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March 2012 Archives

Improving Supermarket Performance

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Since the first Walmart Supercenter was opened in 1988, supermarkets around the country have been struggling to maintain their market share and profitability. According to Supermarket News in 2012, Walmart is North America's largest food retailer, and Target is the 4th largest. As more retailers open more hypermarkets it is increasingly important for traditional supermarkets to know how to compete. Using data from The Food Industry Center's Supermarket Panel study Richard Volpe tests various supermarket strategies to determine which ones are effective in Evaluating the Performance of U.S. Supermarkets: Pricing Strategies, Competition from Hypermarkets, and Private Labels. The article was published in the December 2011 issue of The Journal of Agricultural and Resource Economics.

Drawing on a body of literature in marketing and agricultural economics, Volpe sets up an empirical model to test supermarket performance using variables that relate to market structure, consumer demographics, and advertising and pricing strategies. Volpe found both expected and unexpected results. Consistent with the literature, Volpe found that being in direct competition with a hypermarket had a negative effect on supermarket performance. However, this negative effect was smaller for larger supermarkets than for small supermarkets. While the body of literature comparing everyday low pricing (EDLP) and high-low pricing (HLP) is largely inconclusive, the results of this research found there is some evidence that supermarkets using EDLP had higher sales per square foot than those using HLP. In addition, using EDLP strategies when in direct competition with a hypermarket (whose strategy is usually EDLP) can mitigate some of the negative performance effects.

Contrary to the literature, Volpe found that increased private label product sales do not increase store performance. He states that the recent increase in private labels is good for consumers and private label manufacturers, but not retailers. The literature also shows that increased private label sales results in higher food prices overall. For these reasons, Volpe predicts that private label growth will slow down. He also states that use of technology had a significant effect on performance and more research is needed to study how it can improve supermarket performance. Since supermarkets who compete directly with hypermarkets have decreased performance relative to those who don't, Volpe argues it is important to understand how different factors influence supermarket performance.

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Do Food Subsidies and Nutrition go Hand-in-Hand?

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Last week on the blog we talked briefly about 2011's record high world food prices and why the United States didn't feel the effects of those food price increases. The FAO reports that high food prices disproportionately affect the world's poorest who spend 60%-80% of their income on food. In order to combat high food prices many countries such as Egypt offer as much as 1% of their GDP in consumer food price subsidies. This type of assistance is politically more palatable than a direct cash transfer as food subsidies are justified by the idea that they are improving the nutrition of the very poorest. In the article Do Consumer Price Subsidies Really Improve Nutrition?, published in the November 2011 issue of The Review of Economics and Statistics, Robert Jensen and Nolan Miller attempt to answer this fundamental question.

Miller and Jensen set up a field experiment in 2 provinces of China to explore food price subsidies. Random households in Gansu and Hunan provinces were given vouchers to help pay for their province-specific dietary staple. The 1300 households selected were part of China's urban poor, living on $0.41 to $0.82 per person per day. This amount is well below the World Bank's extreme poverty line of $1 a day. They were also malnourished, consuming far fewer kilocalories per day than international standards recommend. Participants were asked to complete a diary of what they ate in a 24-hour period before, during, and after the survey in order to estimate how diets were changing. There were 4 groups in the survey, ranging from the control group receiving no subsidies to some recipients receiving almost a 30% discount.

What Miller and Jensen found was that in this experiment there was no evidence that food price subsidies increase nutrition. In fact, in some cases the subsidies reduced caloric intake. This is because in Hunan province they found that the increased wealth effect of the subsidy encouraged substitution away from the staple food towards fish, the cheapest meat. However, while the effect of the subsidy on nutrition was very low and for most nutrients statistically insignificant, the welfare effects were not. Consumers who received the subsidies were able to change their food purchasing behavior to maximize their utility. Meaning with food price subsidies consumers were better off, just not nutrition-wise. The authors state that "a number of other policy instruments such as in-kind transfers also improve welfare for the poor, and price subsidies or controls are generally held to have a number of disadvantages relative to these other instruments."

