Facts you must assume: I Fresh lemons are known to all. Used mainly for juice and as a garnish, they grow all year around and are available in all seasons. California is a principal producer, although lemons are grown elsewhere, including Arizona and Florida. Fresh lemons are perishable in a relatively short time. Estimates of the shelf-life of unrefrigerated lemons range from five days to three or four weeks. Under refrigeration at the proper temperature, however, they can last six to eight weeks. Dollar sales of fresh lemons approximate $200 million yearly. Juice from lemons is sold in a variety of forms. The most popular form is âreconstitutedâ lemon juice. It is manufactured by adding water, a preservative or preservatives, and lemon oil to pure lemon juice concentrate which is purchased in bulk. The ingredients are mixed according to a simple, well-known formula, using uncomplicated, relatively inexpensive equipment of the sort employed by any juice bottling operation. After manufacture, the product is packaged for consumer use in glass bottles ranging from eight to twelve ounces in size (one ounce of bottled lemon juice being the rough equivalent of the juice of one fresh lemon). In recent years a small volume has been marketed in plastic green or yellow lemon-shaped squeeze containers. The preservatives used in bottled reconstituted lemon juice prevent spoilage and impart to the product a shelf-life of a year or more. The preservatives used have at times been 3/l00ths of 1% sodium benzoate and 1/40th of 1% sodium bisulfite. At other times, 1/30th of 1 % sodium bisulfite and 1/50th of 1 % sulphur dioxide have been used. With regard to the presence of these additives, particularly sulphur dioxide, the president of one company producing bottled reconstituted lemon juice recently wrote: The biggest potential problem is the use of sulphur dioxide as a preservative. While the level used in the juice could not be considered in itself harmful, there has been considerable adverse publicity given to sulphur dioxide in the past couple of years, as peopleâs awareness of air pollution has grown. Should they identify our preservative as being one and the same with the gas present in the air, we could have problems. Sulphur dioxide does have, if nothing else, a very obnoxious odor, and yet at the same time it is the only preservative that works effectively on lemon juice. If we were unable to continue using it, we would not have a product that could be considered satisfactory to the consumer. 2 4814-4260-2812 v1 The existence of these preservative may account for the substantial, if not drastic, difference between, the taste of reconstituted lemon juice and juice obtained from fresh lemons. A study prepared by the Center for Advanced Marketing concluded with respect to the difference in taste: The superior flavor of fresh lemon juice, the distasteful flavor of the bottled, is the chief reason for its use by the fresh users. The taste of the bottled is considered in no way comparable to the fresh. The fresh is thought to be sweet and true tasting; the bottled is described as being different, imitation, funny tasting. Counterbalancing the taste difference between bottled reconstituted lemon juice and juice from fresh lemons is the price differential between the products. Fresh lemon juice costs from four to seven times more per ounce than a ânon premiumâ bottled lemon juice, and from three to five times more than a âpremiumâ brand (e.g., âReaLemonâ). This price differential stays relatively constant. It is also known that when this price ratio changes for any considerable period of time, consumers begin to respond. For example, 2009 was a banner year for lemon growers in California. The price of lemons fell by 5% compared to reconstituted lemon juice. As a consequence ReaLemon sales were down, and ReaLemonâs management contemplated a price reduction for 2010. Luckily for the company, in 2010 the price ratio between fresh lemons and reconstituted lemon juice returned to normal. ReaLemon has a joint venture with a small lemon grower in Florida. In 2009, ReaLemon dropped the price of its Florida lemons by 5%. Fresh lemons fluctuate in price on a weekly (or even daily) basis, depending on the supply available from the field, in transit, and in cold storage. In contrast the price of bottled lemon juice changes at infrequent intervals. Indeed, manufacturers of processed lemon juice claim that they price their brands in competition with other processed lemon juice brands, not fresh lemons. Typical is the following statement by the president of a regional producer of processed lemon juice: Q. Is there a close correlation between retail fresh lemon prices and retail processed lemon juice prices? A. Do you mean, do they move up and down together or apart, this sort of thing? No. [Processed) Lemon juice prices