March 26, 2008
Brands Shrink to Avoid Price Hikes
Companies faced with higher cost for raw materials often find that a decision needs to be made. Continue production as-is and lose money if the price for the item isn’t increased; keep on manufacturing but raise the price or alter the product itself to reduce the cost of making it.
For many manufacturers, reformulations have been the chosen path to meeting consumer demand while protecting profitability. Of course, when changes are noticed, as in the case of a smaller candy bar or fewer rolls in a pack of paper towels, there is bound to be grumbling. This is especially true at a time when consumers are watching prices rise at a much faster rate than their take-home pay.
“The incredible shrinking package is becoming a very popular thing to write in about and talk about,” Meg Marco, senior editor with the Consumerist told ABC News. “A lot of loyal consumers of certain brands are going to the store and they’re noticing, ‘Hey, what I buy every week is somehow slightly different. It says new and improved, but really I have 2 ounces less.’”
Changing a product’s size does not always add up to consumers paying the same or more while getting less, say manufacturers.
Kimberly-Clark, which has reduced sheet count and roll size in paper products such as its Scott Tissue, contends that the new formulation makes the product what ABC described as “softer and loftier.”
Georgia Pacific, which reformulated its Brawny paper towels, said the new version has thicker and softer sheets that last longer than the previous generation, which had 22 more sheets to a package.
Discussion Questions: Do you think most consumers are understanding in the current environment when it comes to manufacturers downsizing and/or raising prices on established brand products? Is there a right or wrong way to go about handling the announcement of a product being reformulated in a smaller size? What role is there for a retailer to play in the current scenario where products are being altered to avoid heft increases in prices to consumers?
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Product manufacturers aren’t fooling anyone by packaging products smaller, but they are making them mad. It’s just one more shock to the system as consumers wander the aisles of the grocery store, wondering if the $4.99 per pound hamburger or the $6.00 milk (yes, I’ve seen $6.00 milk) is a better buy. People who have families to feed aren’t going to be fooled by half-loaves of bread.
I don’t think consumers are understanding in the least–that’s the bad news. The good news is, if your change is subtle, they won’t recognize that a change has occurred. I think the “new and improved” announcement is taken with a large grain of salt and may actually call attention to a downsizing or a price increase.
We may be better off just making the size change and not saying anything. The only way a shopper is going to notice most of the downsizing we’d take is if they put an old and new package side-by-side. Because so many products are bought when the last one is used up, this is a relatively rare occurrence.
Consumers may say they understand or may even feel like they understand, but the bottom line is that customers feel negatively about price increases or worse, unit volume reduction. Manufacturers should try to balance the situation out. Perhaps there is a way to reduce the size but also reduce the price minimally to appease the consumer psychology gods.
With all due respect to Stephen, they won’t notice until some newspaper, magazine or slow news day television show or consumer activist website tells them.
David is right. The better strategy is to bite the bullet. If the public things you’re trying to fool them their reaction is predictably slow. Remember what happened when Gerber’s tried to downsize?
I have not been recommending downsizing of quantities or other such ways to cut costs in order to keep margins consistent while the cost of raw materials are rising. Instead, it’s better to confront the realities.
#1 price hike strategy: sit in the back of a dark bar with your competitors and agree to raise prices (or reduce contents) together. #2 price hike strategy: make a future price increase announcement to the trade and if your competitors don’t match it after 2 weeks, back down. Then try it again 60 days later. Or invite them to meet you in the back of a dark bar.
Everyone in the food business faces the same commodity increases. Either make your competitors into friends or coach your competitors to higher prices. Your chance of legal jeopardy is less than getting drowned in the Sahara. Price competition is the surest way to lose money.
I think it’s time to be honest with consumers. It is what it is for pricing, whether it’s some kind of collusion as some have suggested, or that cheap food just isn’t cheap anymore. People need to understand that it’s not just fuel cost that is driving these price increases. Corn and wheat being at basically double the price this year over last year has a large impact on many parts of the grocery market from bread to meat. But to hide behind the packaging and not send the right kind of message to consumers about the changes in the market is just plain wrong.
I just bought a half gallon of gas for $1.58 and I feel much better about the transaction. We’re raising pricing when needed. The goods news is everyone knows, if they live in the real world.
