Three researchers at Leuven University, Jo Swinnen, Kristine Van Herck and Thijs Vandermoortele, in a recent paper in the newly-launched BAE Bio-based and Applied Economics journal put the spotlight on the potential to base future growth in European agriculture on the willingness of consumers to pay a price premium in exchange for various ‘experiences’ (working paper version available here ). They suggest that this may be a more promising growth strategy, at least in some sectors or for some regions, than a more conventional emphasis on producing food, albeit of high quality, at low cost.
Definition of experience goods
The researchers base their proposal on two pieces of evidence. The first is evidence generally that there is rapid increase in the demand for experience-related products and services. It is important here to explain what the authors mean by experience goods.
Products and services are assumed to consist of three components, each of which add value. The first is the physical good or service. The second is its quality characteristics. And the third is the experiences associated with purchasing and consuming the good or service. By definition, experiences – in contrast to quality – are intangible.
Take, for example, the purchase of an apple. The physical apple delivers certain nutrients and vitamins. But apples differ in their quality characteristics, for example, their taste, or whether there is a risk of absorbing harmful pesticide residues. And they also differ in their experience characteristics. Consumers, for example, may ‘feel good’ about buying apples at a farmers’ market (because they are helping the local economy) or buying organic apples (because they are helping the environment). This ‘warm glow’ experience is something the consumer is willing to pay for.
The organic example shows the difficulty sometimes in distinguishing between quality and experience characteristics (do we buy an organic apple because we think it is a guarantee of the absence of pesticides, or because we think we are supporting a better environment?). This interdependence contributes to the difficulty in measuring experiences to get a handle on their importance and how this is changing over time.
Nonetheless, the paper provides some convincing evidence that expenditure on experiences is increasing in importance. They cite work by Jensen who has identified different markets for experiences. In addition to the market for convictions (where people pay for products that are consistent with their ethical beliefs) and the market for caring (which includes the ‘warm glow’ if people feel their purchase goes to help alleviate poverty or care for the environment), he identifies markets for adventure, for conviviality and togetherness (sporting events, rock concerts), for self-definition (where purchase of a good implies a statement about lifestyle or identity) and for peace of mind and tradition (a belief in ‘rural romanticism’ may explain part of the interest in farmers’ markets and community-supported agriculture).
Growth in demand for food experience goods
Their second piece of evidence is that the desire for experiences is an increasingly important part of consumers’ food purchase decisions. They cite the growing importance of markets for free range eggs, fair trade products, organic food and farmers’ markets, as well as the greater role of experience standards (sustainability certification by environmental NGOs, for example). Other examples might be the growth of expenditure on foods with PDO/PGI labels. Although seen as part of the EU food quality policy, the attributes they signify are often intangible and thus fit into the category of experiences as defined by the authors.
Based on this evidence, the researchers conclude that it is worthwhile to consider the experience economy as a pathway for future farm growth. In fact, they are bullish about its potential. “This…may offer substantial growth perspectives and a growing comparative advantage for European farmers in the medium term.”
They propose that agricultural policy (and particularly Pillar 2 rural development policy) might be refocused “towards programs that aim at assisting farmers and the agricultural system as a whole to reorient itself towards what appears to be a growth area for the future: the experience economy”. This is a tentative proposal, as they recognise that most of the past growth in experience products has come from private sector initiatives and standards, and they recognise that public policy might more usefully be directed at supporting more generic skills of innovation and entrepreneurship.
Could selling ‘experiences’ be a growth strategy for European agriculture?
Are the authors justified in their optimism? One point is that consumers when asked in surveys routinely over-estimate their willingness to pay for experience characteristics as compared to their actual buying behaviour. While the authors of this paper do not rely on survey data and for their case studies use data on actual expenditures, a farmer thinking about the option of producing experience goods might well get a misleading impression from what marketing surveys say.
The authors recognise food sales of experience products are still relatively small compared to the total food market, but point out that this is no longer true for specific markets (eggs, coffee, bananas) where they have gained substantive shares. Their case is that, with rising consumer income, experience products are likely to be the fastest growing share of the food market and thus have a better potential to provide a future for European agriculture and food.
However, we are unlikely to see much growth in aggregate household consumption in Europe in the coming decade and there are downside risks that household consumption could even fall. That leaves the possibility that there is an export demand for European-produced experience food products. Even if that is the case, it runs up against the fact that, despite the hype about Europe being the world’s largest food exporter, it is extraordinarily self-sufficient in food. Most European food is bought by European consumers, so that purchases by foreigners of European food experience products will only ever be important for very specific commodities.
A final ground for scepticism relates to how the premium from experience products is distributed along the food supply chain. Supermarkets can use experience goods as a market differentiation strategy, but for farmers complying with the standards (animal welfare, environment) to produce experience goods the initial impact is higher production costs as well as requiring higher management ability. How much of the premium paid by consumers is passed back to farmers not only to compensate these costs and to reward these management skills but also to provide an additional rent that adds to farm income compared to conventional farming is an open question.
Short supply chains by-passing strong intermediaries do not suffer from this problem, but the whole history of the development of modern food supply chains suggests there are strong advantages to centralised provision such that farmers’ markets and the like are unlikely to develop significant scale.
Despite these caveats, some farmers have found it profitable to convert to the production of experience goods. The question posed by the authors of this stimulating paper is whether this can now become a mass movement?
This post was written by Alan Matthews.
Photo credit William Metcalfe under a Creative Commons licence