What is the new product development pricing strategy of FMCG companies today?

 

In 2017 the Office of National Statistics publicly announced that as many as 2,529 products have officially shrunk in size over the past 5 years, but are being sold for the same price. In 2020, the subject of shrinkflation is still a matter of debate in both the UK and Australia. As before, shrinkflation was restricted to mainly snack food categories. Now, however, shrinkflation has been reported to spread over to staple goods like: toilet roll, coffee, fruit juice, etc. and continue to be sold in smaller packet sizes. This is the new product development pricing strategy that food manufacturers are using.

 

  • Consumer watchdog which? has found, for example, that some brands of toilet paper have lost up to 14% of the number of sheets per roll over two years, without any corresponding drop in price.
  • Likewise, some toothpaste brands have started to sell in tubes that hold less and consequently cost more per millilitre.
  • Even non-food categories, like personal care have experienced shrinkflation in Australia. With the most price increases and size reductions being appliances and personal care products. Including items like toilet rolls, nappies and tissues, and non-durable household goods like kitchen roll and washing up liquid.

 

Shrinkflation –  when fmcg companies intentionally reduce the size or quantity of a good and keep prices the same. This is sometimes called ‘Grocery Shrink Ray’ or ‘Package Downsizing’. It is a new product development pricing strategy and an important concept in pricing because essentially it gets shoppers paying higher unit prices for less food without really noticing they are.

 

Shrinkflation basically means more profit for food manufacturers and supermarket retailers.

 

But are shoppers really getting more value for money in this new product development pricing strategy? We’re interested to find out how food manufacturers are able to pull this new product development pricing strategy off for price increase. Without most people even realising they are paying substantially more each year for essentially less and across nearly all types of food and non-food categories.

 

So, in this article, we’ll evaluate three different arguments for and against shrinkflation.

 

  • That food manufacturers are reducing pack sizes without reducing the price to increase profit.   
  • They are shrinking pack sizes for our convenience.
  • Food manufacturers are shrinking pack sizes for our health.

 

We’ll then discuss why food manufacturers are increasingly implementing shrinkflation. Is it because they care for consumer’s health (reducing sizes and controlling calorie intake)? Or are they just trying to cover their costs and make some profit on top? By the end of this article, you’ll learn exactly how and why food manufacturers are investing in shrinkflation as part of its new product development pricing strategy.

 

1. Food manufacturers are reducing pack sizes without reducing the price to increase profit.   

 

This year, Mondelez, owner of Cadbury’s chocolate publicly announced that it remains committed to reducing chocolate bars sold in multipacks in the UK without changing the price. They blatantly came out and said about reducing pack sizes and have no intention of reducing prices.

 

In the same press release, Louise Stigant, UK Managing director at Mondelez International, said: “Our products have been delighting consumers for hundreds of years and we feel a strong sense of duty to preserve what makes them so special. We also recognise that we must play our part in tackling obesity and are committed to doing so without compromising on consumer choice.”

 

The move to cut pack sizes but not the price has been met with a backlash from some consumers and shoppers. People feel the timing is poor. As we know, many people are feeling huge financial pressure as a result of the COVID-19 crisis. For other consumers, however, this is a new topic and a phenomenon they just haven’t picked up on.

 

Mondelez argues that it is up to the supermarket retailers what they charge for their products.

However, they are not planning to cut their own prices. They argue they have invested in years of product innovation to give consumers more choices and flavours they enjoy.

 

Some critics argue that food manufacturers are reducing pack sizes by reducing the price simply to increase profitability. What’s more, they believe that they use market research to capitalise on human blind spots and weaknesses to maximise margins.

 

For example, food manufacturers spend millions of dollars each year trying to understand how visual cues impact shopper purchasing decisions. Notably, they have found that price and size are the two most important visual cues for shoppers.

 

On the matter of size, food manufacturers have learned from market research that very few shoppers examine the differences in weight for the same product over time. Rather, they find that most shoppers tend to assume pack sizes don’t change and are the same weight. What’s more,  a lot of consumers are willing to pay a higher price. Especially when they believe they are getting more for their money or more value for their money.

 

A common practice for food manufacturers – largely stemming from this market research  – therefore is to shrink the internal contents of their products gradually year on year. However, leave the external package the same size; and of course, leave the price the same.

 

For example, while it is common for the size of the package to stay the same after shrinkflation, often the design or picture on the package changes. Often this design change refers to the product’s ingredients. The packages now proclaiming, ‘Now with added folate’ or ‘Proudly made with 100 per cent Australian ingredients.’

 

This change in design but not in price is intentional. Of course, as manufacturers do not want shoppers to think they are losing out on the change in any way. Also, they certainly don’t also want people to realise that they are actually paying more for less on their snacks. Even for their staple items like bread, milk and toilet paper.

 

Take Cadbury’s as an example. They reduced their Mars Bars, Kit Kat, and Chunky brands over the past several years. Cadbury also decreased the number of Creme Eggs in a box. It went down to five from the original half-a-dozen and barely anyone actually noticed. That made a 16.7% increase in their gross profits for every box.

