Financial Decision-Making in the Foodservice Industry

Economic Costs and Benefits

Amit Sharma

• Publisher: Apple Academic Press
• Year: 2019
• Print ISBN: 9781771888257
• eBook ISBN: 9781000012491
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The study of decision-making in foodservice is still a relatively new area of scholarly interest. The application of cost-benefit analysis and behavioral finance and economics in the foodservice context is rare. This volume, Financial Decision-Making in the Foodservice Industry: Economic Costs and Benefits, fills that gap and focuses on cost-benefit analysis, decision-making, behavioral finance, economic theories, and their application in foodservice and restaurant industry. The volume synthesizes these major themes by developing new theoretical foundations and presenting findings from the investigation of managerial practice.

The authors cover an abundance of topical issues, including ethical obligations in foodservice, sustainability issues in the foodservice/restaurant industry, farm-to-school and local food expenditures in school foodservice settings, managerial traits and behavior in the foodservice industry, and more.

PART I
Eating Away from Home Decisions

CHAPTER 1

The ACE Trade-Off Model: A Cost–Benefit Perspective to Understanding the Process of Everyday Food Choice Transactions

AMIT SHARMA^*

School of Hospitality Management, College of Health and Human Development, the Pennsylvania State University, 201 Mateer Building, University Park, PA 16802, USA

^* Corresponding author. E-mail: [email protected]

ABSTRACT

Everyday food choices in the foodservice system continue to be investigated extensively from varied perspectives. Economics of food decisions, one such perspective, can benefit from a guiding framework to enhance a deeper understanding of the principles guiding food choice decisions. An underlying unit of food choice analysis is the transaction of buying or selling food. Such transactions present the decision maker with choices. Therefore, food decisions are the result of tradeoffs that appear within such choices. These tradeoffs are based on the costs and benefits associated with transactions. In this paper, we present a framework that describes food decisions as a tradeoff of cost and benefits that the decision-maker must resolve. The framework also incorporates the approach decision-makers take for information processing. In doing so, we draw upon the theories of informed choice and bounded rationality. How we evaluate the food choice transaction can help us better understand food decision dynamics. The adoption of this framework in studies of food decision processes and outcomes can be informative to optimize individual outcomes (such as health, utility) and consequences that will impact the broader market.

1.1 Introduction

Food choice decisions are complex and consequential to well-being of individuals and families and profitability of businesses in the foodservice system.¹ For individuals, the complexity of food choices, particularly when eating away from home, have increased manifolds given the alternatives available, invariably the high speed of such transactions, and the continuously increasing expenditure on food away from home. Similarly, businesses operating in the complex foodservice system must constantly make choices that involve the supply chain and demand side stakeholders. The question is how do individuals make these decisions?

Theories of decision-making and choice processes are abundant, both from a positivist and a normative point of view. The normative analysis in the domain of food choices and decisions has received some focus, particularly in Frost et al. (1996). However, for the most part the analysis of foodservice system choices and decisions has happened on the crossroads of the larger decision analysis context. That is, decision analysis has largely focused on longer-term decisions such as retirement planning, fixed and financial asset investment analysis, and others. We could enhance our understanding of the shorter-term decisions, particularly those that involve day to day choices, and at a high frequency. Foodservice decisions fall in this category—as individual consumers; food choice decisions are frequent, over a shorter period of time. Similarly, businesses in the foodservice system need to make choices that are frequent. However, similar to less frequent decisions, consequences of food choices could be felt over the short and the long term. Therefore, while the day-to-day decisions involve higher frequency, they also inherently lead to both long and short-term consequences.

The seminal works of Daniel Kahneman and Amos Treversky in the analysis of decisions under uncertainty have enhanced our understanding of how the System 1 processes contribute to our decision making. While System 1 is reactive and less mindful, System 2 is deliberate and thoughtful. Given the consequences of food choices and decisions, System 2 ought to be the process that could help guide our actions. System 2 requires individuals to be deliberate with seeking and obtaining information, processing it, and then using it to make decisions. Not everyone is prepared or even trained for such processes. One of the significant challenges for enhancing our decision making is to gain a deeper understanding of how can individuals be better trained and educated to use the System 2 processes that would help guide more deliberate decisions, particularly in the context of food. Given the growing emphasis in eating away from home environments, we believe the System 2 impact on food choices would be of critical consequence to enhance individual well-being.

¹ Here the foodservice system broadly refers to the various segments of the foodservice industry, the associated industries along its supply chain, and the consumer behavior in food away from home environments.

