Chocolate company Toblerone announced this week that it will be returning its chocolate bars to the pre-2016 shape — at least in the British market. Back in 2016, the company had decided to put less chocolate in its chocolate bars by changing the shape. It was, the company said, part of an effort to deal with rising production costs. Here’s what the two different versions of the bars looked like:
Source: The Telegraph
Among chocolate lovers, this change was rather scandalous. Most people, of course, didn’t exactly make an issue of it in social media, but the change constituted one of many efforts to deal with price inflation at the time — known as “shrink-flation.”
Back in 2016, Christopher Westley reported on this, and how the Toblerone “scandal” was part of a larger inflation-created problem:
[Toblerone] widened the gaps between the segments of its iconic chocolate bar, reducing its total volume by some 10 percent. Although the reaction has something of an Old Coke-New Coke air to it, one can easily see it as a sign of the inflationary times, an effect of worldwide money creation coordinated by the leading central banks, with Toblerone being just one of many victims.
The economics of the decision shouldn’t surprise an actual student of economics. Since inflation is always and everywhere a monetary phenomenon, and since the world’s central banks have been pumping new money into the global economy at unprecedented rates for several years, we should expect an upward pressure on prices. In a Facebook post, Toblerone explained that it was forced into changing its product in response to “higher cost of numerous ingredients,” adding that
...we had to make a decision between changing the shape of the bar, and raising the price. We chose to change the shape to keep the product affordable for our customers, and it enables us to keep offering a great value product.
Statements such as this cause Toblerone to become, unwittingly, a case study for how firms in competitive markets respond when monetary inflation raises their costs of production. When that happens, firms are less able to pass the cost on to consumers in the form of higher prices because if they do, they face a strong likelihood of losing market share and revenues. Instead, these firms cut back in terms of volume, size, and portions.
We see this all the time. Have you been to a restaurant lately where the menu prices haven’t seemed to change but the portions of food on your plate has? Or opened a bag of chips that hasn’t fallen in size while the volume of chips inside has? Or consumed a product of lower quality than you remembered in less inflationary times because its producer was obligated to change ingredients to break even?
The fact is, Toblerone can’t raise its prices willy-nilly due to the many substitutes available to consumers. Critics claiming otherwise ignore this common side effect of inflation in competitive industries, a phenomenon that especially has applied to candy markets in recent years.
It remains unclear, however, if the company is just reverting to the old shape and size, or just the old shape? If it’s going back to the old shape and size, this would suggest that the company has found a way to produce candy bars less expensively, or that it can raise the price of the bars without driving down demand to the point it will hurt the company.
It’s a safe bet, though, that we shouldn’t expect a general reversal of the shrink-flation trend. A “pound” of coffee now seems to be 10 or twelve ounces of coffee in the US.
On the other hand, median income growth has in recent years finally begun to significantly exceed old pre-2008 levels, so it may be food companies are now using the current income gains as an opportunity to re-adjust prices upward before the next recession, when sensitivity to price increases will be far more significant.