 

In a sense then, shrinkflation could be a food manufacturer’s new product development pricing strategy of maximising their margins from both sides of the profit equation (cost and revenue). Essentially, when they shrink the product but not the price, they are getting a price rise and decreasing costs at the same time. All the while, the shopper is blissfully unaware that their favourite products are getting smaller and they are paying more.

Is this new product development pricing strategy of FMCG companies legal?

 

There are regulations relating to consumers in providing information about the quantity of the serving. As well as the unit price and overall price of the product. When shrinkflation occurs the unit price of a product will become less appealing. But only a relatively small consumer in Australia notice shrinkflation, as many Australian consumers pay attention to unit prices. And, even then, they do not keep track of how unit prices are increasing year on year. They tend only to note the absolute unit price and it’s relatively to a competitive brand’s unit price. Then make a decision based on the differential.

 

For example, research shows that shoppers are more conscious of changes in prices and external pack size (as mentioned above) than changes in weight. What’s more, even a small increase in price can have a big effect on price-sensitive shoppers. Especially for shoppers that are already on the edge of choosing a cheaper brand based on size and price.

 

Shoppers, therefore, make a lot of their purchasing decisions based on two things: psychological price thresholds and unit price comparisons with like brands at a specific moment in time.

 

So if a price goes above a certain psychological threshold – like moving from $0.99 to $1.49 – the effect for price-sensitive shoppers is amplified and they’ll start actively comparing prices. All in all, then people will actually consciously weigh the decision of which item to buy. Rather than doing what they have always done. And this all done, largely on the spot and depending on what products they are looking at. Also, on what they are thinking about at that specific moment in time. Justification of Cialdini’s theory on price decision making.

 

In terms of the legal ramifications of all of this, companies have no legal requirements to run public awareness campaigns if they raise prices or change the ingredients they use or shrinkflate. Shrinkflation is undoubtedly legal but it’s debatable how ethical it is to shrink serving sizes, but not the prices and hope your customers won’t notice.

 

No doubt, there are some companies who do sometimes shrinkflate to increase profit margins. But, food manufacturers, like Mondelez (mentioned above) are now saying they are doing it for our health, not just to cover their costs or increase their profits. This puts a new and interesting spin on the traditional profit-making fmcg new product development pricing strategy.

 

Are food manufacturers now using health trends to justify higher prices for essentially reduced product? Does focusing on customer value drivers like health and convenience give food manufacturers the justification they’ve been looking for to extract more money from a customer segment already willing to pay more for their health?

 

Let’s look at these arguments in more detail to find out, starting with convenience.

 

2. Food manufacturers are shrinking pack sizes for our convenience

 

Though bite-size products are not new to the food industry, still major brands are continuously developing a new array of small-sized food packages. This makes it easier for people on the go. Nowadays, people are spending more time at home and the younger generations are more independent. No doubt that they are more likely to buy food for immediate consumption. Today’s generations desire convenience and portability.

 

Tyson, a big meat processing, for example, launched Hillshire Snacking with packs of cut-up chicken that a consumer can eat with their hands. Another example is Hormel, they created “Spam Snacks,” in resealable bags. They serve up canned meat in bite-sized pieces. Kellogg’s also made their Kellogg’s To Go pouches with slightly larger pieces of cereal. The size is comparable to a bag of chips. The company says they’re “specifically created to be eaten by hand”. Even Hershey’s made snack mixes.

 

A part-time student and freelance writer in Wilmington, stated, “I don’t like things that have to be assembled.” She said she picks snacks like protein bars and oranges that she can carry around in her purse.

 

Industry experts said that small snack packages are convenience items. And that they have one thing in common – to entice and satisfy consumers that want pre-portioned and portable snacks. Consumers don’t mind paying extra for products they see as making their lives easier.

 

3. Food manufacturers are shrinking pack sizes for our health

 

New health trends suggest that consumers are trying to minimise the amount of sugar and fat they consume, according to Euromonitor. Big companies such as Coca-Cola, Nabisco and McDonald’s have started to offer some of their products in smaller packages or servings. For example, McDonald’s is testing Oreo Thins and Coca-Cola has created their mini cans soda. The SuperSize option in Australia has gone completely and in its place are the smallest replacements ever to McDonald’s, especially for sugary drinks. However, the unit price is the same if not more expensive for these sugary drinks than ever before.

 

The motivation behind the reduction in size for snacks, but not the price is that they believe that, eating smaller snacks is less detrimental to the diet. Paying a higher price is like a reminder to us about our health.

 

Let’s take Oreo, for instance. A Mini Oreo is about one inch in diameter and the original cookie measures about 1.75 inches across. According to Nabisco, one regular Oreo is equivalent to five Mini Oreos. This is what gives consumers the understanding that mini cookies are “lighter” or are good for their diets.

 

The vice president for snacks at Pepperidge Farm foresees that the market for these small packages would undoubtedly double because they help consumers eat less without having to count their calorie intake.