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The Winners and 'Losers' of Country of Origin Labeling

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We have all seen the stickers on our food that tells us where that particular piece of food was grown. This is called country of origin labeling, or COOL, and has a goal of helping consumers make informed choices when buying their food. Mandatory labeling for beef, lamb, pork, fish, perishable agricultural commodities, and peanuts was part of the 2002 Farm Bill, but was not implemented until the Spring of 2009. In the article Consumer Perceptions and the Effects of Country of Origin Labeling on Purchasing Decisions and Welfare, published in the January 2012 issue of Food Policy, Lana Awada and Amalia Yiannaka develop a general framework to examine market and welfare effects of COOL implementation.

Awada and Yiannaka look at a variety of cases including going from a no COOL to a voluntary COOL regime and a voluntary to a mandatory COOL regime. The study looks at both of these scenarios within vertical and horizontal product differentiation. Vertical product differentiation is when COOL is indicative of the products quality and horizontal product differentiation is when COOL is not indicative of a products quality, but gives information that allows consumers to express support for a particular country's economy. The study showed that both market and welfare effects of COOL were the same regardless of vertical or horizontal product differentiation.

While vertical or horizontal product differentiation didn't matter, the same could not be said moving to a mandatory COOL system from a no COOL or from a voluntary COOL system. The authors found the market effect of a mandatory system depended on relative prices of products and the strength of the general consumers' preference to labeled products. They found the higher the price of the labeled item and the lower the preference for the item, will cause the labeled product to have a smaller market share. Awada and Yiannaka also found that when moving from a no COOL to a mandatory COOL regime, there are welfare losses and gains. Consumers with strong preferences for COOL saw welfare gains due to new information, while those with little to no preference saw welfare losses due to increased prices and lack of an unlabeled product. However, when moving from voluntary to mandatory COOL there were undisputed welfare losses as those with a strong preference for COOL saw no welfare change and those with little to no preferences saw higher prices and the disappearance of the unlabeled product. The size of these welfare losses and gains ultimately depends on how much consumers value COOL products.

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What is so Different About U.S. Food Prices?

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In 2011 food prices hit all-time highs, causing much distress in the developing world as the higher prices led to widespread hunger and social unrest. There was some relief in the months following the February peak, but the March release of the Food Price Index from the Food and Agricultural Organization of the United Nations shows that prices are again on the rise, creating new fears about food price inflation. However, prices are still nominally below their peak about a year ago.

Food Price Index.png

Graph from UN FAO, 2012

While commodity prices were at historical highs in early 2011, U.S. food price increases paled in comparison to global food price increases. In Will U.S. Food Prices Follow Global Trends? found in the 3rd issue of 2011's The Main Street Economist published by The Federal Reserve Bank of Kansas City, Jason Henderson evaluates why the U.S. has been relatively unaffected by these commodity price increases. Henderson explains that consumers in the United States eat more processed and prepared food than the rest of the world so labor markets have a bigger influence on U.S. food prices. He states that only about $0.15 of every retail dollar spent of food in the United States is to pay for farm commodities while labor costs account for about half of every retail dollar spent on food.

Henderson states that since labor costs are the largest contributor to food prices, in the future it is likely that changes in U.S. food prices will follow wages and economic growth more than commodity prices. He speculates that with slow wage growth, the price of food away from home will grow more slowly (2%-3%) than the price of food at home (3%-4%) in 2012. He also states that even if global commodity prices continue to rise, modest wage growth in the U.S. will buffer those effects on U.S. food prices. However, the developing world and even the poor in the United States will feel the effects of higher food prices as the poorest 20% spend about 1/3 of their income on food, and ¾ of their food budget on food at home.

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Way out West: The NGA show

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For four days, in the dead of a Minnesota winter, five other students and I were able to take a trip to Las Vegas, NV for the 2012 National Grocer's Association show. This sector of industry was completely new, especially for myself being a public health nutrition graduate student. My research is about nutrition labeling and how labels influence purchasing decisions of various types of food (ie. healthy/unhealthy) and figured this is related to the grocery industry. After browsing around the NGA website and doing research about this field and the show, I was certain there would be plenty for the other students and I to learn.

