Something has changed in the grocery store pricing environment. And it's not just prices rising (which they are, across the board in almost all food categories).
What we're also seeing is a fundamental change in the way things are priced relative to each other, and it's ruining one of the key grocery store hacks frugal shoppers have used for years.
What's the fundamental change? It used to be that store-brand products always sold at meaningful discounts to branded products. Not any more. And so, one of the easiest ways to save money food shopping--switching from the branded to the generic product--no longer works as well as it used to.
The backstory
Consumers were a lot better behaved twenty years ago. They didn't change brands often. So, to induce the typical consumer to even consider buying a store brand or generic product, the store had to offer a really juicy price. The price discount had to be huge.
Remember, this was back when companies actually made things, and when there (sometimes) used to be an actual difference between branded and unbranded products. Not so much any more. Furthermore, if you've read any of Casual Kitchen's posts on branding, you're well aware that, today, many consumer products brands don't actually make the products they're known for. They instead outsource it to other third party food manufacturers.
Not only that, but often those third party manufacturers make not only the branded item, but the store brand product too. Often in the very same factory. And those two products sit right next to each other on the store shelf, differentiated by absolutely nothing but price. [For a depressing and highly typical example, see CK's article on commodity canned tuna.]
Consumers, especially the ones who didn't enjoy getting separated from their money for no reason, caught on to this game. They stopped playing checkers and started playing chess. When you figure out to your dismay that the only difference between a branded product and a store brand product is a label and a 30-50% higher price, you won't just consider the store brand, you'll buy it. From now on. What kind of fool would do otherwise?
Add in some inflation
There's one more step in this discussion. We're now in a more inflationary environment than we were just a few years ago. Prices are starting to rise across many grocery store categories. But here's what's unusual in today's pricing environment: while many branded products have hiked their prices, store brands have hiked their prices even more. Now, the pricing differential between branded and generic items is a lot smaller than it was. Instead of discounts of 30% or more, you might see discounts of as little as 5-10%.
I'll share an example. Over the past couple of years, Planters brand nuts has put in meaningful price hikes to the point where (in grocery stores in our area) their standard 1-lb jar of peanuts now costs up to $4.29. The store brand in my store responded to this "pricing umbella" by raising their standard price to $3.99, a mere 7% discount. Yes, both have raised prices, but the store brand raised its price more, and now the store band offers far less of a discount to the branded product than before.
Another example. Store brand analgesics (aspirin, ibuprofen, acetaminophen) now are priced at a smaller than ever discount to branded analgesics, with discounts of only 10-15%. Previously you could buy store brand painkillers for sometimes half the price of branded Tylenol or Advil. And because these products have to be identical in every way by law, this was the easiest, most entry-level frugality hack in all of consumer products.
As a matter of fact, with some products, the generic/branded pricing differential has gotten so tiny that you can sometimes find a branded product offered at a temporary "on-sale" price that's actually less than the store brand product! Grocery store reality seems totally upside down when this happens. More on this in two paragraphs.
You can only push consumers so far
Finally, you can only push prices so far before consumers push back. In many food categories, companies and grocery stores are discovering to their dismay that they hurt sales by ramming through big price hikes, as consumers adjust by finding substitutes or buying less. Then, to win those buyers back, consumer products companies rely on discounting, sales and couponing.
Here's a somewhat ludicrous example of this from the packaged cookie aisle: after years and years of price hikes and stealth price hikes (keeping the price the same but offering fewer cookies per box, one of the most annoying tactics out there), it feels ridiculous to pay $6.00 or more for a box of some 17 Oreo DoubleStuff cookies, a quantity of cookies I could easily inhale in one sitting. Apparently many consumers agree with me (maybe not about the inhaling part, but definitely about the price), and in my grocery store, these cookies are frequently offered at half off. Half!
So, let me offer readers a thought experiment. What really is the price of Oreos?
Obviously, for a non-savvy, non-flexible customer who must have her Oreos on the exact day she happens to shop… that day's price is the price, however high it happens to be.
For the rest of us, however, we easily defeat these pricing games by shopping opportunistically, and never paying full price for anything, ever. Ever! Unless something is offered at a highly desirable, on-sale price, we. don't. buy. Here's where a savvy consumer separates herself from the pack.
Or! An even savvier, self-reliant consumer can always use the Don't want it! technique and not buy Oreos at all. After all, a batch of homemade cookies--made with love from laughably cheap commodity pantry items--will taste far better and cost far less.
And because learning to make delicious food at home is an inherently good skill, and because working on this skill improves your independence, flexibility and self-sufficiency, doing so will bring you far more satisfaction than overpaying for some flimsy, pathetic plastic container of 17 lousy Oreos.
So what's the takeaway here? First, all of this goes to show, yet again, who has ultimate power in this business environment. We consumers do. We are the ones who willingly decide whether or not to pick the product up off the shelf, carry it over to the checkout counter, and fish money out of our pockets to pay. By definition, companies cannot sell us products at any price unless they offer sufficient value to us such that we decide to buy.
The minute we say no and don't buy... they start discounting. Then we buy.
The consumer products marketplace is changing, it's evolving, as companies seek ways to maintain their profitability in an increasingly uncertain retailing environment. Some of our favorite frugality techniques still work, but some aren't working quite as well as they used to. We have to stay flexible, independent and opportunistic.
READ NEXT: Why Bad Blogs Get More Readers (An Accidental, Secret Recipe for Massive Web Traffic)
AND: Nine Terrible Ways to Make Choices
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Showing posts with label beating inflation. Show all posts
Showing posts with label beating inflation. Show all posts
When Restaurants Stop Being Worth It
There is an existential crisis in the restaurant industry. Right now.
Forget about Chili's re-re-vamping their menu to try to win back alienated customers. The restaurant industry is now getting squeezed from multiple directions: rising minimum wages, rising rents, rising legal and regulatory costs, and of course rising food costs too.
What's new this time around is the industry finds itself absolutely unable to pass these costs through to consumers in the form of higher prices.
The latest and most shocking admission of this was from the restaurant chain Red Robin [ticker symbol RRGB]. Red Robin's management said this in their most recent quarterly conference call:
"A top area of focus for us has been managing labor costs. The minimum wage and general regulatory environment is growing at an unprecedented rate, especially on the West Coast, where we have our strongest and largest footprint. Hourly wages are up again this year in the mid-single digits, and we know there's no appetite by today's consumer to spend more to cover this. Absorbing these increases with higher pricing is not an alternative for us."
There it is, straight out of the bird's, I mean CEO's, mouth: Not only are food and regulatory costs rising and minimum wage is increasing "at an unprecedented rate," but worst of all, they can't hike prices any more to compensate.
I'll share yet another an example from a local Irish pub we sometimes go to here in suburban New Jersey. This place is a basic, no frills, casual restaurant, a good place, and it now charges $11 for a burger. And an extra buck fifty for a piece of bacon and cheese.
So, imagine the management of this restaurant as they experience the same inevitable cost squeeze that Red Robin and others face. At first, they'll do what they've always done: they respond to their higher costs by passing them along to us. Just hike that burger's price by yet another buck.
That worked in the past, as the consumer didn't mind (or even notice) a burger increasing from $6 to $7 or $7 to $8.
But at some point the consumer notices. And minds. At some point, that burger just stops being worth it. Where that point is, it's hard to know. It depends. But when a basic burger starts to get up into the double digits, at $11-ish, $12-ish, can you hike prices another buck? And, then, a year from now another buck?
Before you know it, a modest dinner of, say, two burgers and two beers, maybe a side order, add in taxes and tip... suddenly, you're looking at a sixty or seventy dollar tab. For burgers and beers.
It ain't worth it. So people stop going out to eat. This is exactly what intelligent consumers do in the face of inflation.
Heck, I can easily feed the two of us for two weeks on $70.
Even Jim Cramer, stock market spaz for the masses, is onto this. Partly it's because he actually owns a restaurant, a Mexican place in Brooklyn. Regarding these trends, he wrote recently:
"It's a nightmare for any restaurateur. And it's just beginning."
A final note, regarding yet more synergies of being an investor and a (frugal) consumer. You'd have seen this theme coming, likely as much as a few years ago, if you were paying attention to the rising cost--and increasingly questionable value--of dining out versus cooking at home.
Resources:
Red Robin's Third Quarter 2017 conference call transcript
Finally a quick housekeeping note: Next week I'll run Casual Kitchen's top posts of 2017. Stay tuned!!
