Obesity, Social Responsibility, and Economic Value
Market change and social change are processes that become intertwined over time. An interesting but unanswerable question is whether economic change leads to social change or vice versa. In this article, a case is made that social issues can present businesses with opportunities to increase economic performance.
Economic Value and Social Responsibility
When compelling information is presented to the public about a social issue, the marketplace reacts. A case in point is the social issue of obesity in the United States. Obesity became a visible social issue when medical research, national health organizations and medical professionals tied obesity to many health conditions such as type 2 diabetes and heart disease and found obesity to be the second leading cause of unnecessary deaths. The Centers for Disease Control reported in 2004 that 42 states had an obesity prevalence rate of 20 percent or more. Higher incidences of obesity mean that society will pay more in the future for treatments, procedures, and medications related to these consequential health issues. In 2002 it was estimated that almost $100 billion was spent on medical issues related to being overweight or obese, half of which was covered by taxpayers’ dollars in the form of Medicare.
A milestone was reached in 2003 when the U.S. Food and Drug Administration (FDA) announced an initiative for food and dietary supplement companies to provide more accurate information on packaging labels. In the same year, President Bush announced the Healthier U.S. Initiative, which encourages Americans to “improve personal health and fitness.” Subsequently launched was The President’s Challenge website (http://www.presidentschallenge.org/), which promoted health and nutrition information and awards as well as served as a resource for scholarships and grants for individuals and groups involved with promoting more active lifestyles among the U.S. populace.
This article examines the responsiveness of selected food service companies to the information provided by the government and society’s response to a call for a change toward healthier habits. In the short term business model, changes focus on product differentiation and pricing formulas. Both allow increased costs to be passed on to consumers. The resulting bottom line or overall economic value reflects the realized differences between sales and costs. A follow-up step in the social change process is also presented. Specifically, derived demand markets, especially labor, take the social change process to another level.
Two Case Studies in Food and Nutrition: Subway and Whole Foods
Two cases in which improved economic value supports social change are Subway and Whole Foods Market. Although both companies had been operating well before the 2003 FDA initiative, the role of the government in promoting social responsibility has in recent years been an important catalyst in both of these case studies.
As noted earlier, the Food and Drug Administration (FDA) in 2003 announced an initiative for food and dietary supplement companies to provide more accurate information on package labels. The more the labels provide clear and accurate statements of contents, the more the consumer can make better informed choices.
The latest statistics show that 64 percent of the adults in the U.S. are either overweight or obese, and 15 percent of U.S. children under the age of 19 are overweight. Providing improved nutritional information on package labels allows consumers to make healthier eating choices. Among fast food restaurants, Subway is among the first to revisit its business model and offer consumers additional choices.
Subway led the way with its Jared Fogle campaign illustrating the health benefits of Subway’s products and their “7 subs under 6 grams of fat” campaign. Subway sales rose 19 percent during the first year of the Fogle campaign.
Subway has continued to expand on their original fresher/healthier campaign with their F.R.E.S.H. Steps Initiative, “a national campaign to raise awareness and educate communities on the need to prevent and treat childhood obesity.” Today Subway offers a healthier option on the Kids’ Pak, which comes with 100 percent fruit juice and a fruit roll-up.
Frequent comparisons with other fast food options led McDonald’s Corp., Wendy’s Restaurants, and Jack in the Box to introduce and announce healthier meal options such as salad instead of fries and yogurt instead of soft serve ice cream. McDonalds Corp. actually experienced economic benefits derived from sales of healthier and “premium products” such as salads and white meat chicken. Healthier products have been responsible for more than half of same-store growth in the U.S. since 2003.
The market differentiating effects of Subway’s social initiative have been tracked for Subway, McDonalds and Wendy’s. The results indicate how product differentiation can improve revenue positions over those of key competitors. A comparison of average year-over-year growth in sales adjusted for inflation from 2000 to 2004 shows that Subway’s 14.6 percent growth substantially exceeded Wendy’s 9.8 percent and McDonalds 0.3 percent growth. Economic revenues are reported annual market sales adjusted for inflation. Other factors such as stores opened and advertising that changed during the period were not accounted for.
