Bad News Comes in Small Packages

There’s a change taking place in supermarkets – one that’s going largely unnoticed, in spite of the fact that it’s becoming a new norm.

Packaging for products, particularly foodstuffs, is getting downsized. Folger’s coffee, Chobani Yoghurt, Fritos, etc. – all are being offered in smaller packages than before.

The resizing is not dramatic; in fact it’s so small – sometimes less than 10% - that it’s hard to imagine why they’re bothering to do it.

This is particularly true of items that come in plastic packaging. Gatorade, for example, has been reduced in size from 32 to 28 ounces, but the price is the same.

To the consumer, a change in the size of a plastic Gatorade bottle doesn’t raise an eyebrow, but for food producers, it’s a significant event. Each time a new bottle is designed, even if the change is very slight, new moulds must be designed and machined. And every machine in every factory across the country that produces the bottles must be fitted with new moulds. Then, the injection-moulding machine must be re-calibrated to insert a smaller amount of polyethelene into the mould and the moulding time must be recalibrated.

Injection moulding machines are notoriously temperamental and it can take weeks or months to fine-tune them to perform consistently in continual production. Very costly.

While this information is boring for most of us, it’s of great importance to the producer of the product.

Re-sizing packaging is a last resort for any producer of goods. A simple downsizing is costly enough that he wouldn’t entertain the idea unless he’s backed into a corner and can’t do anything else. If an entire industry is downsizing products, it means something more concerning than just a few companies trying to remain competitive.

And, in fact, a writer for Consumer World commented recently that price increases and smaller packaging “comes in waves,” but that, “We happen to be in a tidal wave at the moment.”

But, again, all this is small potatoes to the consumer – it’s not his problem. So why should we bother to think about the minutiae of food production when we have bigger issues to concern us?

Well, in actual fact, there’s no issue that’s of greater importance to us than the supply of food. Until recently, we’ve been able to be fairly complacent about food availability, as most of us have been accustomed to the shelves at the supermarket remaining full. But, recently, there have been a few scares. Some items have gone missing for several months. Certainly, the shortage of baby formula was important enough to have appeared on the evening news for several weeks.

But what if all food products were, without warning, in short supply? What if a percentage of the supermarkets began shutting their doors across the country?

Let’s back up a bit here.

In decades past, it was the norm for most major supermarkets to have their own warehouses, where backup stock could be stored. If for any reason shipments were delayed by, say, a snowstorm, the shelves could be restocked locally until the weather improved.

In addition, payment terms of 30-days net were not uncommon in the industry.

Markups, too, were substantial enough that items that were marked up 10%, 20% or more, could cover for those items that could not be marked up as much, but were necessary as a draw to get customers through the door. A store owner might decide, “Put 5% on the milk and we’ll get the shortfall back on the Häagen-Dazs.”

But, over the last decade or more, the food industry has taken repeated economic hits. In each case, the industry has attempted to give the impression that there were no problems – that it has been business as usual. But, truth be told, the viability of the industry as a whole has degraded considerably.

The food industry has, for years, gotten by on a retail markup as low as 2% on most items. Also, suppliers are demanding three-day payment turnarounds in order to get by. In addition, the local warehouses that most supermarkets once maintained are largely gone. Supermarkets now rely on semi-weekly deliveries from wholesalers to keep the shelves full. There’s minimal back-up supply.

What all this means is that the food industry, from the producers to the wholesalers, to the retailers, has no wiggle room left. At this point, the industry resembles a boxer who has given up and dropped his hands, and is just waiting for the knockout punch.

It will come as no surprise to the reader that inflation is increasing due to dramatic government spending. In the last ten years, more currency has been created than in the previous 230 years put together. Dramatic inflation is unavoidable.

At present, if significant inflation were to take place in any given month, food industry profits would be eliminated for the month. This now happens periodically in the industry, but it’s recoverable the following month. (The next shipment is marked up enough to cover inflation and, while the profit for the month in question is never recovered, the industry survives.)

However, if a mere three consecutive months of significant inflation were to occur, we might expect to see the lights going off in supermarkets across the country. Those that are the most heavily in debt would go first. They’d be followed in the following months by others, for as long as the inflation trend continued.

If any nation were to lose suppliers and retailers in, say, shoes or washing machines, shortages would occur and we would simply adjust. Our old shoes would go to the cobbler rather than being thrown out. We’d call the washing machine repairman if we couldn’t go to the appliance store and buy a new one.

But food is different. It’s the one product that must be replaced immediately. We cannot simply postpone our need for food for a period of weeks or months.

A decade ago, when I wrote that food shortages would take place in the coming economic crisis, unsurprisingly, few people took the notion seriously, as the warning had been made so early. But those shortages have now begun. They’re not yet serious, but we’re now seeing the warning signs.

Back then, I additionally projected that the shortages would become severe enough that food riots would take place and, worse, that famine would occur for the first time in living memory in the First World.

If there’s a shortage of shoes or washing machines – let’s say 10% or even 20% - we’d simply adjust. But if there’s a 10% or 20% shortage of food, it means that some retailers have folded and that a given area no longer receives food.

If producers, wholesalers and retailers shut their doors in greater numbers, there is famine. It will be selective – that is – it will be greater in some areas than others.

And of course, that’s a hard concept for us to wrap our heads around, in an economy that until now allowed us to simply pop round to Burger King if we got a bit peckish.

So, the downsizing of a Gatorade bottle doesn’t mean that tomorrow we’ll be without food. This is a mere symptom of a greater problem. But it’s a warning sign that we should be paying closer attention to an industry that has run out of wiggle room and may soon become unsustainable.

If and when that happens, the outcome will be far more important than any of the other economic concerns that we presently focus on.