Read Next: How to Become a Sophisticated Investor: Six Steps
Forget about Chili's re-re-vamping their menu to try to win back alienated customers. The restaurant industry is now getting squeezed from multiple directions: rising minimum wages, rising rents, rising legal and regulatory costs, and of course rising food costs too.
What's new this time around is the industry finds itself absolutely unable to pass these costs through to consumers in the form of higher prices.
The latest and most shocking admission of this was from the restaurant chain Red Robin [ticker symbol RRGB]. Red Robin's management said this in their most recent quarterly conference call:
"A top area of focus for us has been managing labor costs. The minimum wage and general regulatory environment is growing at an unprecedented rate, especially on the West Coast, where we have our strongest and largest footprint. Hourly wages are up again this year in the mid-single digits, and we know there's no appetite by today's consumer to spend more to cover this. Absorbing these increases with higher pricing is not an alternative for us."
There it is, straight out of the bird's, I mean CEO's, mouth: Not only are food and regulatory costs rising and minimum wage is increasing "at an unprecedented rate," but worst of all, they can't hike prices any more to compensate.
I'll share yet another an example from a local Irish pub we sometimes go to here in suburban New Jersey. This place is a basic, no frills, casual restaurant, a good place, and it now charges $11 for a burger. And an extra buck fifty for a piece of bacon and cheese.
So, imagine the management of this restaurant as they experience the same inevitable cost squeeze that Red Robin and others face. At first, they'll do what they've always done: they respond to their higher costs by passing them along to us. Just hike that burger's price by yet another buck.
That worked in the past, as the consumer didn't mind (or even notice) a burger increasing from $6 to $7 or $7 to $8.
But at some point the consumer notices. And minds. At some point, that burger just stops being worth it. Where that point is, it's hard to know. It depends. But when a basic burger starts to get up into the double digits, at $11-ish, $12-ish, can you hike prices another buck? And, then, a year from now another buck?
Before you know it, a modest dinner of, say, two burgers and two beers, maybe a side order, add in taxes and tip... suddenly, you're looking at a sixty or seventy dollar tab. For burgers and beers.
It ain't worth it. So people stop going out to eat. This is exactly what intelligent consumers do in the face of inflation.
Heck, I can easily feed the two of us for two weeks on $70.
Even Jim Cramer, stock market spaz for the masses, is onto this. Partly it's because he actually owns a restaurant, a Mexican place in Brooklyn. Regarding these trends, he wrote recently:
"It's a nightmare for any restaurateur. And it's just beginning."
A final note, regarding yet more synergies of being an investor and a (frugal) consumer. You'd have seen this theme coming, likely as much as a few years ago, if you were paying attention to the rising cost--and increasingly questionable value--of dining out versus cooking at home.
Resources:
Red Robin's Third Quarter 2017 conference call transcript
Finally a quick housekeeping note: Next week I'll run Casual Kitchen's top posts of 2017. Stay tuned!!
Read Next: How to Become a Sophisticated Investor: Six Steps
How You Can Beat Inflation, Part 2
...continued from last week:
In our last post we talked about expanding how we think about competition and substitution in order to defeat inflation and shift the balance of power back into consumers' hands. Let's pivot now from the spending side of the ledger over to the savings and income side of the ledger, and try to think creatively about attacking inflation on a second front.
Labor markets: tightening
One of the fortunate aspects of inflation is it tends to coincide with lower unemployment rates and an improving economy. Remember last post when we talked about making companies compete to sell to us? Well, labor market conditions are tightening, which means, finally, employers are beginning to compete for workers.
This means a couple of things. For one, enterprising workers who are valued by their employers and willing to ask for what they want can potentially get more money for the jobs they already have. Second, other opportunities are likely be opening up for you, right now, for a superior work situation. Start looking.
Both employment and wage increases tend to lag a recovery, which means now is the time to start taking advantage of the most direct way to beat inflation: get more money.
Side hustles/additional income sources
Last week we talked about monopolies in the consumer marketplace. Here's another way to think about a monopoly: if you have one job, your employer is a monopoly provider of your income. Your employer has maximum power over you, and it can "substitute" you right out of a job under the flimsiest of pretexts, whenever it wants!
To borrow a phrase from Nassim Nicholas Taleb's must-read book Antifragile, this makes you fragile to the loss of all of your income. Not good.
You cannot consider yourself to be truly robust financially if a) you have a monopoly income provider and b) your monopoly income provider can, by terminating your job, spontaneously shut off all of your income. This is why all households ought to be thinking about what kind of side hustles they can run to supplement income from their primary job.
My domain of expertise is stock market investing, thus that's where I try to drive incremental income for my household. But there is no shortage of ways to earn extra money on the side, and plenty of resources that cover this topic better than I could. Once again, remember our primary heuristic: the more broadly we think about competition and substitution (and monopoly providers of things like our income!), the more we can eliminate various fragilities in our financial lives.
Turning an expense into an income source
One major insight from Jacob Lund Fisker's book Early Retirement Extreme is to look for ways to "monetize" your hobbies: Fisker loved bicycles, taught himself how to fix them, and gradually fell into a modest income source repairing them. Recently, I taught myself how to string tennis racquets. Now, not only have I dramatically reduced one of my largest tennis-related expenses, I'm now in a position to string other peoples' racquets for additional income!
In both these cases we've taken an inflation-prone expense and not only neutralized it, but turned it into a source of funds. I'll leave it to you to figure out where in your life you can apply this important insight.
Low overhead, low fixed costs
The late publisher Felix Dennis, in his useful book How to Get Rich, used to say "overhead walks on two legs."
I gotta be honest: that phrase makes absolutely no sense. But, well, he's from England.
What he's getting at, however, is this: never, ever, ever get yourself in a situation where you have high fixed overhead costs. Felix Dennis kept his organizations lean, mean and flexible so they could withstand anything--any kind of financial stresses. And whenever a windfall came in, rather than getting spent covering expenses and overhead, that income dropped right down to the bottom line.
Why can't we keep our households lean, mean and flexible too?
Debt = Fragility
The first and most obvious step most families can take towards making their households lean is to pay down all debts. Debt makes you fragile. It saddles you with non-negotiable monthly fixed costs that swell up your expenses, limit your flexibility, and crowd out your ability to manage inflation.
But believe it or not, debt can be an inflation fighting tool. Let me explain how.
Here at Casual Kitchen, we carry a modest mortgage on our townhome. When we first started seeing a few too many "non-beat-backable" examples of price inflation, like our auto insurance bill, our property taxes and some of the other examples I discussed in Part 1 of this post, we put a plan into place to accelerate paying off our mortgage entirely.
Our plan is to get this cost item paid off and eliminated from our household ledger for good by the end of 2018. This will create significant room in our budget to compensate for quite a bit of other sources of inflation in areas where we have less control.
A quick sidebar. Traditional economic "logic" says that borrowers benefit from periods of inflation. If you borrow money today (assuming you can do so at attractively low interest rates, a not-always-true presumption) you can then pay it back with lower-value dollars in the future. That's what the economic textbooks say at least.
The truth is debt is a fixed overhead cost burden that you are better off not having at all. The money you vaporize to service your debts could can be far better used to fund a huge savings buffer, or to fund investments in long-term, inflation-protected cash flows. Unlike a large debt load, these protect your family, making you more financially robust.
Nearly every household in our country carries a significant level of debt, which means nearly every household lights a meaningful portion of their money on fire, every month, just so they can use someone else's money to buy things they likely never needed in the first place.
Eliminate all debt. Overhead walks on two legs. Eliminate that overhead and you'll free up room in your budget to handle all sources of inflation and then some.
Now, let's move on to our final and most powerful tool for defeating inflation.
Income generating investments
A detailed discussion on investing is beyond the scope of this post and likely beyond the scope of this blog.[1] But we'll make room here for a few general heuristics you can use to diversify your sources of income using the amazing vehicle of conservative dividend paying stocks.
Remember in last week's post when we were talking about companies with pricing power? Those are the types of companies you'll want to consider for investments. Or, as I phrased it in another post here at Casual Kitchen: "Wherever you find a highly profitable company charging prices well above intrinsic value, forget buying the product. Buy the stock instead."
I'll share a couple of examples from my personal investing activities: my dividend on my Coca-Cola stock has more than quadrupled since I bought my first shares in 1999. Since the financial crisis in 2008-2009, JP Morgan hiked its dividend from a post-crisis low of 5c a share to 56c a share, an eleven fold increase.
I have yet to see a product in the consumer marketplace inflate prices at that kind of rate, not even status-signalling iPhones.