I believe that biting the bullet and taking the price increase is the best way to go–but try not to be the first to do it. Everyone remembers the first guy to raise prices.
Consumers are savvy enough to realize that when prices are going up all over the market, either you pay more for the brand or you get less. Most consumers are able to control their purchasing habits so raising the price on a quantity that they are familiar with and have experience using is better than switching up the package. Example: [2 national brands] recently introduced a 24 oz spaghetti sauce jar (2 ounces shy of everyone else) to control price. Consumers now have to adjust their recipe, buy an additional jar, or switch to another acceptable brand that still has the 26 oz jar to meet the recipe requirement. Switching to another brand and paying $0.25 per unit more is preferable to buying a second jar or changing a favorite recipe. In microcosm, this is how brand equity is effected by the shrinking package approach to rising costs.
Every reputable manufacturer should always look for ways to lower the cost on any item. As product volumes and run rates become established then cost reduction becomes an everyday task.
I have never worked for a CPG company that did not operate in this manner. In fact, this is the area where procurement and R&D should spend 80% of their time. New products are great but failure is frequent. To be able to shave 6% from the cost of an established product will often yield more bottom line profit than two or three new products.
Every ingredient should be examined every day to achieve the most cost effective formulation. R&D must insure that formulation changes do not compromise product quality. I feel sorry for the “downsize the package” companies. It only points out an entrenched mindset that says there is only one way to do things. A great deal has changed since 1950; some people should recognize that.
The process of reducing size or changing ingredients to reduce manufacturing costs is called “incremental degradation.” This can be a slippery slope. The effects of tiny reductions in size or quality are not immediately apparent to consumers and certainly fatten the bottom line. Managers begin to rely on incremental degradations to maintain margins and assume the consumer will continue to not notice. Eventually, though, these incremental degradations add up and the consumer stops buying either because they notice the difference or because they just don’t like the product like they once did. When this happens, it is too late to reverse course because the relationship with the customer is damaged. Particularly if yours is a product known for quality, incremental degradation is a dangerous path. You either believe in quality or you don’t. Make a choice.
It is a much better strategy to implement incremental augmentation: subtly adding value to your products which will tend to increase customer loyalty and keep your customers loyal even when prices eventually need to rise.
We’ve been downsizing so long that some of the sizes now are becoming just impractical or silly. Maybe it would be better in these cases to consider an “economy size” that is a step up, and hopefully achieve some economies of scale with the bigger price.
For what it’s worth, IRI recently did some research on price elasticity/price sensitivity, and it says an average 10% price increase in 2008 will reduce volume by 13.7% vs. 12.1% in the period prior to 2006. Its research showed 2007 price elasticities across 40 categories were all well above 2005/2006 levels. It noted that advertising reduces price elasticity in 50% of all observed brands, and suggested avoiding deep discounts, since they tend to train shoppers to wait for sales and to avoid facing the new reality of higher prices across the board. Finally, it suggested incrementally reducing quantity and count, noting that downsizing is most effective when change is relatively small and new innovation accompanies the size change.
We could argue that to death and of course categories vary all over the lot, but I thought these observations by IRI were interesting.
There’s a difference between understanding and affordability in today’s economic climate. Since all products are more expensive to consumers just because of oil prices for transportation if nothing else, sure the consumers understand that companies face the same high gasoline prices as consumers do.
However, that doesn’t mean they have more money to spend and it doesn’t mean they can afford to buy what they purchased in the past because gasoline prices and all other higher prices also have to be faced.
Raising prices may cover profits but decrease consumer purchases. It may not be possible to lower costs to keep prices the same to consumers. However, don’t just assume that consumers don’t understand higher prices. Many simply just can not afford to keep paying higher prices for everything.
This whole process (remember when a “pound can of coffee” weighed 16 ounces?) has been going on for years. From a purely technical perspective, it causes havoc with forecasting, replenishment, and pricing algorithms that don’t understand that two different UPC’s represent the same item from a process perspective.
Another curious question is whether the whole downsizing phenomena is accurately accounted for in the consumer price index calculation. Are “standard shopping baskets” adjusted to reflect changes in net content? I sometimes feel the CPI does not accurately reflect my personal experience and have wondered if this is one reason.