are primarily, as I said earlier, predicated on cost and promotions, et cetera. Retail grocery and supermarket buyers also apparently do not consider the price of fresh lemons in making decisions on the purchase of processed lemon juice for resale. The grocery buyer for a Wisconsin chain of 80 retail food stores has stated: Q. Mr. Ellenson, in making buying decisions concerning processed lemon juice, do you consult the price and quantity information concerning fresh lemons at Godfrey stores? A. No, sir. A. Why not? 3 4814-4260-2812 v1 A. Itâs two different worlds youâre talking about, a concentrated against a pure natural product. Nor do produce buyers give consideration to the current price of processed lemon juice when placing orders for fresh lemons. The National Director of Produce Merchandising for A&P has stated: Q. In making your decision as to what demand or how many fresh lemons to buy, did you consult the grocery buyer, check his supply or his price of [bottled] lemon juice? A: No. It may be, however, that the lack of consultation between produce and grocery buyers is simply a reflection of the way the products are marketed by producers. Fresh lemons are marketed through produce brokers, who sell through produce wholesalers to supermarket produce buyers. The produce brokerage business is one characterized by fluctuating prices and requires a special expertise. Processed lemon juices are sold through food brokers or company salespeople to supermarket grocery buyers. As a result of the purchase by different departments, fresh lemons are displayed and sold to the public in the fresh fruit and vegetable departments of supermarkets and retail food stores, whereas bottled lemon juice (except for plastic squeeze containers shaped like fresh lemons) is carried on the shelves of the grocery department. II In 1934 Irving Swartzberg began selling bottles of presqueezed lemon juice to bars, hotels, and other institutional customers. The product was an attractive one, mainly because it was more convenient than squeezing fresh lemons. Over the years, Swartzbergâs company began selling its juice directly to customers, and also changed the composition of the product from pre-squeezed fresh lemon juice to a reconstituted product made from lemon juice concentrate, lemon oil, water, and a preservative. In the early 1940s the company began to use the âReaLemonâ name in connection with its product, and in the ensuing years heavily advertised and promoted ReaLemon brand reconstituted lemon juice. In 1982, the Puritan Company purchased ReaLemon for approximately $12.4 million. ReaLemon is the only nationally distributed brand of bottled reconstituted lemon juice, all others being local or regional, with the recent exception of Golden Crown. The president of ReaLemon Foods has characterized the ReaLemon brand as âone of the greatest brand names in the history of the supermarket,â further noting that in a âcompletely unique situationâ ReaLemon lemon juice commands a premium of 25 to 30 cents per unit over competitive bottled lemon juices, and that no such differential on any other food product, frozen or non-frozen, exists anywhere in the industry. Thus, the Center for Advanced Marketing Practice, after a study of consumer attitudes, reported: âReaLemon is really the only one expressesâ the prevailing sentiment in these groups. While respondents [to the survey] are aware of a few other brands (Seneca, ShopRite, Crown, National), 4 4814-4260-2812 v1 ReaLemon is the one that stands out as the commercial lemon juice. Respondents apparently feel it was the original commercial lemon juice and has been available for many years. Although no differences were mentioned between ReaLemon and the other products, both commercial and fresh users see ReaLemon as the brand that is proven and reliable and has captured their brand loyalty. The former head grocery buyer for a division of a large Eastern supermarket chain expressed it this way: Q. Will you tell us why Acme has continued to stock ReaLemon during at least this twelve year period that you are familiar with? A. There is a customer demand for the item. ReaLemon is almost a generic term for lemon juice, like Coke or Mortonâs Salt. As a result of this brand recognition and loyalty, ReaLemon has had no difficulty competing for supermarket shelf space. Many supermarkets have room for only two brands; such stores tend to carry ReaLemon and the least expensive other available brand. Indeed, in stores where there is room only for one brand of bottled reconstituted lemon juice, that brand will most likely be ReaLemon. ReaLemon occupies some of the best space in the supermarket. It is regularly displayed at the check-out aisle or at eye level in the fresh produce section. ReaLemon claims that it receives these treatments because it maintains a resale price maintenance