Which reminds me! Apple stock paid its first quarterly dividend in 2012, a modest 38c a share. In the five years since, the company has nearly doubled the dividend, a growth rate of some 15% a year.
I don't know if we can expect these types of dividend growth rates going forward, but you can put a relatively high level of confidence on all of these companies, and many others like them, increasing their dividends over time at rates equal to or exceeding inflation. This genre of stocks should be one of the pillars of your overall investment strategy.
Conclusion and review
Once again, let's return to Galbraith's "at-risk" households: those with no control over their income, no control over prices they pay, and "no capacity to protect themselves by increasing their own returns." While we can't control everything--here and there we will have to eat a price hike--we now have several tools we can use to increase our "capacity" to protect ourselves and our families from inflation:
* Think about competition and substitution as broadly and as empoweringly as possible
* Improve your brinksmanship: increase your ability to say "no" to more and more products and services in the consumer marketplace
* Avoid monopoly and oligopoly providers in as many forms as you can
* Ruthlessly strip out overhead ("overhead walks on two legs")
* Relentlessly pay off all debts (debt = fragility)
* Save more, both into a large emergency fund and into income generating investments
* Don't let your job be a "monopoly income source"--diversify away from it now, even if you do so in small steps at first.
Good luck and get started!
[1] Footnote: Resources for further reading:
For those readers interested in more articles and resources about investing, see:
1) Consumer Empowerment: How To Self-Fund Your Consumer Products Purchases
2) Synergies of Being an Investor AND a Consumer
3) Money Sundays: The "Stoplight Rule" For Creating An Emergency Fund
4) Ask CK: More on Emergency Funds
And, be sure to see my chapter-by-chapter analysis of Your Money Or Your Life, [full archive here], and in particular,
5) Becoming a Sophisticated Investor: Six Steps
6) The Official "Your Money Or Your Life" Reading List
7) Ask Casual Kitchen: Best Investing Books
In our last post we talked about expanding how we think about competition and substitution in order to defeat inflation and shift the balance of power back into consumers' hands. Let's pivot now from the spending side of the ledger over to the savings and income side of the ledger, and try to think creatively about attacking inflation on a second front.
Labor markets: tightening
One of the fortunate aspects of inflation is it tends to coincide with lower unemployment rates and an improving economy. Remember last post when we talked about making companies compete to sell to us? Well, labor market conditions are tightening, which means, finally, employers are beginning to compete for workers.
This means a couple of things. For one, enterprising workers who are valued by their employers and willing to ask for what they want can potentially get more money for the jobs they already have. Second, other opportunities are likely be opening up for you, right now, for a superior work situation. Start looking.
Both employment and wage increases tend to lag a recovery, which means now is the time to start taking advantage of the most direct way to beat inflation: get more money.
Side hustles/additional income sources
Last week we talked about monopolies in the consumer marketplace. Here's another way to think about a monopoly: if you have one job, your employer is a monopoly provider of your income. Your employer has maximum power over you, and it can "substitute" you right out of a job under the flimsiest of pretexts, whenever it wants!
To borrow a phrase from Nassim Nicholas Taleb's must-read book Antifragile, this makes you fragile to the loss of all of your income. Not good.
You cannot consider yourself to be truly robust financially if a) you have a monopoly income provider and b) your monopoly income provider can, by terminating your job, spontaneously shut off all of your income. This is why all households ought to be thinking about what kind of side hustles they can run to supplement income from their primary job.
My domain of expertise is stock market investing, thus that's where I try to drive incremental income for my household. But there is no shortage of ways to earn extra money on the side, and plenty of resources that cover this topic better than I could. Once again, remember our primary heuristic: the more broadly we think about competition and substitution (and monopoly providers of things like our income!), the more we can eliminate various fragilities in our financial lives.
Turning an expense into an income source
One major insight from Jacob Lund Fisker's book Early Retirement Extreme is to look for ways to "monetize" your hobbies: Fisker loved bicycles, taught himself how to fix them, and gradually fell into a modest income source repairing them. Recently, I taught myself how to string tennis racquets. Now, not only have I dramatically reduced one of my largest tennis-related expenses, I'm now in a position to string other peoples' racquets for additional income!
In both these cases we've taken an inflation-prone expense and not only neutralized it, but turned it into a source of funds. I'll leave it to you to figure out where in your life you can apply this important insight.
Low overhead, low fixed costs
The late publisher Felix Dennis, in his useful book How to Get Rich, used to say "overhead walks on two legs."
I gotta be honest: that phrase makes absolutely no sense. But, well, he's from England.
What he's getting at, however, is this: never, ever, ever get yourself in a situation where you have high fixed overhead costs. Felix Dennis kept his organizations lean, mean and flexible so they could withstand anything--any kind of financial stresses. And whenever a windfall came in, rather than getting spent covering expenses and overhead, that income dropped right down to the bottom line.
Why can't we keep our households lean, mean and flexible too?
Debt = Fragility
The first and most obvious step most families can take towards making their households lean is to pay down all debts. Debt makes you fragile. It saddles you with non-negotiable monthly fixed costs that swell up your expenses, limit your flexibility, and crowd out your ability to manage inflation.
But believe it or not, debt can be an inflation fighting tool. Let me explain how.
Here at Casual Kitchen, we carry a modest mortgage on our townhome. When we first started seeing a few too many "non-beat-backable" examples of price inflation, like our auto insurance bill, our property taxes and some of the other examples I discussed in Part 1 of this post, we put a plan into place to accelerate paying off our mortgage entirely.
Our plan is to get this cost item paid off and eliminated from our household ledger for good by the end of 2018. This will create significant room in our budget to compensate for quite a bit of other sources of inflation in areas where we have less control.
A quick sidebar. Traditional economic "logic" says that borrowers benefit from periods of inflation. If you borrow money today (assuming you can do so at attractively low interest rates, a not-always-true presumption) you can then pay it back with lower-value dollars in the future. That's what the economic textbooks say at least.
The truth is debt is a fixed overhead cost burden that you are better off not having at all. The money you vaporize to service your debts could can be far better used to fund a huge savings buffer, or to fund investments in long-term, inflation-protected cash flows. Unlike a large debt load, these protect your family, making you more financially robust.
Nearly every household in our country carries a significant level of debt, which means nearly every household lights a meaningful portion of their money on fire, every month, just so they can use someone else's money to buy things they likely never needed in the first place.
Eliminate all debt. Overhead walks on two legs. Eliminate that overhead and you'll free up room in your budget to handle all sources of inflation and then some.
Now, let's move on to our final and most powerful tool for defeating inflation.
Income generating investments
A detailed discussion on investing is beyond the scope of this post and likely beyond the scope of this blog.[1] But we'll make room here for a few general heuristics you can use to diversify your sources of income using the amazing vehicle of conservative dividend paying stocks.
Remember in last week's post when we were talking about companies with pricing power? Those are the types of companies you'll want to consider for investments. Or, as I phrased it in another post here at Casual Kitchen: "Wherever you find a highly profitable company charging prices well above intrinsic value, forget buying the product. Buy the stock instead."
I'll share a couple of examples from my personal investing activities: my dividend on my Coca-Cola stock has more than quadrupled since I bought my first shares in 1999. Since the financial crisis in 2008-2009, JP Morgan hiked its dividend from a post-crisis low of 5c a share to 56c a share, an eleven fold increase.
I have yet to see a product in the consumer marketplace inflate prices at that kind of rate, not even status-signalling iPhones.
Which reminds me! Apple stock paid its first quarterly dividend in 2012, a modest 38c a share. In the five years since, the company has nearly doubled the dividend, a growth rate of some 15% a year.
I don't know if we can expect these types of dividend growth rates going forward, but you can put a relatively high level of confidence on all of these companies, and many others like them, increasing their dividends over time at rates equal to or exceeding inflation. This genre of stocks should be one of the pillars of your overall investment strategy.
Conclusion and review
Once again, let's return to Galbraith's "at-risk" households: those with no control over their income, no control over prices they pay, and "no capacity to protect themselves by increasing their own returns." While we can't control everything--here and there we will have to eat a price hike--we now have several tools we can use to increase our "capacity" to protect ourselves and our families from inflation:
* Think about competition and substitution as broadly and as empoweringly as possible
* Improve your brinksmanship: increase your ability to say "no" to more and more products and services in the consumer marketplace
* Avoid monopoly and oligopoly providers in as many forms as you can
* Ruthlessly strip out overhead ("overhead walks on two legs")
* Relentlessly pay off all debts (debt = fragility)
* Save more, both into a large emergency fund and into income generating investments
* Don't let your job be a "monopoly income source"--diversify away from it now, even if you do so in small steps at first.