I think consumers understand the need to raise prices, but I believe some of the trends we see toward private label and economy brands are their way of coping with the increases. Is the national brand really that much better? I also think the manufacturer’s perspective may be a little too parochial when you consider the impact on all the supply chain processes.
Here we go again. Years ago, it was the shrinking candy bar, along with the shrinking bag of potato chips. Then it was the 1.75 qt ice cream pretending to be a half gallon, then the 6 oz yogurt instead of 8 oz cups.
Today, it is the shrinking toilet paper roll. Every thing is shrinking and at the same time, their prices keep rising.
Will consumers notice? Heck yes they will! Will they revolt and/or boycott? No, but they will gripe.
Talk about inflationary times. Yes folks, they are back with a vengeance.
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Product manufacturers aren’t fooling anyone by packaging products smaller, but they are making them mad. It’s just one more shock to the system as consumers wander the aisles of the grocery store, wondering if the $4.99 per pound hamburger or the $6.00 milk (yes, I’ve seen $6.00 milk) is a better buy. People who have families to feed aren’t going to be fooled by half-loaves of bread.
I don’t think consumers are understanding in the least–that’s the bad news. The good news is, if your change is subtle, they won’t recognize that a change has occurred. I think the “new and improved” announcement is taken with a large grain of salt and may actually call attention to a downsizing or a price increase.
We may be better off just making the size change and not saying anything. The only way a shopper is going to notice most of the downsizing we’d take is if they put an old and new package side-by-side. Because so many products are bought when the last one is used up, this is a relatively rare occurrence.
Consumers may say they understand or may even feel like they understand, but the bottom line is that customers feel negatively about price increases or worse, unit volume reduction. Manufacturers should try to balance the situation out. Perhaps there is a way to reduce the size but also reduce the price minimally to appease the consumer psychology gods.
With all due respect to Stephen, they won’t notice until some newspaper, magazine or slow news day television show or consumer activist website tells them.
David is right. The better strategy is to bite the bullet. If the public things you’re trying to fool them their reaction is predictably slow. Remember what happened when Gerber’s tried to downsize?
I have not been recommending downsizing of quantities or other such ways to cut costs in order to keep margins consistent while the cost of raw materials are rising. Instead, it’s better to confront the realities.
#1 price hike strategy: sit in the back of a dark bar with your competitors and agree to raise prices (or reduce contents) together. #2 price hike strategy: make a future price increase announcement to the trade and if your competitors don’t match it after 2 weeks, back down. Then try it again 60 days later. Or invite them to meet you in the back of a dark bar.
Everyone in the food business faces the same commodity increases. Either make your competitors into friends or coach your competitors to higher prices. Your chance of legal jeopardy is less than getting drowned in the Sahara. Price competition is the surest way to lose money.
I think it’s time to be honest with consumers. It is what it is for pricing, whether it’s some kind of collusion as some have suggested, or that cheap food just isn’t cheap anymore. People need to understand that it’s not just fuel cost that is driving these price increases. Corn and wheat being at basically double the price this year over last year has a large impact on many parts of the grocery market from bread to meat. But to hide behind the packaging and not send the right kind of message to consumers about the changes in the market is just plain wrong.
I just bought a half gallon of gas for $1.58 and I feel much better about the transaction. We’re raising pricing when needed. The goods news is everyone knows, if they live in the real world.
I believe that biting the bullet and taking the price increase is the best way to go–but try not to be the first to do it. Everyone remembers the first guy to raise prices.
Consumers are savvy enough to realize that when prices are going up all over the market, either you pay more for the brand or you get less. Most consumers are able to control their purchasing habits so raising the price on a quantity that they are familiar with and have experience using is better than switching up the package. Example: [2 national brands] recently introduced a 24 oz spaghetti sauce jar (2 ounces shy of everyone else) to control price. Consumers now have to adjust their recipe, buy an additional jar, or switch to another acceptable brand that still has the 26 oz jar to meet the recipe requirement. Switching to another brand and paying $0.25 per unit more is preferable to buying a second jar or changing a favorite recipe. In microcosm, this is how brand equity is effected by the shrinking package approach to rising costs.