Indeed, the philosophical approach in this paper needs to be recognized. While there is value in the role of our reactive and less mindful actions play in decision making, there is also a need to balance these reactive approaches with the more methodical and systematic analysis of information. If the two proposed systems (Systems 1 and 2) were to be taken on face value to exist, then there is a reason for the two to exist: Each plays a role in our choices. Both together would likely enhance our decisions and choices more so than either of the two actings alone. There is, however, an imbalance in the way we allow the two systems to evolve over time. While System 1 benefits from repetitive reactive and responsive actions, System 2 may not necessarily benefit for such repeated actions. If anything, due to lack of use System 2 could stand the risk of deteriorating over time.

There are no straightforward answers on how we can enhance System 2 (Evans, 2003; Sinayev and Peters, 2015; Frederick, 2005; Sadler-Smith and Shefy, 2007; Samson and Voyer, 2012). One that most researchers agree upon is that System 2 needs to be constantly educated so that we become more aware of our decisions and choices (Viswanathan and Jain, 2013; Dansereau et al., 2013). While this sounds simple in a statement, acting upon it is another matter. We now also have this challenge of “scaling up” that has emerged in the recent past—how can we scale up our intervention for maximum impact. This further complicates the challenges of strengthening our System 2. However, that should not lessen our efforts to do so, in fact, it should increase our efforts to find ways that would enhance System 2, and help balance the synergies between these two Systems.

Food decisions are amongst the most essential, day to day choices we make on a repeated basis. Given the recent trends, we are also eating far more away from home than ever since such observable behavior has been recorded. Therefore, foodservice choice analysis could benefit from a more focused and systematic assessment of the manner in which individuals make such decisions, and also help guide individual decision making to be more systematic and analytic, than just being reactive and responsive. In this paper, we present an approach to achieving this end and propose an analytical framework to understand the decision process within the domain of foodservice choices. The approach we take is that of a an transaction, one that involves an exchange of a good or service for cash or a promise to pay (credit). Defining such decisions as a transaction can help us systematically unfold the complex aspects involved in food decisions. Such a systematic approach would thereby help guide individuals’ analytical decision making, to complement it with the more intuitive and reactive System 1 approach.

1.2 The Foodservice System

What is the food choice system? It could be defined as the system within which an individual would make food choices. From a microeconomic perspective, and with the consumer at the center of this discussion, one way to define the food choice system could be to divide it into two key components: food at home, and food away from home. The foodservice system can be defined as the food away from home environment. This includes, and is not limited to, a supply of food for production and preparation in foodservice businesses, and the consumption of food by consumers either in these environments or in the extended foodservice environment that often includes their own homes.

The foodservice segments that could be classified in this system are varied and with a diverse set of goals (Reynolds and McClusky, 2013). Foodservice segments have traditionally been divided into commercial and noncommercial/nonprofit. That said, the lines a blurring along these traditional boundaries. For instance, corporate dining services are an interesting example of foodservice operations; while the corporation providing the foodservice is not intending to make a profit from selling that food to its employees, the foodservice company managing that unit on behalf of the corporation would have a profit objective.

Another way of segmenting the foodservice industry has been to place it distinctly different from food retail businesses. That boundary too is now increasingly blurring as grocery stores have developed their own foodservice outlets within the grocery store environment. The food delivery segment traditionally used to be an extension of the restaurants so that their physical location would not be a constraint. However, now with the advent businesses offering ‘ingredient and recipe’ tool kits, the line separating delivery service from restaurants has become more distinct.

There also used to be a clear distinction between food away from home versus food at home. As one can imagine, that line too has significantly blurred in the recent past; largely because food prepared away from home can more conveniently be consumed at home. In fact, food away from home can be prepared at home for home consumption, despite not being from your own pantry. These are interesting trends shaping the foodservice system, and the phenomenon we have called food away from home.

As the context of the foodservice system evolves over time, the constant aspects of this system have been the stakeholders in the system, activities that create value and establish interaction between these stakeholders, and the inputs to generate these activities, and the outputs as the outcomes of these activities. While we will restrain from dwelling into the details of this systematic view, we highlight the key elements of each of these system components, through a transactional perspective. Stakeholders in the food-service system include the growers and producers, wholesalers, and retailer markets both physical and virtual, suppliers and transporters, storage facilities, producers, servers, consumers, associations of each stakeholder, local, state and federal governments, and the global dimension of the foodservice system. The key activities that generate value across these stakehold...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• About the Editor
• Contents
• Dedication
• Contributors
• Abbreviations
• Preface
• PART I: EATING AWAY FROM HOME DECISIONS
• PART II: FOODSERVICE SYSTEMS
• PART III: FOODSERVICE BEHAVIORS
• Color insert of illustrations
• Index