Inflation is everywhere. Labour shortages, supply chain bottlenecks and rising post-pandemic demand were already pushing up costs. Now Russia’s invasion of Ukraine is squeezing the supply of food and energy.
Some big companies have seemed happy to push the pain through to their customers: Procter & Gamble and Unilever bragged that price increases had boosted revenue last year as they announced plans for more.
But sometimes manufacturers prefer to be sneaky – or fear that customers will flee. So today’s Dorito bags have five fewer crisps and mega packages of Cottonelle toilet rolls have lost 28 sheets. Unilever is among those practising “shrinkflation”: bottles of Dove body wash recently dropped from 24 to 22 ounces in the US but can still be sold for the same price.
Mentions of changing product sizes shot up on earnings calls at the end of last year, says analytics firm Sentieo. "Pricing is just one of the levers in our toolkit ... Price pack architecture also becomes critical in these inflationary times," said Noelle O'Mara of Tyson Foods, in one typical reference.
Shrinkflation doesn’t start and stop with packaged goods. Service and hospitality providers, such as hotels, restaurants and theme parks, are under even more pressure to find creative ways to preserve their margins. Sales and consumer demand for their products were badly dented by Covid lockdowns. Revenue is rebounding, helped by widespread price hikes, but these companies can ill-afford to alienate their guests.
Data from OpenTable show that global seated diner numbers – including walk-ins – have only just recovered to pre-pandemic levels after the latest Omicron wave. Hotels have had it worse. Global room rates fell by more than 25 per cent during the pandemic, so operators were digging their way out of a big hole even before costs started to rise.
Creative ways
Such businesses are now turning to creative ways to pass on costs or otherwise boost profits. That may mean providing less for the same price or tacking on new fees. Both Hilton and Marriott have made daily housekeeping services "opt in" for most properties, which means guests don't get it unless they ask. I recently spent four nights at a Best Western and was told there would be no housekeeping at all during my stay. Most hotel breakfast buffets closed down during the pandemic, and many chains have been slow to reopen them and incur the additional costs. And Walt Disney World last year retired its free line-skipping service and now charges for speedy ride access.
UK pub group JD Wetherspoon is taking a different tack. Chair Tim Martin says the chain has absorbed higher costs for some popular items, such as Beck's beer and Bell's whiskey, with the goal of making up in volume what it sacrifices on each sale.
At restaurants, cost-shifting strategies often revolve around tweaking menus to avoid outright price hikes. Chefs may reformulate a dish to remove expensive ingredients or give it a new name and price. Entrées that once came with two vegetable sides now have just one. Online menus, ordering and payment apps help cut staff costs, while shorter menus allow venues to order fewer ingredients, cut food waste and capitalise on volume discounts. More deviously, some establishments exploit the concept of "plate cover", says restaurant consultant Peter Backman, using decorative sauces and meat sliced diagonally to make portions look more generous.
The penny pinching is not going unnoticed. Covid was initially an acceptable excuse for reduced service and empty shelves, but patience is wearing thin. US customer satisfaction has fallen since 2018 to its lowest level since 2005.
Companies scrambling
That discontent leaves companies scrambling to sell these product and services changes as something more wholesome. Cadbury owner Mondelez insisted that a cut to the size of Wispa chocolate bars in its multipacks was part of a “proactive strategy to help tackle obesity”. PepsiCo-owned Gatorade has said the 14 per cent cut in the size of its sports drink bottles was part of a redesign to make them “more aerodynamic” and “easier to grab”. Hyatt (along with most other hotel chains) touts efforts to eliminate small bottled amenities and encourage towel reuse as part of cutting its carbon footprint. All three claims appear to be true, but common sense dictates that the associated cost savings were not irrelevant.
Food delivery app Just Eat is trialling a less cynical way to shrink portions and preserve margins for its partner restaurants. Its “waste less” programme offers customers the option of ordering a smaller size fries if they don’t need a regular one. That way they get less because they choose to, not because the seller does. – Copyright The Financial Times Limited 2022