Every reputable manufacturer should always look for ways to lower the cost on any item. As product volumes and run rates become established then cost reduction becomes an everyday task.
I have never worked for a CPG company that did not operate in this manner. In fact, this is the area where procurement and R&D should spend 80% of their time. New products are great but failure is frequent. To be able to shave 6% from the cost of an established product will often yield more bottom line profit than two or three new products.
Every ingredient should be examined every day to achieve the most cost effective formulation. R&D must insure that formulation changes do not compromise product quality. I feel sorry for the “downsize the package” companies. It only points out an entrenched mindset that says there is only one way to do things. A great deal has changed since 1950; some people should recognize that.
The process of reducing size or changing ingredients to reduce manufacturing costs is called “incremental degradation.” This can be a slippery slope. The effects of tiny reductions in size or quality are not immediately apparent to consumers and certainly fatten the bottom line. Managers begin to rely on incremental degradations to maintain margins and assume the consumer will continue to not notice. Eventually, though, these incremental degradations add up and the consumer stops buying either because they notice the difference or because they just don’t like the product like they once did. When this happens, it is too late to reverse course because the relationship with the customer is damaged. Particularly if yours is a product known for quality, incremental degradation is a dangerous path. You either believe in quality or you don’t. Make a choice.
It is a much better strategy to implement incremental augmentation: subtly adding value to your products which will tend to increase customer loyalty and keep your customers loyal even when prices eventually need to rise.
We’ve been downsizing so long that some of the sizes now are becoming just impractical or silly. Maybe it would be better in these cases to consider an “economy size” that is a step up, and hopefully achieve some economies of scale with the bigger price.
For what it’s worth, IRI recently did some research on price elasticity/price sensitivity, and it says an average 10% price increase in 2008 will reduce volume by 13.7% vs. 12.1% in the period prior to 2006. Its research showed 2007 price elasticities across 40 categories were all well above 2005/2006 levels. It noted that advertising reduces price elasticity in 50% of all observed brands, and suggested avoiding deep discounts, since they tend to train shoppers to wait for sales and to avoid facing the new reality of higher prices across the board. Finally, it suggested incrementally reducing quantity and count, noting that downsizing is most effective when change is relatively small and new innovation accompanies the size change.
We could argue that to death and of course categories vary all over the lot, but I thought these observations by IRI were interesting.
There’s a difference between understanding and affordability in today’s economic climate. Since all products are more expensive to consumers just because of oil prices for transportation if nothing else, sure the consumers understand that companies face the same high gasoline prices as consumers do.
However, that doesn’t mean they have more money to spend and it doesn’t mean they can afford to buy what they purchased in the past because gasoline prices and all other higher prices also have to be faced.
Raising prices may cover profits but decrease consumer purchases. It may not be possible to lower costs to keep prices the same to consumers. However, don’t just assume that consumers don’t understand higher prices. Many simply just can not afford to keep paying higher prices for everything.
This whole process (remember when a “pound can of coffee” weighed 16 ounces?) has been going on for years. From a purely technical perspective, it causes havoc with forecasting, replenishment, and pricing algorithms that don’t understand that two different UPC’s represent the same item from a process perspective.
Another curious question is whether the whole downsizing phenomena is accurately accounted for in the consumer price index calculation. Are “standard shopping baskets” adjusted to reflect changes in net content? I sometimes feel the CPI does not accurately reflect my personal experience and have wondered if this is one reason.
I think consumers understand the need to raise prices, but I believe some of the trends we see toward private label and economy brands are their way of coping with the increases. Is the national brand really that much better? I also think the manufacturer’s perspective may be a little too parochial when you consider the impact on all the supply chain processes.
Here we go again. Years ago, it was the shrinking candy bar, along with the shrinking bag of potato chips. Then it was the 1.75 qt ice cream pretending to be a half gallon, then the 6 oz yogurt instead of 8 oz cups.
Today, it is the shrinking toilet paper roll. Every thing is shrinking and at the same time, their prices keep rising.
Will consumers notice? Heck yes they will! Will they revolt and/or boycott? No, but they will gripe.
Talk about inflationary times. Yes folks, they are back with a vengeance.