Rossputin.com Rational Thinking About Our World

Many Americans are discovering something disturbing in the supermarkets this summer. Just in the past few weeks, there has been a stealth increase in the price of two of the four major food groups, namely breakfast cereal and ice cream.

The Cinnamon Toast Crunch that you claim to buy for your kids has gone from 14 ounces to 12.8 ounces. The Cheerios have gone from 10 ounces to 8.9 ounces. And for after dinner, that container of ice cream which you have thought for years was half a gallon but was really only 1.75 quarts is now only 1.5 quarts. If you are wondering how much the prices of these items have dropped as a percentage of the size reduction the answer is almost precisely 0%.

Although cereal and ice cream are the two most visible examples of “downsizing”, it’s also happened in many other of the most common products Americans buy, from mayonnaise to crackers to chewing gum.

The cause is no surprise to anyone who trades commodities or eats food. (Commodities traders are frequently too busy to eat...) The three charts below show one year of futures prices from June 20, 2007 to June 20, 2008 in corn, soybean oil, and crude oil. Although it captures the most headlines, crude oil is the laggard with “only” a 95% price increase in the past year, half of the gain for corn futures. While people may not think much about the price of petroleum when looking at a box of cereal or a tub of ice cream, the cost of our food can be as affected by oil as by its direct inputs due to the cost of running a factory and transportation of ingredients going in and final product heading out to supermarket shelves.

The bottom line is that the food companies have to protect their bottom lines. And that means passing along at least some fraction of their cost increases to customers. According to a consumer affairs representative at General Mills, they hadn’t increased prices since 2005. What’s different about this price increase is that it’s being done, if not exactly secretly, in a way designed to minimize its impression on consumers.

Food companies from General Mills to Kraft to Wrigley have determined that while shoppers will tolerate a higher price per ounce or per piece, we have reached a point where won’t tolerate a higher price per box or per pack. If a person has a $100 budget for food, she can live with paying an extra few cents per ounce of cereal, but not with a box of cereal that costs more than $4. So instead of raising the $4 box to nearly $5, the price stays the same but the amount of cereal in it decreases.

Each company has a slightly different spin on their downsizing. General Mills says that their package sizes were larger than competitors’ packages, so similar sizes will let consumers compare better. (Yes, and I liked the larger packages better!) And they do directly acknowledge that “consumers are more likely to pay the same price for a smaller package than more for the same package.” The company also notes that their changes are tested and examined by focus groups before being put in place: “Our decisions are based largely on extensive research”.

Other products with high grain content are being downsized as well. Triscuit crackers, a Nabisco/Kraft product, have replaced their 13 ounce box with a 12 ounce box. But Ritz and Wheat Thins haven’t downsized. According to a Kraft representative, “prices change more than sizes with Nabisco products”. He added that the company is reducing costs so that it can minimize cost increases or package downsizing, including working on “source reduction”, namely reducing the size and cost of packaging without reducing the quantity of product. For example, a 16 ounce package of Chips Ahoy cookies has been reduced to 15.5 ounces net weight, without putting in fewer or smaller cookies, by using thinner paper, less plastic, and changing the way the package opens. Of course, they claim that their motivation to reduce packaging is “for environmental reasons”, but I’m more pleased that they’ve found a way to lessen price increases for my cookie fix.

Lay’s potato chips have gone from a 13 ounce package to 12.5 ounces. When asked about public reaction, a Lay’s representative was…representative of the industry: “Customers are not happy about it, but they understand and they’ll continue to buy the product.”

Other packages have been downsized as well. Hellmann’s mayonnaise went from 32 ounces to 30 ounces, and even the Wrigley chewing gums in the “slim package”, such as Big Red, Extra, and DoubleMint have gone from 17 pieces to 15 pieces, effectively a 12% price hike.

But for this dessert-aholic, the real trauma comes from the downsizing of ice cream packages. Breyer’s, Dreyer’s, and Edy’s have all dropped their container sizes from 1.75 quarts to 1.5 quarts, nearly 15% less mint chocolate chip or Moose Tracks to satisfy the summer snacker. According to Breyer’s, a division of Unilever, “while (higher ingredient prices) are an industry-wide problem, we’re working to offset cost increases through hedging, reformulation, and cost savings programs.” The “r-word” scares me.

A representative for Edy’s, a Nestlé company, made a point which sounded like she knew my ice cream habits: “In addition to the price of ingredients going up generally, consumers want more indulgent ingredients, like cookies and swirls and cake mixes.” She added that they faced “a very difficult decision” between maintaining package size and maintaining quality, and they decided on the latter.

While I don’t like paying the same price for a smaller container of ice cream, if my options are tolerating 1.5 quart boxes versus having to give up my Breyer’s Fried Ice Cream Overload (“Cinnamon caramel light ice cream swirled with honey caramel with cinnamon tostada pieces”), it’s not really a difficult decision.