Business models based on economic value require that the implicit costs of facilities, equipment and inventory be quantified. In this article, implicit costs were calculated using information on risk-free interest rates, market risk premiums and stock price movement (beta) measures. Combining the adjusted sales with accounting costs and implicit costs yields equals economic costs.
In Wendy’s case, the growth in economic costs was 9.1 percent, so its economic value or difference between adjusted sales and economic costs increased only an average of 0.7 percent. Over the same period, economic costs for McDonalds changed by -0.2 percent, so McDonalds economic value increased 0.5 percent overall.
Another case of increased economic value and social change is found in the retail food industry. With a reputation for social responsibility, Whole Foods Market, Inc. currently boasts an operating margin of 4.9 percent, almost double the industry standard.
Whole Foods Market’s Organic Trend Tracker 2005 survey reported that 74.6 percent of respondents said that the prices of organic food were a barrier against consuming more such food. About 52.8 percent of respondents reported that they believe organic foods and beverages are “better for my health,” and 70.3 percent responded that their main reason for buying organic foods is to avoid ingesting pesticide residue. Although higher priced food is a barrier, Whole Foods Market accumulated enough shareholder value and attention to become part of the S&P 500 in December 2005.
Comparing growth in adjusted sales for Whole Foods with similar revenues of Safeway and Albertsons shows that Whole Foods grew at an average of 5.0 percent for the period from 2000 to 2004, while Safeway grew at 2.8 percent and Albertson’s growth was negative at -3.8 percent. Using economic value growth rates for comparison reveals that Whole Foods recorded a positive 1.3 percent, while Safeway and Albertsons both recorded negative trends of -0.5 percent, but for different reasons. In Albertson’s case, economic costs decreased, but not as fast as economic revenues. At Safeway, economic costs increased faster than economic revenues.
Whole Food’s commitment to product differentiation provides a substantial comparative advantage in the company’s very competitive industry. Other grocery chains have now begun to provide organic food choices for consumers. Safeway, for example, launched its “Lifestyle” stores, which are aimed at selective shoppers. Lifestyle stores, which are themed with dark atmospheres and hardwood floors, feature a large selection of organic fruits and vegetables similar to the look and feel of Whole Foods stores.
Success stories for selected businesses, such as those of Subway and Whole Foods, lead to reassessment and adjustments in business models among competitors. Improvements in societal health challenges, such as obesity, require long-term change processes. True progress means more than short-term economic movement. Value propositions of workers and institutions must align with the improved economic values of businesses to continue the change process in the long run.
Over time, corporate social responsibility (CSR) practices intertwine with market based economic value changes. Assessing new information and revisiting business models with an eye toward social change are important market differentiators. Innovative businesses can find a clear path from economic value to social responsibility in the social change process if they seek better information sources and exhibit increasing responsiveness to changes in consumer choices.
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About the Author(s)
Donald M. Atwater, PhD, is a practitioner faculty of economics at the Graziadio School of Business and Management. Previously, he served as chief executive for a southern California technology company, the chief financial officer of an international, value-added software company, a principal in the human resources and compensation practice at William M. Mercer, and a director and co-founder of several start-up companies. He has created decision-support technologies and implemented them in a number of Fortune 100 companies, including AT&T, Intel, Dell Computer, Apple Computer, and Nestle USA. Dr. Atwater has also worked with many public organizations, including the U.S. Navy, the General Accounting Office, the state of California, and both the county and city of Los Angeles. His work has been published in the Monthly Labor Review and he has co-authored numerous papers. Today he owns and operates a company dedicated to building goal-driven communities.
Shizuka Suzuki, is a full-time student at Pepperdine University's Graziadio School of Business and Management. She earned a Bachelor of Science from UCLA in Cognitive Science and has over five years' experience in technology and the higher education industry, specifically in the areas of user support and instructional technology. She will be interning this summer with the Business Sales Operations Division at AT&T.