Good luck and get started!
[1] Footnote: Resources for further reading:
For those readers interested in more articles and resources about investing, see:
1) Consumer Empowerment: How To Self-Fund Your Consumer Products Purchases
2) Synergies of Being an Investor AND a Consumer
3) Money Sundays: The "Stoplight Rule" For Creating An Emergency Fund
4) Ask CK: More on Emergency Funds
And, be sure to see my chapter-by-chapter analysis of Your Money Or Your Life, [full archive here], and in particular,
5) Becoming a Sophisticated Investor: Six Steps
6) The Official "Your Money Or Your Life" Reading List
7) Ask Casual Kitchen: Best Investing Books
How To Beat Inflation
How do you deal with inflation and price increases? I've noticed quite a few price hikes over the past several months across the consumer marketplace: in the grocery store, on the menus at local restaurants, in the costs of various services... the list goes on. Some examples from our household:
* Our cable company hiked our internet bill 9%.
* Many product categories in our primary local grocery store have seen price hikes: a few that come to mind: store brand peanuts $2.49 to $2.99 (20%) and then to $3.29 (32% cumulatively), soy milk: 33% ($1.50 to $1.99). pineapples 20% ($2.50 to $2.99).
* Our automobile insurance bill went up a surprise 10% in the last billing cycle.
* Our townhouse community fees increased about 5% last year.
* And our property taxes jumped 8% two years ago as our town put through new assessments.
Of course, let's not forget one of the worst examples of inflation today: increases in health insurance policy premiums, which seem to inflate at a shocking rate each year.
All of this made me want to attempt to collect and organize my thoughts for readers on how best to deal with inflation and price increases. Unfortunately, I can't solve the inflation problem directly,that's the job of all those stone-handed economic geniuses at the Federal Reserve. Bitcoin solves this! But I what I can do is share some heuristics and general principles to help us blunt inflation's impact on our household budgets.
Let's start by stealing a quote and a conceptual framework on inflation from economist John Kenneth Galbraith, from his book The Affluent Society:
"Those individuals and groups will suffer most which have the least control over their prices or wages and hence the least capacity to protect themselves by increasing their own returns."
Galbraith ain't the greatest writer in the world, but what he's trying to say here is you want to increase your flexibility on both sides of the ledger--with both income and expenses. Those households without much room between income and expenses, those carrying high fixed costs, those that can't (or won't) save aggressively, and those unable to control their incomes at least to some extent--it's those households inflation hurts the worst.
Don't be that kind of household. To ensure your family isn't like the "at-risk" example Galbraith describes, you'll want to add to your income, cut expenses, and beat price hikes where you can. All three--at the same time.
Okay. Let's move from the theoretical and get into some practical ideas.
The ability to say no
The things we buy in life can be broken down into two categories: things we need and things we don't. Many posts here at Casual Kitchen address how easy it is to confuse needs with wants, and inflation in the price of a given product or service gives us a way to clarify the confusion. The more you can consider something as a want rather than a need, and the more you can simply say "no" to that product or service, the more power you have over the entity selling to you.
Some of our peers tell us they could never part with television. Now, I never judge peoples' horrible media consumption habits, but if that's your position, guess what? To the extent you believe TV is a "need" you lose all your leverage. You lose the ability to use true brinkmanship with the supplier. Yes, you can use all the Ramit cost-savings scripts you like. But if you won't cancel service when it really gets down to it, the company holds all the cards, not you.
Eventually, you're going to eat a price hike.
In contrast, imagine a household that places cable television in the "want" rather than "need" category. In our case, that simple act of mental categorization at first enabled us to keep cable, as the cable company, smelling our utter indifference when we called to challenge a price hike, offered us a hilariously cheap deal. Ironic.
But eventually, as with all monopoly- or oligopoly-provided services (more on this in a moment) the price hikes inevitably resumed, and we simply eliminated the entire cost category from our life. We won the brinkmanship battle because we could always say no. And eventually we did. The more you can improve and expand your ability say no, whatever the product or service, the more power you have over inflation.
Sounds easy, right? The problem, of course, is sometimes there's no competition at all.
Monopoly providers
In our community, internet service is a monopoly, and--no surprise--they've put through multiple price increases in recent years. They do it because they can. It's a reality. We've managed to negotiate the last few away, but this summer they put through a 9% hike that we were unable to beat back.
Unfortunately, some price hikes you just have to eat, and we'll be eating this one. You won't be able to beat back every single manifestation of inflation. Instead, you'll have to make room for the ones you can't beat back by driving down costs elsewhere in your budget.
Oligopoly providers
Oligopolies are markets where there are very few players competing. Here's where we often see creeping inflation and the dreaded "pricing umbrella," where the most dominant company in an oligopoly hikes prices and the other competitors follow along. It's not collusion exactly. It's not like these companies get together in a smoky back room and agree to hike prices in advance (which is illegal). They are, however, still free to watch each others' pricing decisions in the open market, and either follow along or not.
Branded consumer products companies tend to be worst offenders here, which is why you want to try and both avoid their products and invest in their stocks. More on that next week in part two of this post.
Substitution/Competition: broadening our primary weapon
It's an elementary economic concept to know that the more competition there is in a market, the lower prices will be, and the less likely there will be inflation. I wouldn't be teaching you anything by telling you this--you already know it.
What I want readers to do instead is to view "competition" as broadly as possible in all consumer marketplaces.
Branding is one way companies try to artificially limit competition. If you only buy Bumblebee Tuna for example, you're enabling a type of mini-monopoly market, and setting up a possible pain point for inflation in the future. On the other hand, if you know the real truth about canned tuna, and thus are indifferent to branding, you can switch.
And the ability to switch or substitute is a consumer's primary weapon of empowerment. The question is, can we think about substitution in ridiculously broad terms, and impose more competition across more markets--and thus increase our overall power as consumers?
Let's go over an example of what I mean. One of the most basic substitution examples, one you'd find in an introductory economics textbook, is the idea of substituting chicken for beef based on whichever meat is least expensive. But Casual Kitchen readers steeped in the practice of almost meatless cooking should be able to broaden the substitution possibilities far, far further, by rotating in laughably cheap vegetarian meals for some meat-centered meals.
If you think about it, this makes meat providers "compete" far more expansively. They're not just competing against other meat providers, we're making them compete against vegetables too! In other words, you've created circumstances where all of these food providers have to compete against each other for your food dollars. And this gives you more options and flexibility than ever.
Interestingly, one of the primary flaws in measuring inflation decades ago resulted from the government failing to take into account the substitutability of many products in the consumer marketplace. Heh. We won't be making that mistake.
Substitution and competition can be thought of still more broadly, at all levels of the consumer marketplace. For example, think beyond the mere product level. Competition and substitution can be found at the store level too: If any store hikes prices beyond what you think is reasonable, go to another store.
So, we now have our first set of weapons for combating inflation, and here's the general heuristic for readers: source as many of your "needs" from markets that are competitive, and for each need, have as many substitution possibilities as you can, in as broad a sense as you can. To the extent you can expand the envelope of competition and substitution across all things you buy, you will massively increase your leverage and flexibility over price inflation.
Next week we'll look at still more ways to beat inflation in Part 2: we'll look at the issue from the income and employment side of the ledger, and we'll consider some unusual ways to think about overhead and investing. Stay tuned!
* Our cable company hiked our internet bill 9%.
* Many product categories in our primary local grocery store have seen price hikes: a few that come to mind: store brand peanuts $2.49 to $2.99 (20%) and then to $3.29 (32% cumulatively), soy milk: 33% ($1.50 to $1.99). pineapples 20% ($2.50 to $2.99).
* Our automobile insurance bill went up a surprise 10% in the last billing cycle.
* Our townhouse community fees increased about 5% last year.
* And our property taxes jumped 8% two years ago as our town put through new assessments.
Of course, let's not forget one of the worst examples of inflation today: increases in health insurance policy premiums, which seem to inflate at a shocking rate each year.
All of this made me want to attempt to collect and organize my thoughts for readers on how best to deal with inflation and price increases. Unfortunately, I can't solve the inflation problem directly,
Let's start by stealing a quote and a conceptual framework on inflation from economist John Kenneth Galbraith, from his book The Affluent Society:
"Those individuals and groups will suffer most which have the least control over their prices or wages and hence the least capacity to protect themselves by increasing their own returns."
