Rafi Mohammed

Why is Lobster Cheaper than Dining at McDonald's?

Posted on August 12th, 2009 (0 Comments)

Apologies for missing my blog entry last week. I am happy to let you know that I turned in the final draft of my new pricing strategy book to HarperCollins on Monday. It has been an intense 18 month project and I am extremely pleased with the final result.

Over the summer, I noticed the prices of lobster and prime grade steak have dropped precipitously. Lobsters are selling for as low as $3.99 a pound (normally $7.99) and prime steak for $9.99 a pound (previously as high as $45 a pound). While it is understandable that demand for these luxury foods has slowed down, it is surprising how drastically prices have dropped. Curious, I decided to conduct further research.

One key point is that while lobster and steak are thought of as luxury goods, in reality these are perishable commodity products. Their prices are strictly determined by demand and supply. Unlike other producers of premium goods, these products are not withheld from the market (airline and hotels, for example, can accept lower capacity utilization in return for higher market rates). With lobster and steak, supply is dumped on the market and demand determines the price that sells the last pounds of steak and lobster.

The decline of lobster prices is pretty straightforward to understand. Because lobster is considered a celebratory food, with the economy in the doldrums, demand has dropped. In addition, good wildlife management initiatives have led to record supply. Reduced demand and higher supply unequivocally leads to a lower market price. As a result, it is cheaper to dine on lobster than having a meal at McDonald’s.

The story behind lower prime steak prices is more interesting. Beef consumed by humans in the U.S. is rated by the U.S. Department of Agriculture as either Select (lowest grade), Choice (medium grade), and Prime (the best, of which only 2% of all meat is graded). Historically, most of the demand for prime steaks has come from top-tier steakhouses (such as Morton’s) and home grillers could only purchase from specialty meat shops or mail order houses. But today, Costco is selling prime steaks for $9.99 a pound.

Similar to lobsters, demand has dropped due to the economy and supply has increased (due to the popularity of steakhouses before the recession). But why have prices cratered by 75%? Even at $9.99 a pound, prime steaks are not selling well. A butcher I spoke with claims that the average steak buyer doesn’t understand the difference between Prime and Choice (in contrast, most everyone views lobster as “premium”). Until recently, I did not fully understand the distinction between these two meat grades. Thus, demand for Prime comes from a very small segment. With the small number of core customers pulling back, prices have to be drastically lowered so fine steaks do not go to waste.

There are a few more weeks of summer and the economy is on the rebound (which the Fed confirmed today). Why not cut loose a bit? Throw a premium barbecue and enjoy discount prices that are likely to be the lowest that we’ll see for a long time.

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