The first guest on today’s episode of the Consumerism Commentary Podcast are Tod Marks, senior project editor at Consumer Reports and author of the Tightwad Tod column. Host Bryan J Busch talks with Tod about consumer product downsizing and price increases in 2011.
After the break, Bryan speaks with Nico Willis, author of Death of the American Investor (The Emergence of a New Global eShareholder), about his book and what today’s investors need to know about the stock market.
Product Downsizing, Tod Marks & The Death of the American Investor, Nico Willis: S04E18 / 119 & 120
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Table of contents
[00:00] Introduction from Bryan J Busch
[00:34] Interview with Tod Marks
— [00:45] How manufacturers avoid raising prices
— [02:06] How consumers feel about product downsizing
— [03:00] People remember prices, not product sizes
— [04:00] Retail prices aren’t proportional to commodity prices
— [04:44] How manufacturers shrink packages
— [07:02] Store brand product quality
— [09:06] Why younger generations are less brand loyal
— [10:47] Consumers fighting back against product downsizing
— [13:38] Are store brands made in the same factories as name brands?
[15:26] Interview with Nico Willis
— [15:48] The origin of the U.S. stock market
— [17:57] Stock manipulation, then and now
— [19:48] The average American investor
— [21:00] “The Four Es”
— [22:47] What is an eShareholder?
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Bryan J Busch: On today’s episode of the Consumerism Commentary Podcast we talk about product downsizing and the death of the American investor.
Bryan: Welcome back to the Consumerism Commentary Podcast. I’m Bryan J Bush. My first guest today is Tod Marks, senior project editor at Consumer Reports and author of the Tightwad Tod column. Tod, how are manufacturers avoiding raising prices in this struggling economy?
Tod: When you hike prices in a bad economy it can be the kiss of death for a lot of packaged good manufacturers because the reality is that many, many consumers have options. There are many brands out there that don’t always raise their prices or cut down the size of the product.
So with so many options out there, along with the improvement in a lot of store brands or what’s called private label products, which are typically 20% to 30% cheaper than national brand packaged goods, the big brand manufacturers have to be careful about raising prices because consumers have choices.
So what many of them have resorted to doing — and it’s something that started many, many years ago — is to downsize the product package but not raise the price. In effect, they’re giving you the same amount or they’re giving you less for the same amount of money, which is an alternative form of price increase and many companies readily admit this is what they do and they say they do it because, “Well, we’ve surveyed our consumers and they tell us that they would — in order to keep within their budget they would much rather prefer that the size be shrunk but the price stay the same.”
Now, we here at Consumer Reports a couple years ago did our own survey on downsizing and it revealed a couple of interesting points. First, we found that three quarters of Americans are, in fact, aware of the incredible shrinking packages, these product packages that are getting smaller.
Second of all, 70% of people surveyed said that they think that manufacturers are doing this or undertaking this strategy to trick them, to fool them. Third, half of Americans told us that they would simply prefer that the price go up but don’t shrink the size of the package because they have to go out and buy it more frequently, which, again, may also have environmental ramifications if they have to keep going out and buy the same packages more frequently.
Bryan: Good point.
Tod: So the public is really hip to what’s going on and they’re not always in lockstep with the companies’ philosophies. But, again, the reason the companies do it also, from an inside the beltway point of view, is because people know prices but they do not know product sizes.
Let me give you an example. Most people know that a typical — when Tropicana orange juice is typically sold it’s around $4 when it’s not on sale. But they don’t know when a company may shrink the size of the product from, say, 96 ounces to 89 ounces because product sizes change all the time. It’s hard to keep up on them.
When you talk about a product — let’s take Oreo cookies. Oreo cookies come in 12 different package sizes, from around two ounces to more than 50 ounces. If you can find a consumer out there who can tell me what a typical size of an Oreo package — a package of Oreo cookies is, I’ll give them a prize because they just don’t know.
So, again, it’s a way to fool the consumer. Now, that’s not to say that companies aren’t justified in raising prices from time to time because we do know that commodity prices are on the rise. Fuel prices are on the rise. The cost of labor increases all the time.
But how come when commodity prices fall as they did last year when they really tumbled and when fuel prices do go down — and there are times when this does happen — that we never see the opposite; packaged good makers giving you more for your money?
So it’s one of those things where you always look around, shake your head and say, “I guess that’s just the way the world is.” But, again, if companies know that people are apt to know what the price of a product is but not the size, then it’s easier to trick them and give you a smaller size.
Bryan: Is there more than one way of shrinking the package? Is it always visibly smaller or do they keep the same package but put filler in there?
Tod: Well, it’s an interesting concept and there are a lot of answers to that question, but generally speaking, downsizing takes all kinds of forms. Let’s look at ice cream. Ice cream used to come traditionally in a half a gallon carton.
Well, the half gallon has been shrunk and shrunk and shrunk to the point that it’s now 1.5 quarts. So it’s significantly smaller. But then what they also do is they inject air into the product. It’s not just ice cream makers, but you see that a lot of times with yogurt manufacturers. They’ll pump more air into it, put it in the same size container but the container may have substantially less product inside.
Again, you’re paying for air, which is a lot cheaper than buying ingredients. So that’s one of the ways. Another way is to charge a premium for what they call niche products. What I mean by that — here’s an example. You’ve got Kraft Macaroni & Cheese. Now, the typical Kraft Macaroni & Cheese, the classic product, the box, comes in seven — the box is 7.25 ounces and contains elbow macaroni and let’s say it’s roughly, oh, $1.50 for that box.
Then you want to get a Spongebob Squarepants form of the product or a spiral pasta form of the product. These are called niche products or specialty products, the same exact thing but you get 5.5 ounces and they charge the same amount.
So what they’re doing, basically, is in effect, again, because you as consumer are heck bent on getting this specialized product, they’re charging you a premium for it. When you talk to the company sometimes they’ll tell you, “Well, hey, there are a couple things going on here. One, we don’t sell as much of these specialized products, so we can’t charge less,” in other words, there’s less of an economy of scale.
Two, they say, “Well, the machinery that makes these products is more involved. It involves more labor, so we have to charge more.” Whether that’s true or not, I’m not going to make a judgement but only the consumer can decide. So those are some of the ways that companies do these things.
Bryan: You mentioned that the store brands or private label options, the quality was improving in those?
Tod: Yes, absolutely. Consumer Reports has been surveying our subscribers for many, many years about store brands that they buy and consistently, over the years, the perception of store brand quality has gone up.
Our product testers try to include as many store brands as possible whenever we test various packaged goods and we can say as a general rule of thumb — again, it’s not true in every instance — but as a general rule of thumb we say that in many instances the store brand is at least as good as the national brand.
Now, that doesn’t mean that the product tastes exactly the same, and I think this is where a lot of people get tripped up. We just did a big story on private label products. What we mean is that in terms of the quality, the freshness of the ingredients, the flavors, how they blend together, the ingredients, how the whole package comes together, the quality of it is as good. But that doesn’t mean that it’s the same.
For instance, let’s take ketchup. Heinz ketchup, this legacy product that America loves; it’s a great product but it’s a spicy product where you don’t taste the tomatoey part of the ketchup as much as you do the spices and that unique flavor of Worcestershire sauce. But if you buy the Market Pantry ketchup at Target, which is their brand, you get a very high quality product, equally high as the Heinz, however, it has a different taste profile because it is predominantly tomatoey with less of a deep spice flavor.
So it’s different but just as good. Again, we all as consumers have preferences. It’s like the old dispute and debate over Coke versus Pepsi. Some people have loyal followings to one brand. They say they can spot it. Other people tell us they don’t care, they’re both okay and I’ll buy whatever one is on sale. So that’s the peccadilloes of individuality.
Bryan: Would you have to retrain yourself to enjoy the store brand as much as you enjoyed the national brand?
Tod: I think it’s a little retraining in terms of a mind set. People that are growing up today probably are not as brand loyal when it comes to these packaged goods as those from generations ago because, remember, these national brands were built when TV was in the form of three networks, NBC, CBS, ABC. They were the big companies that advertised all the time, bang, bang, bang, bang, bang.
Nowadays you don’t see it. We have a much more niche and diverse media stream where people get their information and the days of national packaged manufacturers being the only ones to pound out their message in the media has changed the mind set thing that these are the only products out there.
So brand loyalty on some level may have taken a hit over the years but, also, I think there’s more of a willingness to try today different products and because people when they start seeing success and they say, “You know what? Store brand manufacturers have really put a lot more effort into making these products because they know they can compete and they’re much more profitable to a store than selling a national brand,” because there’s very little research and development costs. They’re typically copycat products. They don’t usually innovate in product packaging. They don’t have the advertising and marketing costs related to building a national brand. Remember, it takes an awful lot of money and an awful lot of time to make a product a legacy. It takes years and years and a fortune in advertising.
So the store brands don’t have to deal with this on the level that the national brands do so they can sell a product at significantly less and still make a profit.
Bryan: Are there other ways that the consumer can fight back against downsizing?
Tod: Sure. You know what I always tell people is there’s a bunch of things to remember. Always check the unit price of the product. That’s the barcoded label on the shelf at the super market that’s below every product and it gives you the price per ounce, per quart, per pound, per 100 sheets, you name it.
It tells you which size is typically the better bargain. What I mean by that is that when manufacturers shrink their product packages, they don’t always do it across all their product lines. It may be a specific size singled out for downsizing and that happened, actually a few years ago with Tropicana orange juice when they went from 96 ounces to 89.
But at the time, they actually kept their legacy half gallon carton a half gallon. It wasn’t until this year that they shrunk the half gallon to 59 ounces, which was what was such big news. But they still sell a quart as a quart. On occasion the smaller size, believe it or not, can be a more economical deal than the bigger size because, again, grocery stores sell products on sale all the time.
The mix of sale products changes from week to week and manufacturers often give deals to retailers to promote a certain size. So that’s what I mean. You won’t always see the bigger size being the better value. So check the unit price.
Definitely buy store brands because they can, as I said earlier, save you on average 25% to 30% off the national brand counterpart. Another thing to do; consider stocking up and saving when your favorite product goes on sale. Store fliers are rampant with these, what they call, cherry-picked specials, those hot, really discounted goods sold as lost leaders week in and week out. They’re the ones typically advertised in large print on your store’s flier and these are items that are called lost leaders because they’re sold at or below cost to get your into the store where hopefully you’ll buy more profitable items.
But when they’re on sale and things like that — every staple constitutes the sale products. You’ve got cereal. You’ve got aluminum foil, plastic wrap, potatoes, orange juice, bacon. You name it. All the things that people buy all the time go on sale at predictable intervals. If you study your store’s flier you’ll see when these sales are spaced out and if you stock up and save on a lot of these items you never have to pay full retail again for these products. So you can buy in bulk.
Go to a warehouse club. Day in and day out you cannot beat warehouse club prices like Costco, Sams and BJs because they do sell multipacks and they do sell large institutional sizes. But for certain products, if you have the storage capability, you never have to wait for a sale because these products are discounted on a daily basis. So those are just some of the ways you can save in this day and age.
Bryan: When I was a kid, my mother was always convinced that the store brand was always made in the same place as the fancy brand.
Tod: Sometimes it is. Sometimes it is. I’ve written about that. There are a lot of companies, Hormell, Sara Lee, Reynolds Aluminum, 4C, these companies are — many times they don’t make a big deal of it and they don’t always sell their legacy product, that is the product that they’re famous for, in the store brand but they’re in the business of making store brands.
You find a lot of big names. But, again, people get caught up in that because it’s really an interesting factoid. But the reality is that any manufacturer can make a product up to the high standards of a national brand. Any retailer can ask an independent contractor to make these products for them at as high a quality level as the national brands but they don’t always do it because they’re seeking — maybe they want to be price competitive or maybe they want to be competitive in terms of quality. It depends what the retailer’s end game is.
What is the point of their private label program? They have to ask that question. So, yes, it’s true. In many instances some of the companies that are national brands also make some store brands, too, and it’s true in the world of hard goods manufacturing.
For years, for example, Whirlpool made Sears Kenmore refrigerators. So there’s a lot of synergy going on because these big companies often have down time excess manufacturing capability and it doesn’t matter who they’re selling for as long as they keep the machinery churning.
Bryan: That’s fantastic. Thank you very much for joining us on the show today.
Tod: Anytime, glad to help.
Bryan: Stay with us. In just a second we’ll be speaking with Nico Willis on the subject of the death of the American investor. My next guest is Nico Willis, president and CEO of NetWorth Services, co-creator and co-host of the Wall Street Hour, a radio talk show. He created the cost basis software NetBasis and released a book recently called Death of the American Investor: The Emergence of a New Global eShareholder. Thank you for joining me on the Consumerism Commentary Podcast.
Nico: It’s out pleasure.
Bryan: If you would, take us back to 1792 at the beginning of the New York Stock Exchange. How did the stock market back then differ from the one we have today?
Nico: Well, for one thing, I don’t know how we would look today in top hat and swallow-tails, but although there are still similarities between the ebb and flows of today and yesterday’s market. There are some clear distinctions that can be contributed to the birth of what we call today our sole market institution of investing.
I think the stock market, if we look back to 1792 was originally created by 24 stock brokers and merchants. They relatively created this exclusive club. They vowed only to buy and sell shares among themselves and charge everyone a commission and fee.
They originally only traded five securities at that time, first being the Bank of New York. As time marched on, in the 1800s, our country began to grow, of course. Businesses started to need capital for expansionary purposes. Investors wanted to own shares in their company and so they needed places to invest and that exclusive club began to slowly open its doors towards investors and businesses.
By the 1900s the industrial revolution just completely changed the market. Everyone wanted a piece of the action and made money at that time.
Bryan: How did one become included in the club? Were there rules actually written down about who was able to participate in the stock market?
Nico: Well, yes, you had to have $400 and, most importantly, be voted in. It was a way in which they could keep tabs on the membership and who was involved. You could easily be voted out. So if there were three members or more you could easily be voted out.
But, as I mentioned before, as our country and business began to grow, that exclusivity began to disappear. I would say the biggest difference of today is the democratization of the process that is free access to the investment process for everyone.
Bryan: How did insiders manipulate the stock market during the Great Depression?
Nico: Well, I would say since that beginning of time there’s been a lot of people who attempted to manipulate the situation for own personal gain and, unfortunately, they became victim and what was very prevalent in the stock market at that time.
You had some people in situations who were on the inside who knew how to make money in the market and you had the novices who were just riding the wave and trying to strike it rich.
So those that were on the inside that were greedy became predators of the victims, very similar to some of the things that you see today. So the market was perceived as being relatively risk-free at that time. It was positioned that way and it only had one direction and that was up.
So you had this flood of really uneducated investors who came into this new market exchange trying to make money but being subject to a lot of schemers for profit.
Bryan: Were people back then doing things like we saw a couple years ago by giving good ratings to things that didn’t deserve good ratings?
Nico: Yes. You didn’t have the traditional rating systems that you have today but certainly a third-party endorsement, what are called tombstones, that you — if you ever go to the library and look at old ads in the papers at that time, the Wall Street Journal’s been around — that talked about securities and positioning them and talking about the return and the limited time of availability. So all of that still plays a role today in trying to attract investors, typically novice investors to a particular investment.
Bryan: So you’ve managed assets for investors and have been a vice president at a major brokerage firm. What have you learned about the average American investor?
Nico: Well, the average American investor is us. We all want to aspire to improve our standard of living and in order to do so we understand that we can do it in a few ways. One is building a business of your own. Another is through your existing career path.
But there is, also, an understanding that the market, the stock market particularly, is the process of owning companies that do very well at selling their goods and services and by making a profit that translates to an increased valuation as you being the owner.
So that will never disappear. I think the average investor always aspires to increase their net worth, if you will, through investing. I think that’s very important. That should still remain in tact today. I think that that is one of the cardinal issues of the investor today is recognizing the fact that they’re in the market for a reason, what their purpose is.
Bryan: I imagine, at least some people were permanently scared away during the last crash in 2007, 2008. How can we American investors survive in a market that seems from the outside to be really uncontrollable and volatile?
Nico: The interesting thing about the recent debacle that we went through is that I think the American investor today has to recognize that there is a change that’s taking place. We’re in a more digitalized society where information flow is rapid.
Going back to say the ’87 crash, at that particular time you had the beginnings of what we saw as globalization, connection where events that happened in Hong Kong triggered a chain reaction to the United States and investors trying to sell couldn’t sell and as a result institutions clogging up the system prevented them from selling out of their positions or liquidating their positions.
Well, in today’s environment, I think you are seeing a lot more liquidity but you are seeing what are called systemic or systematic market corrections which are having a flush-out effect on all investors and their positions.
I think how the investor should survive is — what we’ve identified in our book is assuming the four Es and that is by being educated, understanding your expectation and purpose, following a professional-like execution process and being empowered by communicating and connecting with others that are in similar situations.
Bryan: Is that what the E in e-shareholder is short for or is that the more common electronic?
Nico: In my book it’s a shocking title, Death of the American Investor, but what we’re really saying is that the investor today and the style in which they are behaving by subjecting themselves to day trading, falling forward, the idea, the idealism of profiting consistently over a long period of time through day trading is very, very difficult. It’s very time consuming, which most Americans don’t have, and requires a great deal of dedication towards that craft where recent reports indicating that 47% of all Americans own some form of stock and bond position, whether through mutual funds or individually, but also have their own life to manage, whether it be with your career or a family, have to understand that there is another way to accumulate wealth but their expectations have to be properly aligned.
We think that’s the e-shareholder, someone who understands the market, understands who the players are and understands their purpose and their expectations. What I mean by that is their profit expectations and what their risk expectations are and understands how to network with others so that they can build a community, a consortium of individuals that can help support their process.
Bryan: Great. That’s all very good information. Thank you for joining us today on the show.
Nico: Thank you very much.
Bryan: You can learn more about both of our guests today through links at consumerismcommentary.com. Join us again next week for more great personal financial advice and information.