Galbraith ain't the greatest writer in the world, but what he's trying to say here is you want to increase your flexibility on both sides of the ledger--with both income and expenses. Those households without much room between income and expenses, those carrying high fixed costs, those that can't (or won't) save aggressively, and those unable to control their incomes at least to some extent--it's those households inflation hurts the worst.
Don't be that kind of household. To ensure your family isn't like the "at-risk" example Galbraith describes, you'll want to add to your income, cut expenses, and beat price hikes where you can. All three--at the same time.
Okay. Let's move from the theoretical and get into some practical ideas.
The ability to say no
The things we buy in life can be broken down into two categories: things we need and things we don't. Many posts here at Casual Kitchen address how easy it is to confuse needs with wants, and inflation in the price of a given product or service gives us a way to clarify the confusion. The more you can consider something as a want rather than a need, and the more you can simply say "no" to that product or service, the more power you have over the entity selling to you.
Some of our peers tell us they could never part with television. Now, I never judge peoples' horrible media consumption habits, but if that's your position, guess what? To the extent you believe TV is a "need" you lose all your leverage. You lose the ability to use true brinkmanship with the supplier. Yes, you can use all the Ramit cost-savings scripts you like. But if you won't cancel service when it really gets down to it, the company holds all the cards, not you.
Eventually, you're going to eat a price hike.
In contrast, imagine a household that places cable television in the "want" rather than "need" category. In our case, that simple act of mental categorization at first enabled us to keep cable, as the cable company, smelling our utter indifference when we called to challenge a price hike, offered us a hilariously cheap deal. Ironic.
But eventually, as with all monopoly- or oligopoly-provided services (more on this in a moment) the price hikes inevitably resumed, and we simply eliminated the entire cost category from our life. We won the brinkmanship battle because we could always say no. And eventually we did. The more you can improve and expand your ability say no, whatever the product or service, the more power you have over inflation.
Sounds easy, right? The problem, of course, is sometimes there's no competition at all.
Monopoly providers
In our community, internet service is a monopoly, and--no surprise--they've put through multiple price increases in recent years. They do it because they can. It's a reality. We've managed to negotiate the last few away, but this summer they put through a 9% hike that we were unable to beat back.
Unfortunately, some price hikes you just have to eat, and we'll be eating this one. You won't be able to beat back every single manifestation of inflation. Instead, you'll have to make room for the ones you can't beat back by driving down costs elsewhere in your budget.
Oligopoly providers
Oligopolies are markets where there are very few players competing. Here's where we often see creeping inflation and the dreaded "pricing umbrella," where the most dominant company in an oligopoly hikes prices and the other competitors follow along. It's not collusion exactly. It's not like these companies get together in a smoky back room and agree to hike prices in advance (which is illegal). They are, however, still free to watch each others' pricing decisions in the open market, and either follow along or not.
Branded consumer products companies tend to be worst offenders here, which is why you want to try and both avoid their products and invest in their stocks. More on that next week in part two of this post.
Substitution/Competition: broadening our primary weapon
It's an elementary economic concept to know that the more competition there is in a market, the lower prices will be, and the less likely there will be inflation. I wouldn't be teaching you anything by telling you this--you already know it.
What I want readers to do instead is to view "competition" as broadly as possible in all consumer marketplaces.
Branding is one way companies try to artificially limit competition. If you only buy Bumblebee Tuna for example, you're enabling a type of mini-monopoly market, and setting up a possible pain point for inflation in the future. On the other hand, if you know the real truth about canned tuna, and thus are indifferent to branding, you can switch.
And the ability to switch or substitute is a consumer's primary weapon of empowerment. The question is, can we think about substitution in ridiculously broad terms, and impose more competition across more markets--and thus increase our overall power as consumers?
Let's go over an example of what I mean. One of the most basic substitution examples, one you'd find in an introductory economics textbook, is the idea of substituting chicken for beef based on whichever meat is least expensive. But Casual Kitchen readers steeped in the practice of almost meatless cooking should be able to broaden the substitution possibilities far, far further, by rotating in laughably cheap vegetarian meals for some meat-centered meals.
If you think about it, this makes meat providers "compete" far more expansively. They're not just competing against other meat providers, we're making them compete against vegetables too! In other words, you've created circumstances where all of these food providers have to compete against each other for your food dollars. And this gives you more options and flexibility than ever.
Interestingly, one of the primary flaws in measuring inflation decades ago resulted from the government failing to take into account the substitutability of many products in the consumer marketplace. Heh. We won't be making that mistake.
Substitution and competition can be thought of still more broadly, at all levels of the consumer marketplace. For example, think beyond the mere product level. Competition and substitution can be found at the store level too: If any store hikes prices beyond what you think is reasonable, go to another store.
So, we now have our first set of weapons for combating inflation, and here's the general heuristic for readers: source as many of your "needs" from markets that are competitive, and for each need, have as many substitution possibilities as you can, in as broad a sense as you can. To the extent you can expand the envelope of competition and substitution across all things you buy, you will massively increase your leverage and flexibility over price inflation.
Next week we'll look at still more ways to beat inflation in Part 2: we'll look at the issue from the income and employment side of the ledger, and we'll consider some unusual ways to think about overhead and investing. Stay tuned!
If Big Food is So All-Powerful, Why Aren't They Increasing Prices More?
I was going through some old papers from my parents' home recently and, randomly, stumbled onto a page from an old weekly free newspaper I delivered in my early teens. Here's a blow-up of a tiny square of text from the bottom left corner of the paper's front page:
Not too shabby for my very first job!
Unfortunately, this post isn't about my beginnings in the business world. The truly interesting thing about this piece of paper was on the other side, where an old local grocery store listed sale prices for various foods:
William's was a smallish, family-owned grocery store, and it happened also to be my mother's favorite. She thought it had the best prices in town, and she shopped there consistently each week. Until it closed, driven out of business in the late 1980s by larger chain grocers.
But what's stunning about this ad is how little many of these prices have changed. Some prices are nearly the same today as they were in 1985: think chicken or frozen veggies. Other items--once you think about how long a period much time 32 years really is--represent surprisingly low levels of per-year inflation. For something to double in price in 32 years, you'd have to have an inflation rate of about 2.2% per year. Quite a few food items on this page (apple juice, Polish sauce, bacon, tomato paste) would fit roughly into that category or better.
Keep in mind, this is like a list of promoted items, which means prices you see in the photos above are sale prices. Compare these prices to sale prices today at a typical grocery store, and you'd find even less inflation.
And, sure, some products are significantly more expensive: today, onions in my store cost around $1.99 for a three-pound bag, haddock fillets cost perhaps some four times more, and now that Pabst has become a hipster throwback brand, forget about it, that price is off the charts. But those are exceptions. At the bottom of it all, it's quite stunning to see so little inflation in food prices over such a long period of time.
Now, there are plenty of food bloggers and food pundits out there who use "the greedy food industry is trying to make us all fat" as a default explanation for everything.
But if the food industry were really that greedy, wouldn't they raise prices far more relentlessly? After all, food is a basic necessity. We have no choice but to buy it.
If food companies were as all-powerful and domineering as many food pundits seem to think, why wouldn't all food prices go up at the rate of, say, university tuition costs, which have increased a haddock fillet-like three to four times over this same 32 year period? Makes you wonder who's really greedy, doesn't it?
Not too shabby for my very first job!
Unfortunately, this post isn't about my beginnings in the business world. The truly interesting thing about this piece of paper was on the other side, where an old local grocery store listed sale prices for various foods:
William's was a smallish, family-owned grocery store, and it happened also to be my mother's favorite. She thought it had the best prices in town, and she shopped there consistently each week. Until it closed, driven out of business in the late 1980s by larger chain grocers.
But what's stunning about this ad is how little many of these prices have changed. Some prices are nearly the same today as they were in 1985: think chicken or frozen veggies. Other items--once you think about how long a period much time 32 years really is--represent surprisingly low levels of per-year inflation. For something to double in price in 32 years, you'd have to have an inflation rate of about 2.2% per year. Quite a few food items on this page (apple juice, Polish sauce, bacon, tomato paste) would fit roughly into that category or better.
Keep in mind, this is like a list of promoted items, which means prices you see in the photos above are sale prices. Compare these prices to sale prices today at a typical grocery store, and you'd find even less inflation.
