Capitalism and the price of chocolate
From a previous blogpost published on 4 July 2013, in The Daily Blog…
The Price of Cocoa (2013)
Three cans of cocoa tell an interesting story.
Can A is the oldest, with an expiry date of April 2011. The can measures 110mm (H) x 75mm (D). It contained 200g net dry cocoa powder.
We purchased Can B sometime in 2011 (?). The expiry date was March 2012, so it’s the second oldest can.
Interestingly, it also contained 200g net dry cocoa powder. However, whilst the contents remained the same as Can A – the dimensions of the can inexplicably increased; 130mm (H) x 75mm (D). Same diameter as Can A – but 20mm taller. Contents remain the same net weight.
A month ago we purchased Can C (expiry date, March 2015). The dimensions of this can is the same as Can B: 130mm (H) x 75mm (D). But this time, the contents decreased from 200 to 190g net dry cocoa powder. Ten grams less.
So the up-shot? The can-sizes have gotten bigger – whilst the contents has reduced by 5%.
On 9 June, I emailed Nestle to find out what was going on,
It has recently come to my attention that two cans of Nestle Baking Cocoa measure 110mm X 75mm, whilst the other measures 130mm x 75mm.
Both contain 200g net cocoa powder.
The smaller can measuring 110 x 75 has a “best before” date April 2011.
The larger can, 130×75 has a “best before” date March 2012.
It appears that you have increased the SIZE of the can, whilst the contents remain the same.
Is there a reason why the size of the cans was increased, by 20mm in height?
And can you confirm that the price stayed the same; increased; or reduced; when the change was made from a 110mm height to 130mm height?
(The email was sent prior to purchasing Can C.)
Perhaps not surprisingly, I received no reply from Nestle. [Blogger’s note: I never received any reply from Nestle.]
Unfortunately, I never retained the receipts for Cans A and B, otherwise I could compare prices. But what’s the bet that the retail price probably increased?
And thus it came to pass…
“As short a time ago as February, the Ministry of Plenty had issued a promise (a “categorical pledge” were the official words) that there would be no reduction of the chocolate ration during 1984. Actually, as Winston was aware, the chocolate ration was to be reduced from thirty grams to twenty at the end of the present week. All that was needed was to substitute for the original promise a warning that it would probably be necessary to reduce the ration at some time in April.” – George Orwell, ‘1984’
The Price of Chocolate (2015)
A recent story in the media caught my attention;
The unattributed Fairfax article further stated,
Amanda Banfield, managing director of Australasia for Mondelez International, the parent company that owns Cadbury, said she expected a backlash.
She pointed to rising packaging costs and a lift in the price of raw materials.
The main ingredients are cocoa, sugar and milk.
So let’s have a look at the prices of raw ingredients.
This commodity dropped in price from NZ$0.22 per pound, in July 2014, to NZ$0.20 per pound, by January of this year, according to IndexMundi.com;
Over the last year, the price of sugar increased, peaking in July last year, before falling back;
But taken over a five year period, look at how the price of sugar has dropped dramatically;
So the rationale for Cadbury’s decision to de facto increase their prices cannot be blamed on sugar, which is cheaper now than it was, five years ago.
Let’s have a look at cocoa (beans) – and a similar story unfolds;
Six months – a 3.95% increase;
Twelve months – a 12.26% increase;
However – over 5 years – a 21.06% drop in price;
It would be interesting to note if when the price of cocoa beans collapsed to NZ$2,601.96 per metric ton, in March 2013, did the price of a Cadbury’s bar of chocolate increase in size? Or fall in price?
As for the price of packaging, this would be based on a local commodity (paper and ink) and if New Zealand’s low inflation is anything to go by (an average of 2.7% pa since 2000), would not be much of a factor in pricing. With the exception of four Quarters around late 2010 to mid-2011, inflation has remained at or below 2%, a fallout from the 2008 Global Financial Crisis and ongoing recessionary/low-growth influences;
So with commodity prices for sugar and cocoa beans lower now than five years ago, and with low inflation, what other cause could there be for the de facto price price of Cadbury’s chocolate bars?
Perhaps the answer lies with Kraft’s acquisition of Cadburys for £11.5 billion (US$18.9 billion) in 2010. Kraft financed the take-over deal by borrowing a massive £7 billion (US$11.5 billion) to finance the deal.
However, the New Zealand branch of Cadbury’s did not return a profit to it’s parent company (Mondelez International) until three years later, when it paid a dividend of NZ$40 million to its parent company, Mondelez.
According to statements, Cadbury NZ’s profit tripled to $11.6 million, from $3.5 million a year earlier, even as costs fell by 2.3%.
So despite falling costs, and increased profits, Cadbury NZ was struggling to make dividend payments to it’s parent company, and meanwhile Kraft was committed to servicing a £7 billion (US$11.5 billion) loan which had financed the acquisition in 2010.
The reduction in Cadbury’s chocolate bars can therefore be attributed to Kraft’s indebtedness rather than the official company line of increased costs. Unless Cadbury is lying in it’s financial statements, their costs have actually fallen, not increased.
As with many corporate takeovers, the benefits do not necessarily accrue to the public. The number one beneficiary is almost always shareholders, and consumers come a poor second (or third, or fourth…).
In this case, reducing the size of Cadbury chocolate bars by 20% is equivalent to a price increase, and Kraft’s shareholders will reap the rewards of increased profits.
Not exactly a sweet deal for New Zealand consumers.
On 15 February, I contacted Statistics NZ, to enquire how SNZ views reduction in product sizes, whilst retail prices remain the same, in it’s calculation of the Consumer Price Index (CPI).
Dave Lum, from Statistics NZ replied;
The CPI measures price change in a “fixed” basket of goods and services, which means that we aim to measure price change based on quality being constant. In an instance where the quality (in your example, the weight/size) of an item changes, we show a price adjustment to account for the fact that the quality of the item has changed.
As an example, if the size of a can of beans goes from 300g to 330g for the same price, this is shown as a price decrease for that item in the CPI. Likewise, if the can of beans went from 300g to 250g for the same price, it would be represented as a price increase.
So according to Mr Lum, Cadbury’s “switcheroo” with product sizes, will not materially distort CPI price measures.
Fairfax media: Cadbury blocks get the chop
IndexMundi.com: Sugar Futures End of Day Settlement Price (6 months)
IndexMundi.com: Sugar Futures End of Day Settlement Price (12 months)
IndexMundi.com: Sugar Futures End of Day Settlement Price (5 years)
IndexMundi.com: Cocoa beans Monthly Price – New Zealand Dollar per Metric Ton (6 months)
IndexMundi.com: Cocoa beans Monthly Price – New Zealand Dollar per Metric Ton (12 months)
IndexMundi.com: Cocoa beans Monthly Price – New Zealand Dollar per Metric Ton (5 years)
Reserve Bank: Inflation 1990-2014
Trading Economics: Inflation 2010 – 2015
Wikipedia: Acquisition by Kraft Foods
This blogpost was first published on The Daily Blog on 24 February 2015.
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