SmartMoney, November 12, 2008

Snacks Are Shrinking, but Their Prices Aren't

First they downsized the peanut butter, and I said nothing. Then they came for the yogurt, and I yawned. But recently, while unwrapping a king-size Cadbury Dairy Milk bar (my usual breakfast), I realized there’s a reason for the chocolate bar’s reconfiguration from 16 squares to 12: to distract me, its very best customer, from the fact that it had shrunk. A call to The Hershey Co. confirmed my suspicion; it’s gone from 4 ounces to 3.5. This got me so wound up, I had to eat another chocolate bar.

As disgruntled shoppers know, food manufacturers are responding to rising commodity prices by reducing package sizes. The Cheerios box is 1.5 ounces lighter, Edy’s Grand Ice Cream lost two servings, and the Juicy Fruit pack has two fewer sticks. According to a survey by market researcher Mintel International, roughly one in 10 supermarket products has been downsized since it was introduced. That’s because, unlike price hikes, package reductions have little impact on sales. Then again, downsizing requires cash: General Mills spent $30 million last year to shrink its cereal boxes.

It’s marketing conundrums like this that produce guys like Gary Stibel, founder of the New England Consulting Group. He’s the guy who tells companies like PepsiCo, Heinz and Kraft how to size their products and how much to charge. (He claims credit for inventing the 100-calorie snack pack, an ingenious invention that lets Frito-Lay charge $11 a pound for cheese puffs.) A trim divorcé with keen hazel eyes and an impressive puff of gray hair, Stibel speeds between the office and his oversize Westport, Conn., home in a silver Aston Martin, clutching a 20-ounce Starbucks. Thanks to his firm’s new recession price/profit practice, he’s been up till two every morning, skimming reports and hatching new strategies while soaking in the hot tub. And he’s been telling all his clients the same thing: Raise your price or shrink your package now. Customers not only accept these measures in an inflationary period; they expect them. But the devil’s in the details. “Pricing is the ultimate game,” he declared when I met him recently for a supermarket tour. “It’s tougher than chess!”

As we roam the aisles of the local Stop & Shop, Stibel explains that every shopper has a preconceived idea of what constitutes a reasonable price for any given product. The marketer’s task is to determine the smallest portion it can offer at that price. There are software programs that suggest the best size, of course, but thanks to the vagaries of human nature, you can’t apply the same rules to every product. Price wizards know that it’s generally safe to downsize products favored by dieters, for instance, but don’t mess with baking products—cooks depend on the standardized sizes called for in recipes. And it’s easier to sneak through a change on the jumbo pack than on the small bag—the folks who buy bulk sizes are usually too harried to check the price or wrongfully assume that the largest package has to be the best deal.

For Stibel, the real fun comes in predicting how the competition will react to his strategies. No one wants to be the lone company raising prices, so he uses game theory to calculate the odds that the competition will follow suit. If there’s a 3-in-8 chance that a rival won’t match a price hike, his client can improve the odds by signaling its intentions—testing the change in a small market, for example, or leaking plans to the trade press—so competitors know that it’s safe to jump in too.

Stibel says his strategies benefit everyone: “It’s giving the customer what the customer really wants.” But if that’s true, perhaps more should be done to trumpet all this wonderful progress. When I’m finally crowned Queen of All Supermarkets, manufacturers will be required to advertise their improvements right on the box. I can see it now: “Same great price, new smaller size!”