And, sure, some products are significantly more expensive: today, onions in my store cost around $1.99 for a three-pound bag, haddock fillets cost perhaps some four times more, and now that Pabst has become a hipster throwback brand, forget about it, that price is off the charts. But those are exceptions. At the bottom of it all, it's quite stunning to see so little inflation in food prices over such a long period of time.
Now, there are plenty of food bloggers and food pundits out there who use "the greedy food industry is trying to make us all fat" as a default explanation for everything.
But if the food industry were really that greedy, wouldn't they raise prices far more relentlessly? After all, food is a basic necessity. We have no choice but to buy it.
If food companies were as all-powerful and domineering as many food pundits seem to think, why wouldn't all food prices go up at the rate of, say, university tuition costs, which have increased a haddock fillet-like three to four times over this same 32 year period? Makes you wonder who's really greedy, doesn't it?
Ask CK: How Do You Like Your Prices Raised?
If you have a question you'd like to ask Casual Kitchen, send it in!!
**********************************
Reader Julia at Grow. Cook. Eat. asks me an exceptional question:
I'm curious to know how you would prefer to see companies raise their prices. Inflation is inevitable. As the cost of inputs goes up (not just the cocoa, but also fuel for transportation, etc), so does the cost of production. We can't expect food-companies to keep prices the same indefinitely (or can we?).
This is a fascinating question, although I'd like to first take minor issue with Julia's premise: In my view, price inflation isn't always inevitable. It's common, granted. But pricing trends have been anything but consistent over the past decades across many products and services. And hidden in this wide range of pricing trends is a key to becoming a more empowered consumer.
Again, granted, some prices only seem to go up. The price of most meats and almost all branded cookies, crackers, soda, etc., rise consistently--as do many personal services, like haircuts and restaurant meals. At the same time, however, prices of many other foods have stayed surprisingly stable. Quite a few products, like dried lentils, canned and dried beans, potatoes, carrots, cabbage and other foods can often be purchased at prices not much higher than what I paid when I first moved out on my own some twenty years ago.
Further, some areas of the grocery store, thanks to new competition, are facing falling prices: for example, I can now buy most of my spices at lower prices than I paid just a few years ago, thanks to increased competition from some new spice suppliers now on grocery store shelves. (Long time readers will know exactly why this warms my heart.)
Finally, there are some segments of the consumer products world where prices go through secular declines: consumer electronics, computers, cellphones and cellphone service all cost a fraction (and in some cases a tiny fraction) of what they cost a decade or two decades ago. Even our cable bills, long a bastion of steady annual price increases, are starting to sag in the face of other, less expensive ways to watch TV. (If you haven't called your cable company recently and asked for a price concession, please do so. Right now. I'll wait.)
Okay. Eons ago, when I was getting paid to pick stocks on Wall Street, we had an expression for companies that tried to put through price increases. We'd ask, "So, is their price hike going to stick?" In other words, would their customers accept the price hike? More importantly, did their customers have other suppliers or substitutes that they could turn to if they wanted to resist the price hike? These were the key factors that drove whether a price hike would "stick"--or if the company had to cave in and roll that price hike back.
And this, I firmly believe, is the key to empowering consumers when we face price hikes.
I'll even go further, and argue that we consumers have simply conditioned ourselves to accept regular price increases with certain products. Among the worst offenders: branded, heavily-advertised products and second-order foods. Yes, we notice them (usually), grumble a bit to ourselves, and maybe even mentally shake our fists at Big Food. But then we willingly take these products to the checkout line and buy them anyway.
Maybe, just maybe, we should entirely rethink these purchases. What if we quit buying them--or drastically cut back--and made the makers of those products cave in and roll back their prices? We are already beginning to see this happening across some branded food categories, as consumers are rising up, adjusting their purchasing habits, and finding substitutes for branded products that are priced above their real value. As a result, companies like Unilever and Proctor & Gamble, after years of subjecting us to steady, consistent price hikes, are finding a the rules are changing. They've had to step up discounting and cut prices in order to maintain sales. In other words, consumers are pushing back--and these companies are caving.
So with that as a backdrop: here's how I'd like my price hikes: I'd like them to be clear, not hidden. Overt, not stealthy. In other words, pretty much the exact opposite of what Hershey's and Davis Baking Powder did.
Look: if you're going to raise prices, don't hide it. Just admit it and own up to it. If your product is worth the extra value, I will still pay for it. And if you try to sneak a stealth price hike past me, I will drop your product like a bad habit.
Readers, what's your view? How do you like your prices raised?
Related Posts:
The Do-Nothing Brand
Divorce Yourself from the False Reality of Your Grocery Store
Ten Thoughts On the True Value of Brands
Brand Disloyalty
How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, tell a friend and spread the word! You can also support me by purchasing items from Amazon.com
via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like del.icio.us, digg or stumbleupon. Thank you for your support!
**********************************
Reader Julia at Grow. Cook. Eat. asks me an exceptional question:
I'm curious to know how you would prefer to see companies raise their prices. Inflation is inevitable. As the cost of inputs goes up (not just the cocoa, but also fuel for transportation, etc), so does the cost of production. We can't expect food-companies to keep prices the same indefinitely (or can we?).
This is a fascinating question, although I'd like to first take minor issue with Julia's premise: In my view, price inflation isn't always inevitable. It's common, granted. But pricing trends have been anything but consistent over the past decades across many products and services. And hidden in this wide range of pricing trends is a key to becoming a more empowered consumer.
Again, granted, some prices only seem to go up. The price of most meats and almost all branded cookies, crackers, soda, etc., rise consistently--as do many personal services, like haircuts and restaurant meals. At the same time, however, prices of many other foods have stayed surprisingly stable. Quite a few products, like dried lentils, canned and dried beans, potatoes, carrots, cabbage and other foods can often be purchased at prices not much higher than what I paid when I first moved out on my own some twenty years ago.
Further, some areas of the grocery store, thanks to new competition, are facing falling prices: for example, I can now buy most of my spices at lower prices than I paid just a few years ago, thanks to increased competition from some new spice suppliers now on grocery store shelves. (Long time readers will know exactly why this warms my heart.)
Finally, there are some segments of the consumer products world where prices go through secular declines: consumer electronics, computers, cellphones and cellphone service all cost a fraction (and in some cases a tiny fraction) of what they cost a decade or two decades ago. Even our cable bills, long a bastion of steady annual price increases, are starting to sag in the face of other, less expensive ways to watch TV. (If you haven't called your cable company recently and asked for a price concession, please do so. Right now. I'll wait.)
Okay. Eons ago, when I was getting paid to pick stocks on Wall Street, we had an expression for companies that tried to put through price increases. We'd ask, "So, is their price hike going to stick?" In other words, would their customers accept the price hike? More importantly, did their customers have other suppliers or substitutes that they could turn to if they wanted to resist the price hike? These were the key factors that drove whether a price hike would "stick"--or if the company had to cave in and roll that price hike back.
And this, I firmly believe, is the key to empowering consumers when we face price hikes.
I'll even go further, and argue that we consumers have simply conditioned ourselves to accept regular price increases with certain products. Among the worst offenders: branded, heavily-advertised products and second-order foods. Yes, we notice them (usually), grumble a bit to ourselves, and maybe even mentally shake our fists at Big Food. But then we willingly take these products to the checkout line and buy them anyway.
Maybe, just maybe, we should entirely rethink these purchases. What if we quit buying them--or drastically cut back--and made the makers of those products cave in and roll back their prices? We are already beginning to see this happening across some branded food categories, as consumers are rising up, adjusting their purchasing habits, and finding substitutes for branded products that are priced above their real value. As a result, companies like Unilever and Proctor & Gamble, after years of subjecting us to steady, consistent price hikes, are finding a the rules are changing. They've had to step up discounting and cut prices in order to maintain sales. In other words, consumers are pushing back--and these companies are caving.
So with that as a backdrop: here's how I'd like my price hikes: I'd like them to be clear, not hidden. Overt, not stealthy. In other words, pretty much the exact opposite of what Hershey's and Davis Baking Powder did.
Look: if you're going to raise prices, don't hide it. Just admit it and own up to it. If your product is worth the extra value, I will still pay for it. And if you try to sneak a stealth price hike past me, I will drop your product like a bad habit.
Readers, what's your view? How do you like your prices raised?
Related Posts:
The Do-Nothing Brand
Divorce Yourself from the False Reality of Your Grocery Store
Ten Thoughts On the True Value of Brands
Brand Disloyalty
How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, tell a friend and spread the word! You can also support me by purchasing items from Amazon.com
via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like del.icio.us, digg or stumbleupon. Thank you for your support!
Stacked Costs and Second-Order Foods: A New Way to Think About Rising Food Costs
My goal for today's post is ambitious. I want to give you an entirely new way to think about, and take advantage of, the food industry. After reading this article, you should have a new framework for understanding why some foods have become so expensive relative to others, and you'll also have several new practical ideas for beating food price inflation.
Before I get started, let me provide a brief warning for attention-span challenged readers: this essay approaches 1,600 words. If you don't have time to wade through it right now, feel free to come back later.
New Definitions
First, I'm going to use two new descriptive terms to define food in a totally different way: first-order foods and second-order foods.
First-order foods are the basic building blocks of our diets. Fruits, vegetables, unprocessed grains, beans and legumes, nuts, basic juices and even water are all examples of first-order foods. These foods require little processing and they come to you in basic form.
Second-order foods are simply foods derived from first-order foods.
Examples: TV Dinners, Doritos and Meat
Let's go over some brief examples to help illustrate this further. We'll start with the frozen dinner, which is an obvious example of a second-order food. The company that manufactures Lean Cuisine frozen dinners takes a combination of first-order foods, combines, packages and freezes them, and ships them to your local grocery store. The result? You can stand in the frozen foods aisle, shivering, and choose from a wide variety of frozen dinners, elegantly displayed in conveniently microwaveable cardboard boxes. Of course, you end up paying a premium for this convenience in the form of higher prices.
How about Doritos--one of my very favorite guilty pleasures? Unfortunately, that's another second-order food. A snackfood manufacturer takes corn, processes it into chips, mixes it with salt and other spices, and then packs it into plastic bags and ships it to your store.
Finally, meat is a more complex example of a second-order food, with several added process steps. The meat producer has to feed first-order foods (grain or feed corn) to his cows, chickens, hogs or other animals. He has to pay to clean, heat and/or air-condition the pens. Somebody has to pay to power and operate the plant that slaughters and processes the meat. Then, that meat is packaged in plastic wrap, frozen, and shipped to your local grocery store.
The Cost Stack
By now I'm sure you're figuring out where I'm going with this. Thinking about foods as either first-order or second-order gives you a simple model to explain why the prices of some foods are going up a lot more than others.
Let's use meat as an example. If corn prices (a primary input for animal feed) increase meaningfully, of course it's obvious that chicken or beef prices will increase too. But what if energy prices also increase? Suddenly, costs start rising for several steps involved in the making of second-order foods. Powering the farm and the meat processing plant gets more expensive. Transport costs increase for shipping grain, feed and supplies to the farmer. And of course the cost of freezing and shipping the meat to your local store increases as well.
If you think about this for a minute, it becomes quite clear that all second-order foods have a shocking number of layers of stacked costs:
1) Input costs for first order foods plus a reasonable profit margin for the suppliers,
2) Costs for food or meat processing, plus a reasonable profit margin for the processor,
3) Input costs for energy at all points of the production process, plus a reasonable profit margin both for the energy producer and the utility company,
4) Costs for transport, plus a reasonable profit margin for the transportation company,
5) Costs for branding and marketing, plus a reasonable profit margin for the advertising agency,
6) Costs for packaging.
You've just read through a sextuple-whammy of stacked costs, and I'm sure I left out a few.
You Shoulder the Cost Stack
I now have some terrible news for you: When you choose to purchase and consume second order foods, you end up shouldering the entire multi-layer cost stack.
It gets worse. These layers of extra costs tend to be multiplicative rather than additive, because each company throughout this supply chain passes their increased costs through to the next company, which passes those costs through to the next company, and so forth. Further, each participant in this supply chain (unless it wants to fail as a business entity) will need to tack on at least a little bit of profit margin above and beyond those extra costs--which then of course also get passed through to the next player.
This cost stack is what causes the prices of many second-order foods to increase monstrously, far out of proportion to the increase in the costs of their component first-order foods.
And of course meat products--because they are the most levered to energy costs and they typically have the most layers in their cost stack--give us the most monstrous examples of second-order food price inflation. This is why, with a 30% increase in the cost of a first-order input like chicken feed, and a 30% increase in the cost of energy, the price of the end product (let's say frozen plastic-wrapped chicken breasts), can easily increase by 100% or more.
Solutions
Let's stop with the bad news for a moment and switch to talking about solutions. At this point, you now have definitions of first- and second-order foods, an explanation of cost stacking, and you've seen an example of how cost stacking can drive substantial increases in second-order food prices.
And by now I'm sure you're squirming in your chair with your hand up, wanting to shout out the painfully obvious solution for beating food price inflation: eat more first-order foods and eat fewer second-order foods.
Yep. I knew all along that I had really smart readers.
Let me encourage you still more. The cost advantage of first-order foods over second-order foods is a non-linear function: the savings you get from eating first-order foods gets more compelling as food inflation worsens. Sure, the cost of all food (including the cost of first-order foods) may be going up, but because of our cost-stacking phenomenon, the cost differential between first- and second-order foods gets larger the more food and energy costs increase. Which gives you all the more incentive to bias your diet toward first-order foods.
Health Benefits
How about some more good news? As first-order foods become the foundation of your diet, you'll capture benefits beyond merely saving money.
For example, first-order foods are typically far healthier than second-order foods. They haven't been processed, so they retain more antioxidants with their massive health benefits. They aren't buried in salt, high-fructose corn syrup or sodium hexametaphosphate like many second-order foods. And there is an enormous body of evidence suggesting that if you limit your intake of processed foods, particularly those containing refined carbs and hydrogenated fats, you will have dramatically lower chances of becoming obese, developing cardiovascular problems, or developing Type 2 diabetes.
Practical Applications
So what are the practical steps you can take to focus your diet on first-order foods and take advantage of this new way to look at the food industry? At the risk of being overly prescriptive, here's a list of ten solutions to help you to break the grip of second-order food price inflation:
1) Adopt part-time vegetarianism.
2) Make basic staples, like beans, lentils, grains and white and brown rice, the foundation of your diet.
3) Eat more raw foods.
4) Cook more at home. Restaurant food has an enormous cost stack, including the restaurant's overhead expenses, branding and marketing costs, staffing costs, the air-conditioning bill, and so forth. And don't forget the cost of a generous tip for high-quality table service.
5) Bias your diet away from prepared foods (especially TV dinners).
6) Drop the traditional American conception of a "square meal." Vegetarians of course figured out this secret long ago, but the entire concept of having meat as the focal point of every meal is an obsolete construct.
7) Ruthlessly cut junk food and sweetened beverages out of your diet.
8) Buy foods grown locally, or near-locally. These foods will have lower embedded transport costs.
9) Grow your own food. This is ultimate example of a first-order food.
10) Refuse to pay for "excessively branded" products (full disclosure: we own shares in both Coke and Unilever so you can justifiably call me a hypocrite here). There is no reason to shoulder the cost of a national (or worse, global) advertising budget, especially if you can find equivalent generic products as substitutes.
Readers, if you have additional solutions, feel free to leave them in the comments section below.
******************
Epilogue
Let me take the liberty of adding one final wrinkle to this essay on first- and second-order foods. Don't worry--it's yet another piece of really good news, in my opinion anyway.
Just think: processed meat-like products such olive loaf and liverwurst are third-order foods, because they take high input cost second-order foods (mostly meat, I hope) and apply still more processing, energy, packaging and branding to create yet another level of "food."
So now, I have an airtight excuse never to eat olive loaf or liverwurst, ever. And with any luck, these so-called foods will soon become so expensive that they will go completely extinct, and no one will ever serve them to me ever again.
Who said there aren't advantages to rising food prices?
Related Posts:
Seven Ways to Get Faster at Cooking
All Casual Kitchen posts filed under "Vegetarianism"
All Casual Kitchen posts filed under "Laughably Cheap"
The Dinner Party: 10 Tips to Make Cooking for Company Fun and Easy
Cooking Like the Stars? Don't Waste Your Money
Ten Strategies to Stop Mindless Eating
Mastering Kitchen Setup Costs
How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, or tell a friend and spread the word! You can also support me by purchasing items from Amazon.com via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like del.icio.us, digg or stumbleupon. Thank you for your support!
Before I get started, let me provide a brief warning for attention-span challenged readers: this essay approaches 1,600 words. If you don't have time to wade through it right now, feel free to come back later.
New Definitions
First, I'm going to use two new descriptive terms to define food in a totally different way: first-order foods and second-order foods.
First-order foods are the basic building blocks of our diets. Fruits, vegetables, unprocessed grains, beans and legumes, nuts, basic juices and even water are all examples of first-order foods. These foods require little processing and they come to you in basic form.
Second-order foods are simply foods derived from first-order foods.
Examples: TV Dinners, Doritos and Meat
Let's go over some brief examples to help illustrate this further. We'll start with the frozen dinner, which is an obvious example of a second-order food. The company that manufactures Lean Cuisine frozen dinners takes a combination of first-order foods, combines, packages and freezes them, and ships them to your local grocery store. The result? You can stand in the frozen foods aisle, shivering, and choose from a wide variety of frozen dinners, elegantly displayed in conveniently microwaveable cardboard boxes. Of course, you end up paying a premium for this convenience in the form of higher prices.
How about Doritos--one of my very favorite guilty pleasures? Unfortunately, that's another second-order food. A snackfood manufacturer takes corn, processes it into chips, mixes it with salt and other spices, and then packs it into plastic bags and ships it to your store.
Finally, meat is a more complex example of a second-order food, with several added process steps. The meat producer has to feed first-order foods (grain or feed corn) to his cows, chickens, hogs or other animals. He has to pay to clean, heat and/or air-condition the pens. Somebody has to pay to power and operate the plant that slaughters and processes the meat. Then, that meat is packaged in plastic wrap, frozen, and shipped to your local grocery store.
The Cost Stack
By now I'm sure you're figuring out where I'm going with this. Thinking about foods as either first-order or second-order gives you a simple model to explain why the prices of some foods are going up a lot more than others.
Let's use meat as an example. If corn prices (a primary input for animal feed) increase meaningfully, of course it's obvious that chicken or beef prices will increase too. But what if energy prices also increase? Suddenly, costs start rising for several steps involved in the making of second-order foods. Powering the farm and the meat processing plant gets more expensive. Transport costs increase for shipping grain, feed and supplies to the farmer. And of course the cost of freezing and shipping the meat to your local store increases as well.
If you think about this for a minute, it becomes quite clear that all second-order foods have a shocking number of layers of stacked costs:
1) Input costs for first order foods plus a reasonable profit margin for the suppliers,
2) Costs for food or meat processing, plus a reasonable profit margin for the processor,
3) Input costs for energy at all points of the production process, plus a reasonable profit margin both for the energy producer and the utility company,
4) Costs for transport, plus a reasonable profit margin for the transportation company,
5) Costs for branding and marketing, plus a reasonable profit margin for the advertising agency,
6) Costs for packaging.
You've just read through a sextuple-whammy of stacked costs, and I'm sure I left out a few.
You Shoulder the Cost Stack
I now have some terrible news for you: When you choose to purchase and consume second order foods, you end up shouldering the entire multi-layer cost stack.
It gets worse. These layers of extra costs tend to be multiplicative rather than additive, because each company throughout this supply chain passes their increased costs through to the next company, which passes those costs through to the next company, and so forth. Further, each participant in this supply chain (unless it wants to fail as a business entity) will need to tack on at least a little bit of profit margin above and beyond those extra costs--which then of course also get passed through to the next player.
This cost stack is what causes the prices of many second-order foods to increase monstrously, far out of proportion to the increase in the costs of their component first-order foods.
And of course meat products--because they are the most levered to energy costs and they typically have the most layers in their cost stack--give us the most monstrous examples of second-order food price inflation. This is why, with a 30% increase in the cost of a first-order input like chicken feed, and a 30% increase in the cost of energy, the price of the end product (let's say frozen plastic-wrapped chicken breasts), can easily increase by 100% or more.
Solutions
Let's stop with the bad news for a moment and switch to talking about solutions. At this point, you now have definitions of first- and second-order foods, an explanation of cost stacking, and you've seen an example of how cost stacking can drive substantial increases in second-order food prices.
And by now I'm sure you're squirming in your chair with your hand up, wanting to shout out the painfully obvious solution for beating food price inflation: eat more first-order foods and eat fewer second-order foods.
Yep. I knew all along that I had really smart readers.
Let me encourage you still more. The cost advantage of first-order foods over second-order foods is a non-linear function: the savings you get from eating first-order foods gets more compelling as food inflation worsens. Sure, the cost of all food (including the cost of first-order foods) may be going up, but because of our cost-stacking phenomenon, the cost differential between first- and second-order foods gets larger the more food and energy costs increase. Which gives you all the more incentive to bias your diet toward first-order foods.
Health Benefits
How about some more good news? As first-order foods become the foundation of your diet, you'll capture benefits beyond merely saving money.
For example, first-order foods are typically far healthier than second-order foods. They haven't been processed, so they retain more antioxidants with their massive health benefits. They aren't buried in salt, high-fructose corn syrup or sodium hexametaphosphate like many second-order foods. And there is an enormous body of evidence suggesting that if you limit your intake of processed foods, particularly those containing refined carbs and hydrogenated fats, you will have dramatically lower chances of becoming obese, developing cardiovascular problems, or developing Type 2 diabetes.
Practical Applications
So what are the practical steps you can take to focus your diet on first-order foods and take advantage of this new way to look at the food industry? At the risk of being overly prescriptive, here's a list of ten solutions to help you to break the grip of second-order food price inflation:
1) Adopt part-time vegetarianism.
2) Make basic staples, like beans, lentils, grains and white and brown rice, the foundation of your diet.
3) Eat more raw foods.
4) Cook more at home. Restaurant food has an enormous cost stack, including the restaurant's overhead expenses, branding and marketing costs, staffing costs, the air-conditioning bill, and so forth. And don't forget the cost of a generous tip for high-quality table service.
5) Bias your diet away from prepared foods (especially TV dinners).
6) Drop the traditional American conception of a "square meal." Vegetarians of course figured out this secret long ago, but the entire concept of having meat as the focal point of every meal is an obsolete construct.
7) Ruthlessly cut junk food and sweetened beverages out of your diet.
8) Buy foods grown locally, or near-locally. These foods will have lower embedded transport costs.
9) Grow your own food. This is ultimate example of a first-order food.
10) Refuse to pay for "excessively branded" products (full disclosure: we own shares in both Coke and Unilever so you can justifiably call me a hypocrite here). There is no reason to shoulder the cost of a national (or worse, global) advertising budget, especially if you can find equivalent generic products as substitutes.
Readers, if you have additional solutions, feel free to leave them in the comments section below.
******************
Epilogue
Let me take the liberty of adding one final wrinkle to this essay on first- and second-order foods. Don't worry--it's yet another piece of really good news, in my opinion anyway.
Just think: processed meat-like products such olive loaf and liverwurst are third-order foods, because they take high input cost second-order foods (mostly meat, I hope) and apply still more processing, energy, packaging and branding to create yet another level of "food."
So now, I have an airtight excuse never to eat olive loaf or liverwurst, ever. And with any luck, these so-called foods will soon become so expensive that they will go completely extinct, and no one will ever serve them to me ever again.
Who said there aren't advantages to rising food prices?
Related Posts:
Seven Ways to Get Faster at Cooking
All Casual Kitchen posts filed under "Vegetarianism"
All Casual Kitchen posts filed under "Laughably Cheap"
The Dinner Party: 10 Tips to Make Cooking for Company Fun and Easy
Cooking Like the Stars? Don't Waste Your Money
Ten Strategies to Stop Mindless Eating
Mastering Kitchen Setup Costs
How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, or tell a friend and spread the word! You can also support me by purchasing items from Amazon.com
via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like del.icio.us, digg or stumbleupon. Thank you for your support!
A Simple Way to Beat Rising Food Prices
Anyone who has set foot in a grocery story lately has seen some pretty significant inflation in food prices.
Would you like a simple idea that will help you cut your weekly food bill by 20-30% or more, and better still, will increase the health and nutritional content of your diet?
Here it is:
Switch three of your weekly meals to vegetarian.
Close readers of Casual Kitchen know about our predilection for part-time vegetarianism. And vegetarian recipes are typically healthier, higher in fiber and nutrients, and lower in fat.
But the truly underappreciated advantage of vegetarian cuisine is that it’s typically much, much easier on the wallet than meat-based meals.
For example, when we make a huge batch of Groundnut Stew in our kitchen (cost: around $10), we can feed ourselves for at least four large meals. If you're responsible for feeding a family of three or four, you can serve this soup for a couple of dinners as well as a lunch or two with little problem. Thus a meaningful portion of your week’s meals can be taken care of by dropping just one Hamilton!
It gets better. