Industry News.

Stay up to date with all Industry related news and articles.

Stealthflation is here… expect more of it

I’m always sceptical when supermarket groups publish food inflation figures along with their sales data in financial results. (In February, at its results for the six months to December, Shoprite said “internal food inflation” was 5.2% year-on-year, “substantially below the official food inflation figure of 8.2%”. Woolworths disclosed euphemistically-labelled ‘price movement’ of 9.5% for the same period).

Those averages don’t bear any resemblance to what I notice on my trips to the shops. And Stats SA’s CPI data (4.6% year-on-year for May, with the food sub-component at the same level) often looks rather divorced from reality.

I’m even more sceptical when restaurant and fast food groups like Spur, Famous Brands and Taste publish the weighted price increases on their different brands’ menus along with their financials. Spur Corporation does a particularly decent job of this. At its mainstay steak ranches, menu prices increased by 3.4% in November 2013, 3.9% in May 2014 and 2.9% in December 2014. (Famous Brands seems to have quietly stopped releasing this.)

These ‘weighted price increases’ are great in aggregate. But the average diner or shopper – especially the middle- to upper-class readers of this website – doesn’t experience a 2.9% increase in the price of their steak. Or a 9.5% increase in the price of their trolley at Woolies from July last year (although, who can afford a trolley of the stuff?!)

The prices of staples are – for the most part – either cheaper or not increasing, despite the ±20% depreciation of the rand against the dollar in the past year. It helps that soft commodity prices (not just metals) are down substantially over the past six months. For example global coffee prices (in dollars) have nearly halved in the last six months. The dollar price of rice is down 25% over the last year, maize futures prices had abated before spiking over the last six weeks. No wonder food inflation has moderated and these ‘averages’ look half-decent.

Thing is, I notice prices.

And while these are steadily – and sometimes not so steadily – rising, there’s another strategy taking hold that means we’re paying a LOT more for things without even noticing: stealthflation. The chaps at ETM Analytics (who I respect a lot and who I miss talking to regularly) have blogged about this previously.

Russell Lamberti, chief strategist at ETM Analytics, explained stealthflation as “hidden price inflation when instead of raising a product’s nominal price, manufacturers cut product sizes or reduce product quality. Stealthflation is rampant in South Africa as companies try to push price increases on to consumers without consumers knowing it. It is a classic sign of the erosion of business margins and real profitability brought about by monetary debasement and inflation at a time when consumers are hard-pressed to pay higher prices.”

I couldn’t have described it any better (although I didn’t major in economics!).

Stealthflation isn’t new. It’s inflation, just worse (because most consumers don’t realise its happening).

The canonical example is Coke’s “replacement” (there’s a euphemism again) of its 340ml beverage cans with 330ml ones in late 2007. Of course, inflation at the time was near or at double-digits (it peaked at 13.7% year-on-year in August 2008). It took a while for most people to realise the slightly smaller can (some probably still haven’t). But that’s the point.

Any bets on these shrinking again in the next 12 months?

We also had “some” Cadbury’s Dairy Milk chocolate slabs shrinking from 100g to 90g (and from 200g to 180g) in 2009. In 2012, the shrunken slabs became standard across the range.

A year ago, they shrunk again. The 90g slabs became 80g ones, and the 180g slabs are now 150g. Cadbury’s parent Mondelez told iOL at the time that “new mould sizes” (ha!) had been introduced. Remember, prices haven’t exactly decreased over this time – they’ve increased! Over the past five years, prices of those bigger slabs have risen by 25% (thanks to the smaller sizes) on top of whatever increases you may have noticed on the shell.

This kind of “strategy” is fundamental at most fast-moving consumer goods companies. Executives speak about “pack size innovation”.

And in 2015, it’s everywhere.

Bacon cuts are now largely in 200g packs (a few are attempting a ‘premium’ strategy of continuing with (pricier) 250g packs).

Refills that are cheaper than the actual product but which don’t fill the original container (Jacobs coffee springs to mind).

There’s constant trimming and “refining” at Woolworths, particularly with its prepared fruit and vegetables (10g disappearing here, “new, handier” (read: smaller) portion sizes there… this new pack of diced sweet potatoes is 33% (!) more expensive than the older, larger pack (still stocked)).

The latest to catch my attention: Aquafresh’s rather brazen 25% (!) reduction of the size of some its toothpaste tubes (from 100ml to 75ml). Colgate – it seems – made the first move.

Toothpaste tubes

One of these is not like the other.

And the price stays exactly the same, R12.99 (it’s crept up from R10.99 to R11.99 to R12.99 over recent years).That tube of toothpaste is suddenly 33% more expensive. Toothpaste makers couldn’t exactly put prices up to R15, there’d likely be a dent in sales (I’m assuming they’ve conducted tons of detailed research on the price elasticity of demand of toothpaste).

It’s not only a phenomenon found in supermarket aisles.

Fast food outlets are perpetually redefining portion sizes, to the point that many have “regular” and “medium” (and “small” and “kids”) sizes of items on menus these days.

Wimpy hamburger patties are now 90g (a good few years ago, they were 110g, no doubt shrinking to 100g en route to 90g).

Beef burgers at Spur now have 160g patties. Again, this is a drop from the 200g patties in years gone by. No wonder “menu price increases” are “moderate”.

Pay attention next time you go shopping or buy fast food. Be particularly watchful of any volume or weight that isn’t a round number (190g or 900ml). Nappies which magically shrink from 70 to 68 in a pack, for example.

In an economy with pedestrian growth and large electricity price increases (etc, etc… you know the drill), expect a lot more stealthflation. We’re paying more for things – often, a lot more – than you think. And the rand’s 20% depreciation over the last 12 months didn’t exactly evaporate into thin air…

* Hilton Tarrant works at immedia, specialists in native mobile app and web development and available at hilton@moneyweb.co.za

 Article credit: http://www.moneyweb.co.za/news/economy/stealthflation-is-here-expect-more-of-it/

 

By |2015-07-15T10:47:54+02:00July 15th, 2015|LATEST NEWS|Comments Off on Stealthflation is here… expect more of it

Share This Story, Choose Your Platform!

About the Author:

mm