The convention started out with the university student case competition. A fellow U of M graduate student and I were able to watch the presentations of Minnesota as well as the other schools. It was interesting to see how each team interpreted the scenarios and questions presented for the competition. The trade show booths were quite a spectacle to see. Vendors were selling pretty much anything and everything that was related to grocery stores, from produce misters and grocery carts to deli slicers and custom made reusable shopping bags. It was nice to see some local companies there, too - Kemp's dairy and Malt-O-Meal! There was even a booth about nutrition labeling and nutrition scoring for foods. The booth was for the NuVal food scoring system which gives a health score for food products. I am using similar food scoring system for my masters project so it was especially nice to visit with them.

The entire experience from participating in the 2012 NGA show was fantastic. I learned so much and met numerous fantastic people. I've gained a perspective on the food and grocery industry that I wouldn't have achieved otherwise. I'm very grateful for the experience and hope other students are able to have the same opportunities. Furthermore, I'd like to thank our advisers for the trip, Lisa Jore and Professor Boland, and the sponsoring members of The Food Industry Center.

Meat counter intelligence at U |

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Check out yesterday's StarTribune article featuring the UMN Meat Lab and its students.

NGA student case competition and convention

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In mid February several of my classmates and I went to Las Vegas to the National Grocers Association (NGA) Convention. We came to compete in the second annual student case competition against other undergrad teams from the Food Industry University Coalition. The problem we were asked to address was "how can independent retailers, wholesalers and co-ops implement mobile coupons to drive sales and profits?"

Angelica Almanza, Megan Lovejoy, Andre Gordillo and myself were selected for the team just before the thanksgiving holiday and began our research soon after. My initial thoughts as we approached this project were that there are mountains of mobile apps available and a big part of completing this task would be to find specific apps or at least features of apps that could be adopted or adapted by grocery stores for coupon use.

The process of searching and experimenting with mobile apps led to more than a little frustration. Aside from the weekly software updates, confusing user interfaces, and daily deals that cause your phone to randomly vibrate or beep, basic features needed to make mobile coupons a reality are missing.

One of the major problems with mobile coupons is getting them off your phone; most supermarket scanners cannot read barcodes from a smartphone screen. There are ways around this problem as we discovered on a field trip to the grocery store using coupons from the Chinook Book mobile app. Using numerical short codes given to the cashier either verbally or by handing your phone over gets you your discount, but the process is clumsy and it takes time.

Our strategy to address this mobile coupon problem evolved into a mobile marketing plan that integrated grocery stores existing websites, social media, in store promotions that are automatically applied at the point of sale, and the most widely used, reliable, and user friendly smartphone features, text messages and email.

After the first round of case competition presentations we were able to sit in on the presentations of the four teams in the finals. It was interesting to listen to the different approaches to mobile coupons even though we were drawing upon much of the same research and data. The wining team from Louisiana State University addressed some of the same frustration we had with implementing mobile coupons, but set themselves apart from the other presentations by clearly identifying a few specific apps and features and describing how they could be used to target unique demographic groups.

Throughout our preparation process and throughout the NGA convention, the expertise and experience of associates of The Food Industry Center became an invaluable resource to draw upon.

Kat Kozitza from SUPERVALU gave up her time so that my teammates and I could pick her brain about mobile marketing. She provided us with some great insight on coupon clearing and the shift to digital coupons. She also pointed us to a great example of integrated digital marketing in the form of the new Cub Foods website.

Cindy Sorenson from the Midwest Dairy Association sat in on our presentation and provided some reassurance and advice after a tough round of questions from the panel of grocery industry judges.

Brian Numainville from Nash Finch was kind enough to spend time with me walking around the convention floor and provided a unique understanding of the grocery industry, the NGA, and their evolution.

