Asymmetrical Information - Megan McArdle

11.15.12

The Incredible Shrinking Sugar Bag

Manufacturers are hiding food price increases by shrinking the size of the packages. Why that's bad for consumers, and the economy.

We're having a crazy holiday this year--my mother is moving, I've been travelling and have about 90,000 words of copy due on various stories--so I went to Peapod to place a big Thanksgiving order.  And what to my wondering eyes should appear but a 4 lb bag of sugar.  

This does not seem like a very natural packaging size; things usually come in fives and tens.  To be sure, that's an accident of biology, not some sort of natural law; we like things in fives and tens because that's how are fingers are divvied up.  But still, this demands explanation.  

In fact, I know the explanation: food price inflation.  Prices have risen by anywhere from 20-100% over the last few years, and manufacturers have eased the sticker shock by making the packages smaller.  I recently got an offer from my local grocer for a 3/4 pound package of steak, which is not how I remember the stuff usually being sold.

But the only reason I noticed is that this, and the smaller bag of sugar, was that the offer came from their delivery service.   I'd been aware that food processors were selling smaller packages to ease the pain of price inflation.  Nonetheless, in the store, I've been blithely buying smaller packages without noticing that my sugar had shrunk.

This is, of course, beyond moronic, since it doesn't help us actually need less food.  Instead, we can shop more, or fill the trunk with more packages. But it exploits human attentional flaws: we tend to look at the headline number and ignore the details.  That's why companies will frequently woo you with a great price on a television (and a terribly inflated shipping charge), and why big box retailers push wildly inflated extended warranties.  People will leave the store to save $100 on a washer-dryer, but it will not occur to most of them to check the price of your competitors' warranty programs.  

This is super-annoying in a world that was designed around stable package sizes--my sugar canister was clearly intended to hold a five pound bag, and now I know why it's never quite full.  I also have a fair number of recipes that call for 12 ounces of something that is now being sold in a ten ounce package.  Now you have to either buy two, or break out the calculator.

The fact that producers are shrinking the packages instead of raising the price also contributes to something I've recently seen popping up both on personal finance boards, and in personal conversations: people expressing surprise and frustration at their inability to control their soaring grocery bills.  They don't feel like they've shifted their consumption habits--indeed, in many cases, they've been cutting back on expensive items like meat and cheese--but somehow they just can't keep the cost down, and they don't understand why.  That's because many of them haven't noticed that they're getting less product in their packages.  They may not even be aware that they're running out of things sooner.  But week in and week out they're having to buy more groceries at each trip, and that's adding to a much bigger bill.  They know the price of meat has gone up, because that's something that you usually buy by the pound.  But they're less aware that the price of everything else has gone up too.

The biggest downside of this sort of thing is that it keeps us from shifting our buying habits the way we probably should.  When prices go up, because inputs are getting scarcer, people should substitute away from things that have had the biggest price increases, and towards stuff that's still relatively cheap.  But if customers don't see the price increase, they won't change their buying habits.  That is, of course, exactly what the food processors want.  But it's bad for consumer budgets, and not so good for economic efficiency.