid milk demand billion lbs. of milk Dairy Situation and Outlook
fat equivalent
QCHEESE Commercial cheese demand billion lbs. of milk Dairy Situation and Outlook
fat equivalent
PFLUID Retail fluid milk price index 1982 - 1985 = 100 Consumer Price Index
PCHEESE Retail cheese price index 1982 -1984 = 100 Consumer Price Index
PBEV Retail non-alcoholic beverages 1982 -1984 = 100 Consumer Price Index
a See the reference section for a complete bibliographic citation of each source.
beverages is used as a proxy price for fluid milk substitutes, and the meat price
index is used in the same way for cheese substitutes. All the price and income
variables are deflated by the consumer price index for all items or by other deflators
as discussed below.
Also included in the demand equations are generic advertising expenditures,
brand advertising expenditures, quarterly seasonal dummy variables, and lagged
demand to account for consumer habit formation. The advertising expenditures are
deflated by the media cost index. The carry-over effects of advertising are captured
via second-order polynomial distributed lag functions of the current as well as
previous four quarters' expenditures, with both end-point restrictions imposed
(Kaiser et al.; Liu, et al.; Ward and Dixon; and Wohlgenant and Clary). In the case of
the cheese equation, a dummy variable (1990 to 1995 equals one) is also included to
account for possible structural change in the demand due to gains in experience of
program managers since the inception of the national promotion program in 1985.
The simultaneity problem between demand quantity and own price is dealt with
78 Reviewof Agricultural Economics
by adopting the instrumental variable procedure of regressing own price on its one
period lag, a trend variable, and a first-order autoregressive term for residuals. Finally,
to correct for serial correlation, autoregressive (AR) or moving average (MA) terms
for the residuals are identified and added to the demand equations whenever
appropriate.
The first set of estimated demand equations are presented in table A2 under the
headings, "Fluid Equation #1" and "Cheese Equation #1." The coefficients associated
with income (INCOME/CPI) and the beverage price (PBEV/CPI) in the fluid
equation are both positive and statistically significant. The own price coefficient
Dependent Variables
In (QFLUID)* In (QCHEESE)
Fluid Equation #1 Fluid Equation #2 Cheese Equation #1
Independent Variables Coef t-ratio Coef t-ratio Coef t-ratio
Constant 0.170455 2.5 0.231851 3.3 -0.821563 -2.1
Quarter 1 -0.058844 -12.6 -0.058067 -12.4 -0.111183 -11.1
Quarter 2 -0.091674 -18.8 -0.090657 -17.5 -0.040963 -4.3
Quarter 3 -0.045691 -12.3 -0.046506 -11.4 -0.060793 --6.8