Professor Boland provided guidance for our team on industry analysis, store financials, demographics, and helped us stay focused by asking that key question, "What do the numbers tell you?"

This trip to Las Vegas, competing in the student case competition, exploring the NGA convention, and meeting so many passionate industry professionals has been a wonderful and memorable experience. This experience was possible in large part because of Lisa Jore, who was there to help our team in every step of our preparation for the case competition, managed all the details and logistics of this trip, and is directly responsible for bringing us together with many of the food industry professionals that made this such a rich experience.

NGA Show Experience

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Being able to escape the Minnesota winter and present and participate at the NGA Convention was a rewarding and priceless experience. I would like to first and foremost thank all those who supported our group and aided us in our presentation.

My experience at the National Grocers Association as a second year participant was as exciting and impressive as the first time. Being able to experience the sights and sounds of the convention and seeing familiar faces was most definitely a highlight and helped me better connect to industry professionals and my fellow student peers from other universities.Our case study this year focused on how an independent grocery store could use mobile coupons and mobile app technologies to compete with big box retailers, differentiate their stores, and ultimately improve their bottom line. As a group, we focused on two strategies, one of which we used a low budget advertising strategy and the other where we recommended a cutting edge advertising strategy. Although we did not place in the top four of the universities that participated, the experience and hard work that we put in was invaluable. I firmly believe that experiences like that only strengthen and sharpen our skills as students and give us key insights on relevant issues that the food industry is facing.

Along with the intensive case study preparation and presentation, this year I was also a member of a student panel that was meant to promote the food retail industry to the next generation. I, along with other students from Western Michigan University, St. Joseph's University, Louisiana State University, and Portland State University participated in a discussion geared towards today's industry executives into how to recruit the next generation of food business leaders. The questions asked were very interesting and thought provoking, as were the answers. Too often, retailers emphasize on hard work and long term payoff and completely disregard what new members of the workforce are looking for in an employer. I, along with other students enrolled in these leading food industry programs, spoke candidly and openly about issues and stereotypes that the grocery industry faces. Listeners of the panel were hopefully able to better understand how to be an employer of choice for high-potential employees now entering the workforce, like myself.

Other workshops that I participated in were focused on Low Income Areas and the Challenges and Opportunities those grocers face in those neighborhoods. The questions and discussions were particularly stimulating and we heard a variety of answers from executives from across the country. At the convention floor, I had the pleasure of partnering up with my mentor from Kraft Foods, whom introduced me to many contacts from across the floor. His experience, guidance and words of wisdom were instrumental for someone like myself looking to find a place among the wide array of opportunities that are offered in the grocery industry. Even though we were only able to hang out for a brief period of time, I can count on him as a mentor and look forward to keeping in contact with him as I continue my career. This, along with our mobile marketing case study competition and all the other convention happenings, speakers, workshops and networking events made the 2012 NGA Convention a success!

Voluntary or Mandatory Labeling: The Fight over Genetically Modified Foods

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In the last decade or so, our world has seen a mass adoption of genetically modified (GM) food, especially in the United States. The USDA reported that since 1996, the percent of GM corn in the US has gone from almost nonexistent to 72% in 2011, and genetically modified soybeans accounted for 94% of the soybean crop in 2011. Europe has been much slower in adopting GM foodstuff, which is often referred to as "Frankenstein Food." Only two years Time Business reported that Europe allowed its first GM-food, a potato not meant for human consumption, in the article Is Europe Finally Ready for Genetically Modified Foods? However they do allow for GM foods to be imported.

With the prevalence of GM foods in the food system, there has long been debate over if, and how, these products should be labeled. Some countries, such as the United States and Canada, have adopted voluntary labeling, letting the market determine the optimal amount of labeling without the high costs mandatory labeling would require. The argument for mandatory labeling centers around the idea that consumers have a right to know these details about their food. In the article "Mandatory Versus Voluntary Labeling of Genetically Modified Food: Evidence from an Economic Experiment" published in Agriculture Economics in November 2010, Astrid Dannenberg, Sara Scatasta, and Bodo Sturm talk about the effect of mandatory labeling on GM foods in Germany, whose consumers typically view GM foods very negatively.

