Lobster prices have been showing up in my news a lot lately.
First, there was this article in The New Yorker, followed by this rebuttal from New York Magazine. Then, a few days later, the story was picked up by the broader press, including Good Morning America and Reuters.
The premise of the original New Yorker article was to explain why lobster is still expensive in restaurants despite record low lobster prices. The rebuttal offered a different explanation. And I’ll get to that.
But before I go any further, I have to admit that I’ve never bought lobster. One of my uncles keeps a handful of lobster pots as a hobby, and his summer harvests provide more than enough crustaceans for the entire family. (I went to pull the traps with him once, but they were too heavy for me to be very useful.)
Still, I’ve always known that lobster was a luxury food.
At any restaurant that has one, the lobster entrée is likely to be the most expensive thing on the menu. At ABC Kitchen, a farm-to-table restaurant in Manhattan where I’ve had two-thirds of my New York celebrity sightings, the Wood Oven Roasted Maine Lobster with oregano and lemon-chili vinaigrette will set you back $39; the next most expensive item on their regular menu is a $34 suckling pig.
At the generally more affordable Outback Steakhouse, the Lobster Tails entrée is still the most expensive thing on the menu: $30.29 at their Manhattan outpost, a dollar cheaper at the Brooklyn and Queens restaurants. Even their 22 oz. Porterhouse steak is less expensive.
Based on prices like these across the country, you might assume that fresh lobster is very expensive, and that restaurants are passing their high food costs on to their customers.
And you would be partly right: wholesale fresh lobster still costs more per pound than most wholesale cuts of beef.
But lobster’s default place at the top of the restaurant menu price range is starting to make less and less sense.
While U.S. beef prices hit an all-time high earlier this summer, dockside prices for Maine Lobster have fallen by 63% in the last eight years, from around $6 a pound in 2005 to just $2.20/lb today.
The reason isn’t a mystery: bumper lobster harvests in the last few years have driven supply up, and prices down. The annual catch tripled between 1980 and 2010, from 22 million pounds to 78 million pounds. Last year, Maine lobstermen pulled in a record 126 million pounds of legal lobster.
The reasons behind the bumper harvests are less obvious. Global warming may be involved, and Maine’s minimum and maximum lobster size regulations may be helping to sustain the lobster population there.
Another likely driver is the depletion of the New England cod population: cod are a primary predator of juvenile lobsters.
Lobster also suffered a price shock in 2008, when the failure of several Icelandic banks cut off the credit of three big Canadian seafood processors, and lobster buyers. Prices at the dock dropped from $5 to $2.50 a pound, and never fully recovered.
But whatever the reason, lobster prices are lower than ever in recent history.
These are, of course, wholesale prices for lobster fresh off the boat in Maine, not the marked-up amount you shell out at your local grocery store. But even down here in New York, Fresh Direct is currently offering whole live lobster—delivered to your door—for a very reasonable $4.99/lb.
So why is your lobster entrée still so expensive?
New York Magazine reporter Hugh Merwin talked to some New York restaurateurs and found a couple of answers. Lobster is labor-intensive. Transporting live lobsters is expensive. Lobsters molt in late summer, and these recently-molted soft shell lobsters have more water weight and less meat per pound.
These arguments all ring true: if you’ve ever cracked a lobster yourself, you know how much work they can be. And most other proteins don’t have to be transported live and stored in a fish tank.
But none of these are new factors: lobsters were just as hard to transport and prepare eight years ago, when dockside prices were almost three times higher. And soft shell lobsters are a seasonal factor, every year, not just recently.
Enter the original argument, from The New Yorker reporter James Surowiecki. He came at the question from an economic perspective, and concluded that lobster is what economists call a “luxury good.” In traditional economics, demand and supply for regular goods is determined by price: when the price falls, demand will increase, but supply will decrease. But consumers treat luxury goods differently: lower prices actually makes demand fall, to a certain point.
That is essentially Surowiecki’s argument for the high price of lobster entrées. He wrote:
“Keeping prices high obviously lets restaurants earn more on each dish. But it may also mean that they get less business. So why aren’t we seeing markdowns? Some of the reasons are straightforward, like the inherent uncertainty of prices from year to year: if a bad harvest next summer sent prices soaring, restaurants might find it hard to sell expensive lobster to customers who’d got used to cheap lobster. But the deeper reason is that, economically speaking, lobster is less like a commodity than like a luxury good, which means that its price involves a host of odd psychological factors. ...
“In the nineteenth century, it became generally popular, but then, as overharvesting depleted supplies, it got to be associated with the wealthy (who could afford it). In the process, high prices became an important part of lobster’s image. And, as with many luxury goods, expense is closely linked to enjoyment. Studies have shown that people prefer inexpensive wines in blind taste tests, but that they actually get more pleasure from drinking wine they are told is expensive. If lobster were priced like chicken, we might enjoy it less.
“Restaurants also worry about the message that discounting sends. Studies dating back to the nineteen-forties show that when people can’t objectively evaluate a product before they buy it (as is the case with a meal) they often assume a correlation between price and quality. ... Lobster has also stayed expensive because it makes other menu items, particularly seafood dishes, look more reasonably priced.”
Remember that $34 suckling pig from ABC Kitchen? Imagine how much more expensive that would look if it was not only the most expensive thing on the menu, but was also more expensive than the lobster.
In short, while I don’t discount the amount of effort that goes into a good lobster entrée, I think this is one market where price is determined more by psychology than by a simple equation of supply and demand. And that’s pretty interesting.
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“Historically speaking, the consumer sector tends to begin its favorable period near the end of September and typically remains strong until the beginning of June in the following year. Back-to-school and holiday spending combined with the effects of the ‘Best Six Months’ is the most likely driving force behind this seasonality. More recently, the rising stock market and continued housing and labor market gains (although somewhat sluggish) have given the sector a boost.Now, I don’t have a lobster stock for you today. If you know of a good one, let me know.
But we did recently have an interesting play on consumer whims in the Investment Digest, courtesy of the seasonality experts at Stock Trader’s Almanac. Here’s what they wrote about investing in the consumer in August:
“Over the last 15 years, this trade has produced an average 10.8% gain. Last year’s two ETF trades based upon this seasonality returned an average of 15.9%. Like past years, a two-pronged approach to trade this seasonality will be utilized. We will look to add two consumer-related ETFs to the portfolio that provide exposure to discretionary and non-discretionary spending on pullbacks over the next few weeks.
“SPDR Consumer Staples (XLP) can be bought on dips with a buy limit of $40.00. Employ a stop loss at $36.00 and an auto sell of $48.75. Top five holdings: Procter & Gamble, Coca Cola, Philip Morris, Wal-Mart and CVS Caremark. These names have traditionally been defensive names that have performed acceptably during periods of sluggish growth and should growth accelerate and stabilize at a higher rate, they will also perform. These five names also constitute nearly half of XLP’s total holdings. P&G alone is 14.09% of the ETF’s total assets as of August 5.
“SPDR Retail (XRT) can also be purchased on pullbacks using a buy limit of $79.05. Set a stop loss at $71.15 and take profits with the auto sell at $96.35. Top five holdings: GameStop, SuperValu, Conn’s Inc, Asbury Automotive Group and Lithia Motors. Unlike XLP, XRT is widely diversified and these five companies represent just 6.15% of XRT’s total holdings. As of August 5, retail apparel companies were nearly 28.2% of the fund and automotive retail was 13.84%.” - Christopher Mistal and Jeffrey A. Hirsch, Stock Trader’s Almanac, August 6, 2013
Wishing you success in your investing and beyond,
Chloe Lutts Jensen
Editor of Investment of the Week