 

It seems like there’s a race in the food industries to offer less. As people do seem prepared to pay more for less when its about health and convenience.

 

Hartman Group reported that 29% of Americans don’t mind paying extra for 100-calorie packages. Some even think that 100 calories are too much for other diet-conscious customers. For example, Hershey’s created a 60-calorie chocolate bar and Jell-O also made 60-calorie pudding.

 

The assumption from food manufacturers now then is people think something is healthier when they see low-calorie food packages. However, Lisa Young, author of “The Portion Teller Plan,” a book on portion control, says, “A single portion of junk food is better than a large portion of junk food, but it’s not better than an apple, a peach or a vegetable.

 

One shopper in Midtown Manhattan that bought Chips Ahoy said, “They’re pretty expensive, but they’re worth it. It’s individually packed for the amount I need, so I don’t go overboard.” She said that the small Chips Ahoy does the portion control for her. Further saying that she considered the extra money she pays for 100-calorie packs a kind of convenience surcharge.

 

Discussion: Controversy on the convenience and health reasons for the new product development pricing strategy

 

Does this new focus on health and convenience mean we’ll see a sugar and food tax added on our food bills – for our convenience and health, of course? What’s more, will people actually be out in the streets campaigning for food tax to be added?

 

If that’s the case, new consumer insights generated by food manufacturers like Hershey and Mondelez blast traditional fmcg manufacturers assumptions about consumers out the water. Many fmcg manufacturers for years believed it was not possible to raise prices straight out for their products. For many years now, most fmcg firms viewed consumers and shoppers as price-sensitive and themselves (i.e., what they were selling) as a commodity.

 

However, it looks like the real reason food manufacturers couldn’t raise prices (or only justified price increase using cost increases) in the past was because they didn’t have a customer or consumer-focused fmcg pricing strategy. When you sell junk food as healthy, it stops being a commodity and starts being a special treat; and fmcg firms can illegitimately increase prices.

 

What’s the real cost of food manufacturers ignoring consumer trends and not developing a consumer-focused fmcg pricing strategy?  In effect, trillions of dollars each year.

 

FMCG sales make up for more than half of all consumer spending. Meaning, that more than 50% of what consumers spend goes on FMCG goods. According to BEA (Bureau of Economic Analysis), the amount of money going to FMCG organisations was $13 trillion in the second quarter of 2020.

 

Hershey’s research reveals that some people snack “10 times a day.”

 

“People are snacking more and more, sometimes instead of meals, sometimes with meals, and sometimes in between meals,” said Marcel Nahm, head of North American snacks, Hershey’s.

 

According to Statista, in 2020, snacking is a growing $100+ billion business in the United States. Another report acknowledges the increasing snack frequency of consumers. It states 70% of adults in the US snack 2+ times daily and 5% are doing so once a day. The rest of the percentage is for those snacking 4+ times a day.

 

How about you, when was the last time you had a snack? Most probably, just a few hours ago. The latest is a day ago, I guess.

 

People no longer strictly eat during normal meal times especially those with busy lifestyles. They nibble or snack when they get hungry. Sometimes skipping regular meals altogether. Thus, with the changing of people’s eating habits, food businesses are thinking of how they can create snacks out of normal food. Meaning, everything like grilled chicken, cereal, chocolate, peanut butter and even Spam. That’s how they came up with the basis of shrinking food packages – they want to deliver maximum convenience to people. So that they can eat whenever and wherever they want. Food in small packages or bite-size snacks come in handy.

 

Consumer Packaged Goods

Implications

 

Mondelez is an exceptional case in this debate because they are the first fmcg to admit to increasing revenues based on diet trends. Most fmcgs just say they are reducing pack size and keeping prices the same or increasing prices because of increasing operational or commodity costs. They don’t tend to admit to making profitable revenue growth from price increases or consumer trends. Mondelez, therefore are a landmark case. What does this mean?

 

  • It looks like more fmcg will be using consumer data on key trends to justify price increases.
  • Mondelez is ahead of the curve in terms of its pricing and consumer insights and obviously have a sophisticated customer-focused pricing system worked out and operating to justify their pricing and strategy.
  • It’s only a matter of time before other FMCG follow and do the same.
  • It looks like there are going to be a number of integrated transformation occurring in FMCG soon.

 

Conclusion

 

Snacking is the no.1 growth area for fmcg businesses today. It’s also a highly profitable area for both food manufacturers and supermarket retailers. Whether ‘healthy snacking’ is really better for people’s health is debatable. Obesity levels are high and growing. The lockdown hasn’t helped our waistlines at all. In fact, bite-size snacks could in a way encourage unhealthier eating habits – not better.

 

The fmcg companies that utilise evidence-based consumer and pricing insights to create and capture value evidently appear to be in the box seat. They’ll have mind share and market share. What’s more, there’ll be able to drive profitability by giving shoppers what they want – or what they think is good for them. What’s more, they’ll no longer have to shy away from awkward price rise situations with either their retail customers or the end consumers because both will willingly pay more for less if the agenda behind the price rise is in line with the right trends.

 

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