program. Any grocery store carrying ReaLemon products is guaranteed a retail margin above the level of ReaLemonâs competitors. ReaLemon says it provides these margins because it needs the store to âtake careâ of its products. Supermarkets sell shelf space (called slotting allowances) and offers this space to ReaLemon competitors. ReaLemon never pays for shelf space. To maintain this high consumer loyalty ReaLemon has devoted considerable attention to advertising and promotional activities. For example, ReaLemon Foods spent more than $5 million on advertising between 2007 and 2012, plus an additional $2.8 million on promotional efforts in 2010 alone. In contrast, competing processed lemon juice marketers spent little on advertising during this period. Additionally, from 2000 through 2006 ReaLemon conducted a strong public relations program throughout the country âto tell the story of the advantage of ReaLemon.â Promotional materials of all kinds were distributed, including news releases, recipes, pamphlets, and even âEducational Kitsâ for use by high school students in home economics courses. ReaLemon, being the only processed lemon juice marketer with national distribution, was able to use media with nationwide coverage for advertising, including television. The efforts have yielded substantial rewards. Sales last year were $22 million. The company earned a rate of return on equity in excess of 20 percent, as compared with the average rate of return of 6 percent for the food industry. 5 4814-4260-2812 v1 III Table 1 shows the firms that manufacture bottled reconstituted lemon juice. Table 1. U.S. Sales of Bottled Reconstituted Lemon Juice, in Gallons (Percent of Market) Firm 2007 2008 2009 2010 2011 2012 ReaLemon 88.7 86.1 84.2 80.2 77.4 75.3 Golden Crown N/A N/A 4.4 9.1 13.1 14.9 Seneca 1.4 N/A N/A N/A N/A 1.4 Sunkist 1.9 3.1 2.2 1.8 N/A N/A Vita Pakt 2.8 2.5 2.1 1.8 1.6 N/A Treesweet N/A 1.7 N/A N/A 1.4 1.4 ReaLemonâs position in a number of metropolitan areas is shown in Table 2. Table2. ReaLemon Market Share (Various Areas) Metropolitan Area Market Share by Units Sold (2012) Atlanta 78 Buffalo 65 Chicago 76 6 4814-4260-2812 v1 Cinn/Day/Columbus 91 Dallas/Ft. Worth 80 Detroit 72 Houston 97 Kansas City 97 Los Angeles/San Diego 54 Minneapolis/St. Paul 99 New Orleans 87 New York 81 Philadelphia 73 St. Louis 89 Seattle/Tacoma 97 Not included in the above Tables, however, is Minute Maid frozen lemon juice, produced by The Coca-Cola Company. Minute Maidâs lemon juice is made from lemon juice concentrate and water. It is not sold in bottled liquid form, but in a plastic squeeze container in a frozen state. To use the product, the consumer allows it to defrost in the refrigerator; the juice can then be used without adding water as if it were fresh lemon juice. Minute Maid manufactures this product with the same plan and technology it uses to produce other frozen citrus juices (e.g., orange juice). Because it is frozen, it contains no preservatives (a fact prominently noted on its package and in its advertising). Supermarkets stock it in the frozen food case, which is generally not located next to either fresh lemons or bottled reconstituted lemon juice. If kept frozen, the product will stay virtually indefinitely; once thawed in the consumerâs refrigerator, the juice will last approximately eight weeks under refrigeration. Minute Maid only began selling frozen lemon juice in 2010, when it started a âregional roll-outâ in Northeastern markets. Through heavy advertising and extensive use of promotional âcentsoffâ couponing, Minute Maid generated sales last year of $2 million. By the end of that year Minute Maid achieved nationwide distribution, with sales predicted to be in excess of $4 million. It is currently selling at retail at a price between ReaLemon and fresh lemons. The other major challenger to ReaLemon, Golden Crown Citrus Corporation, has been selling for a longer period than Minute Maid. It began as a Chicago-based enterprise engaged primarily 7 4814-4260-2812 v1 in home delivery of fruit juices in the Chicago area. In the early 1980âs Golden Crown commenced production and marketing of its Golden Crown brand of processed lemon juice. In 2008 Golden Crown decided to emphasize the manufacture and sale of processed lemon juice for distribution to retail outlets. In that year the company began expanding sales of Golden Crown lemon juice into the Midwestern areas around Chicago. As the company grew, it moved into the Eastern areas of the United States in 2009, the Northeast in 2010, the Southeast in 2011, and the Southwest and Western areas in 2012. In 2013, Golden Crown also opened a second producing and bottling facility at Bridgeton, New Jersey. In its most recent Marketing Plan, ReaLemonâs management noted that beginning in 2008 competition from lower priced brands had begun to make serious inroads into ReaLemonâs market share. Of the ten to twelve competitors in the bottled lemon juice business, the report identified two â Golden Crown and Senecaâ as those causing the most difficulty. The report also identified the metropolitan areas which posed the greatest danger to ReaLemon because they ânow have Golden Crown Brand Lemon Juice for competition.