In conducting the experiment, researchers looked at 4 different labeling schemes by changing the number of alternatives in the same choice set (1 or 2 alternatives with voluntary or mandatory labeling as the choice set). This enables them to look at 1) a mandatory labeling of GM foods while allowing for voluntary labeling of non-GM foods, 2) mandatory labels for GM foods, 3) voluntary labels for non-GM foods, and 4) voluntary labeling requirements, allowing for both GM and non-GM food labels. They also looked at how much cheaper GM foods would need to be relative to non-GM foods in order for consumers to purchase GM foods. What they found was consistent with what they expected: most German consumers required a 47%-59% discount to buy GM food.

What they found about labeling is if there are only 2 choices (either "GM food" or "non-GM food" and "unlabeled") consumers could accurately read and trust labeling signals. However, when a 3rd option was thrown in ("GM food", "non-GM food" and "unlabeled") under the mandatory labeling scheme, consumers valued the unlabeled food differently. They had a preference for labeled non-GM foods over unlabeled, devaluing the unlabeled food when mandatory labels for GM foods were required. The authors suggest that mandatory labeling effects consumers' confidence in food labels as a whole. However, under the voluntary labeling scheme, with labels for non-GM food and GM food, consumers monetarily valued unlabeled products exactly between the monetary values they placed on non-GM and GM foods. The authors closed the article by saying that more research needs to be done to find the socially optimal food labeling structure, whether it is voluntary or mandatory.

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Scenes from Las Vegas - NGA Convention

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"Real issues. Real grocers. Real solutions." The virtual emcee spoke in an unplaced drawl, announcing the commencement of the 2012 National Grocers Association (NGA) convention in Las Vegas. Or as the title actually read, more fittingly, the NGA "Show". For all the multicolored spotlights and kitschy tunes, it could have been an episode of Family Feud. "And now, the Chairman of the Board..." Drew Carey? "Chris Coborn!" The CEO of the St. Cloud-based Coborn's, Inc. strode to the podium and proceeded to narrate a grocery list of NGA's accomplishments off a see-through teleprompter, before yielding the stage to the incoming chairman, Joe Sheridan. The introductory keynote session was half back-patting and half sales pitches to encourage membership and participation in the trade association. Former Secretary of Defense Robert Gates then gave a captivating insider's look on international politics and the world's geopolitical future to diversify the night's entertainment. The first night's program was mainly fanfare and was a little bit, err, unreal. So what were the "real issues" facing independent grocers, and what were all these affable store owners and food distributors gathering for?

The next day, the trade floor was arranged with hundreds of booths and exhibitions by food processors, industry service providers, and other related associations. I grabbed a cut of beef from the National Cattlemen's Beef Association and went to meet my industry mentor as part of the student intern program that myself and five other UMN students were participating in. I walked the floor with a gentleman from SUPERVALU responsible for distribution in the Pacific Northwest region. The Eden Prairie-based company is a non-independent competitor to most NGA members through its retail banners, e.g. Cub Foods, yet is also a key player in the independent grocery industry through its distribution and logistics services. This sometimes presents oddly contradictory aims within the same company, especially when it comes to government affairs and lobbying.

My mentor exemplified the situation with the state of Washington's recently passed initiative to privatize liquor sales -- the Washington-based Costco spent a state record $23 million in its successful public campaign for the initiative. Yet the state independent grocers association, presumably with similar members as NGA, opposed the initiative because of its anti-competitive language restricting the alcohol sales privilege to stores over 10,000 square feet -- many independent stores do not fulfill this size requirement. Meanwhile, SUPERVALU operates the retail banner Albertson's in Washington, which would ostensibly profit from the initiative's passing. These conflicting interests are not unique to SUPERVALU and manifest themselves in NGA efforts as well. One can easily imagine situations when the interests of single stores are at odds with larger chains, like Coborn's, which despite yearly revenues of nearly $1 billion still satisfies the member requirements of NGA by being employee- and family-owned. All the while, NGA must identify similarities and differences between its members and the "bigs" (a term I heard throughout the convention, referring to Target, Wal-Mart, Kroger, etc.), and how these interplay with the NGA's goal of presenting a unified voice for independent grocers nationwide.

