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10 August 2017

That shrinking feeling

The subterfuge around trying to increase profit.

by Frank O’Nomics

Are you visiting the supermarket more often due to running out of key provisions more quickly?  You might be concerned that family gastric problems are depleting the supply of toilet rolls, or that you have developed an obsessive compulsion for brushing teeth so that the tubes are forever empty.  There may also be issues with exhausting packets of crisps and biscuits more quickly  – is this the result of a poorer diet?  These concerns are almost certainly misplaced; all you are really the victim of is the corporate desire to maintain or increase profits via the process known as shrinkflation.  Toilet roll is  running out more quickly because there are fewer sheets in a standard roll of Andrex (221 instead of 240), and Sensodyne toothpaste tubes are now 25% smaller.  Many have put this down to yet another result of Brexit, with the cost of raw imports having risen following sterling’s depreciation after last year’s vote. However, this may just be a convenient excuse for manufacturers to try to make more money.

The ONS has recorded instances of 2,529 products shrinking over the last 5 years with 550 of those having occurred since last year’s Brexit vote.  Most of these reductions have come in food products, with packets of McVitie’s chocolate digestives now 300g instead of 332g and Doritos 180g from 200g.  A number of manufacturers, including those of fish fingers (10 to a box instead of 12) and Mr Kipling’s Angel Slices, have cited the currency factors as being behind the changes.  However, the ONS has not found any acceleration of shrinkflation since the Brexit vote, with the reasons cited not always currency factors, or indeed necessarily valid.

Many manufacturers cite rising raw material costs, beyond those of exchange rate moves.  Tropicana cartons have been reduced from 1.75l to 1.6l, supposedly due to supply pressure on fruits due to low yields and poor weather, for example.  Chocolate manufacturers such as Mondelez say that Brexit had nothing to do with them reducing the size of a bar of Toblerone by 10% (by widening the gaps between the triangles) and that this was more to do with the production costs and the Swiss Franc.  Many cite, raw material prices in general, rather than in sterling terms, as drivers of package reduction.  In particular a number mention cocoa prices as being a significant factor, and to be fair the price of cocoa did hit a 5 year high in 2015, following concerns that the El Nino weather system would hit cocoa production in West Africa.  However, cocoa prices have fallen sharply over the last 12 months and offer little justification for reducing package sizes, and sugar (a much more significant component in many of the products) has seen its price fall steadily since mid-2014.  What seems to be the bigger drivers of shrinkflation are pressures of competition and the need to continually increase returns to shareholders.  The likes of Mondelez have form here, having previously reduced the size of Toblerones by 15% as recently as 2010.

A related factor may be marketing.  It may sound cynical, but once you have cut the size of packages it gives you scope to increase that size at a later date and use this in your advertising.  The ONS cites a similar  number of increases to decreases in package sizes over the last year – so we should not be surprised to be shown offers of toilet paper with 10% more sheets before too long.  Other manufacturers have used consumer preference for smaller packaging, with Bulmers saying that the fall in size of fruit cider bottles (568ml to 500ml) came after customer research to shape a new look.  Bulmers argue that the price is not down to them, but to the retailers.  This argument can also be put on health grounds – with Kellogg’s contending that the fall in the weight of a packet of Coco Pops, from 550g to 510g, is due to a 14% reduction in the sugar content.  Given that they have been able to increase the number of Coco Pops in a packet by 15% (from 14,500 to 16,500 – and no I didn’t count them) this would appear to be a win-win situation (if you happen to like Coco Pops).

Advertising standards may forbid most producers using smaller packaging to say that their chocolate bars now have fewer calories, but at least there may be positive health implications, given that we are unlikely to want 2 bars instead of one when the size has only shrunk 10-15%.  There are however 2 key concerns with all of this. Firstly, we need to be aware that we are getting less for our money – and it seems that it is only the diligence of the press that is keeping us informed of recent changes, with no compulsion on the manufacturer.  Secondly, if the impact of a fall in sterling has not been the driver of what is effectively inflation by another name, is this effect still to come through?  There is typically a 6-9 month time lag between exchange rate moves and supermarket prices which means, given the recent plight of sterling, we may see some further inflation – or may just have replenish the larder even more frequently.

 

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