â The Plan expressed particular concern over Golden Crownâs pricing, showing the following comparisons between ReaLemon and Golden Crown; February/March April/May June/July Total U.S. [¢] [¢] [¢] ReaLemon 32 oz. 61.5 67.1 61.6 Golden Crown 32 oz. 47.1 47.6 46.3 In light of these concerns the Plan established a future âMarketing Mix Strategy,â with the major objective of increasing ReaLemonâs share of the market in high lemon juice per capita consumption areas, This objective was to be accomplished through a marketing program which utilized a combination of advertising, consumer promotion, and trade promotion activities. Specifically, ReaLemon planned to increase its market share in four âkey Districts,â New York, Philadelphia, Chicago, and Detroit. These four markets accounted for 38.4 percent of ReaLemonâs sales and 54.7 percent of Golden Crownâs sales. The objective was to reduce Golden Crownâs market share by 20 percent, or from 18 to 14 percent, while ReaLemonâs share was to rise from 71 to 75 percent. The concerns expressed in these Marketing Plans were also conveyed by ReaLemonâs National Sales Manager on many occasions. For example, he wrote one of his Regional Sales Managers: I am attaching the April/May and May/June figures for Pittsburgh. The Golden Crown sales figures tripled, while our quart figures went up very slightly At this time we have continued to go down in market shares to where we are now at only 85%. I would like your comments. 8 4814-4260-2812 v1 To another Regional Sales Manager: I trust that we are doing everything possible to see no further large quantities of Golden Crown are shipped into these [Miami, Jacksonville, and [Birmingham] markets. Several months earlier he had written to the ReaLemon broker in Detroit: Do you have any brilliant ideas how we can more effectively combat this [Golden Crown movement] at the store level? ReaLemon has recently made some large sales to Tops Markets in Buffalo and Acme Markets in Philadelphia. Although ReaLemonâs wholesale price for a case of twelve 32-ounce bottles is normally $6.45, ReaLemon made volume sales to Tops at $4.05 to $4.40 per case, and to Acme at $4.05 to $4.20 per case. These prices led Acme, for example, to purchase 2,500 cases in May and 1,815 more in December. ReaLemonâs costs are set out in Table 3. Table 3. Average Annual Costsâ One Dozen 32-ounce ReaLemon brand Reconstituted Lemon Juice Buffalo Philadelphia Average Ingredients $1.956 $1.956 Average Container 1.104 1.104 Average Label .083 .083 Average Packing .177 .177 Average Transportation .17 .25 Average Expense .26 .26 Average Advertising Costs .21 .21 TOTAL $3.96 $4.04 In addition to the information âReaLemon had with respect to its two costs, ReaLemon received from its brokers and employees competitive information with regard to Golden Crown promotional levels, and attempted to analyze Golden Crownâs cost structure. ReaLemon 9 4814-4260-2812 v1 estimated Golden Crownâs cost of goods alone (including a twenty percent reduction in the cost of ingredients for suspected adulteration) at $2.83. Adding in the cost of distribution, selling, and overhead, ReaLemon estimated Golden Crownâs cost at $3.74. Further, like any other marketer, Golden Crown must sell its product at a price which will allow, the retailer a satisfactory markup for distribution, shelf space, display, and feature activity. According to ReaLemonâs sources, this markup must be twenty to thirty percent. Finally, another brand of reconstituted lemon juice must be ten to fifteen cents per quart cheaper at retail to compete with ReaLemon, and âwould still have hard sledding.â The $4.05 to $4.40 per case price received by Tops Markets, for example, allowed it to feature ReaLemon at thirty-seven to thirty-nine cents per quart. For a retailer selling ReaLemon at thirtynine cents per quart to maintain a Golden Crown price differential of fifteen cents, it would have to sell golden Crown for twenty-four-cents a bottle. Using a twenty percent markup figure, it would thus have to purchase Golden Crown at $2.40 per case. Even if it priced Golden Crown only ten cents under ReaLemon, at twenty-nine cents, it would still need to purchase Golden Crown at $2.90 per case.
1. ReaLemon would like to merge with the largest producer of fresh lemons in the United States. Would such a merger reduce social welfare?
2. Does ReaLemonâs resale price maintenance have a strong efficiency explanation?
3. Are ReaLemonâs prices predatory? What would you have to know?