While one goal of the NGA Show was to present real issues and solutions to members, another was surely to entertain. As the trade floor wound down, the energy in the adjacent room became palpable as contestants and super-fans prepared for the annual Best Bagger Competition. Baggers representing 24 states were judged on speed, weight distribution, placement, and style. Of course, it came down to Minnesota v. Wisconsin: Blake Westling from the Byerly's in Eagan, MN against Stephanie Teteak from the Larry's Piggly Wiggly in Appleton, WI. What was at stake? Only $5,000 and ultimate bragging rights (Is it pop or soda? Is it a fountain or a bubbler? Cheese or lutefisk?). By a heartbreaking 1.3 points, Stephanie defeated Blake despite his valiant effort, but was later bested by late-night funnyman David Letterman. Get 'em next year, Blake.

NGA Convention

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Attending the NGA convention and participating in the NGA case competition was a great experience. I really enjoyed participating in the case competition, as we were able to work with other students in developing mobile marketing recommendations for independent grocery stores. It was a great learning experience as our mobile coupon recommendations could be implemented and used in actual independent grocery stores. What I liked best about this case competition was that we were able to present our real world recommendations to judges that are well knowledgeable in the independent grocery industry. We were also able to listen to the other schools presentations and see how other students were able to take the same topic and formulate a different presentation. It was also a great opportunity to be able to interact with students from other universities that also share an interest in the food industry.

Being able to attend the NGA show and being part of the case competition was a great learning experience that I am very glad I was able to partake in. I learned a lot in preparing for the case competition and presenting, and it was a great networking opportunity to meet a lot of individuals in the food industry.

Food Deserts, Food Swamps, and the Problems of Food Access

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In the last two events held by The Food Industry Center, both speakers addressed the issue of food access, bringing into focus a topic that went largely ignored for many years in economic research. Late last year, as part of the Food Industry Leaders in the Classroom event, Mike Erlandson talked about SUPERVALU's collaboration with the White House to open more Save-a-Lot stores (small grocery stores with limited product variety) with the intent of providing healthy food to people in food deserts. In last Friday's 2012 Houck Lecture, Dr. Laurian Unnevehr spoke about the impact food access has on obesity.

There is surprisingly little research on how food access (both too much access to unhealthy foods known as 'food swamps' or too little access to healthy foods known as 'food deserts') affects public health. In the October 2010 issue of Choices Magazine, Michele Ver Ploeg gives a brief overview of the limited research on food access and says that most studies have found better access to supermarkets is associated with healthier diets and reduced risk of obesity. Meanwhile, Dr. Unnevehr talked about the research literature that associates increased access to fast foods with increased obesity. Research has shown that having fast food close to schools increases childhood obesity and fast food proximity increased weight gain in pregnant women.

Dr. Unnevehr also talked about how food access has become part of federal policy. There have been modest investments at the federal level, such as the Department of Treasury has given awards under its New Markets Tax Credit Program to encourage development in low income communities. Retailers such as SUPERVALU and Walmart have made commitments to Michelle Obama to open new stores in food deserts. Even the 2008 Farm Bill mandated the USDA's Economic Research Service study the access issue. This resulted in the creation of the Food Desert Locator, an interactive map that shows where food deserts are located. They found only 4.1% of the population lives in low-income neighborhoods situated more than a mile from a supermarket.

These new programs present opportunities for further research. Dr. Unnevehr presented important research questions such as how does food access shape purchases? It is also important that the nature of the problem is better defined as studies so far have focused on access from home, but fail to account for access gained from routine daily travel. Without a better understanding of the problem, we cannot know the consequences of inadequate food access.

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About this Archive

This page is an archive of entries from March 2012 listed from newest to oldest.

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