Chocolate ‘shrinkflation’ takes the biscuit – but also displays how not to manage costs across future horizons
31 May 2022
Blog
Tomorrow’s likely success can no longer be measured on today’s results, and without adequate investment in foresight and scenario planning business leaders will make poor long- and short-term decisions
Over Easter, the topic of "shrinkflation" was again on the lips of chocolate lovers. It's now six years since there was an international uproar when the space between Toblerone's triangular peaks was widened. The year before, Cadbury reduced the number of Creme Eggs in a box from half a dozen to five. And now, the same manufacturer has confessed to cutting the size of Dairy Milk sharing bars by 10%, from 200g to 180g. The £2 price remains the same, despite the need to use cheaper ingredients as production and energy costs soar.
When, in 2020, multipacks of Wispa, Double Decker, Bournville classics and Boost bars were slimmed, Mondelez – the company that owns Cadbury – argued that the reductions were for the good of society. Yet, funnily enough, no bite was taken out of profits. Before long, perhaps, we'll only be able to buy one-square chocolate bars. Nevertheless, the ever-shrinking chocolate bar is a tasty example of the importance of managing costs across future horizons.
I worry that many organisations that are not embracing forecasting strategies but are more concerned about the more immediate quarterly results are sleepwalking towards a more significant problem that could swallow them whole.
Until recently, many businesses could predict tomorrow's likely success based on today's results with reasonable confidence. Now, though, those that lack good enough visibility across the future horizons of their business tend to get caught up in managing events in the short term.
The ongoing management of near-sighted events is dizzying, and – without realising it – a distracted leader at the helm might steer the company off course, and into choppier waters. However, as historian Edward Gibbons noted: "The wind and the waves are always on the side of the ablest navigator." Essentially, leaders can better navigate challenges by having a broader scope of understanding and investing in foresight and scenario planning. Moreover, with a more holistic, integrated approach, they will understand the root cause of the short-term issues that keep bobbing up.
Big ships take longer to turn
You might think that it's primarily small- to medium-sized enterprises that tend to take their eyes off the horizon due to a lack of resources and the need to keep the ship afloat. But from my experience, the bigger the boat, the longer it takes to turn. So unless you are turning it well in advance, you're more likely to end up crashing into something impossible to avoid, and the cost of business may be too great to survive.
Leaders have to understand that in 2022, budgets are out of date the minute they are inked. With everything that's going on in the world, it is critical to have rolling forecasts, including budget forecasts. Assumptions around costs – whether commodity pricing, raw materials, fuel, and so on – need to be updated continuingly.
Running scenario planning, having greater visibility, and modelling potential outcomes of the impact will help you understand what it means in terms of the overall product pricing and determine ways of mitigating some of the cost increases with other cost-out type activities. But it is paramount to use a rolling financial plan.
I urge leaders to move away from standard costing being the typical mentality and dealing with variances after the event. The alternative is handling future disruptions before they adversely impact the profit and loss sheet and taking the opportunity to use proactive mitigation activity at arm's length. The crucial point is that you can be in greater control of your destiny with scenario planning.
Cut the long tail
Projecting the profit and loss over future horizons across one, two, or even three years could mean you need to start cutting the tail of your portfolio of products or services. For most businesses, around 20% of the portfolio is what generates by far the most considerable amount of profit, and 80% is costing you to sell, in effect. Unfortunately, instead of dealing with this situation, often companies can justify why they should carry on as before.
The key message is that it's not only about taking costs out of individual products, but it's time for people to focus on removing the tail eroding the profit margin on the more prosperous areas of the portfolio. It has to be a mathematical rather than an emotional decision.
Horizon scanning and having a more complete picture means that a business could – and should – review all products. Even if things are selling well now, they might not be relevant in three years.
Mind you, in three years, perhaps we will have those one-square chocolate bars. If that were to happen, it would take the biscuit. But, more importantly, it would indicate that not enough chocolate manufacturers had used adequate forecasting.
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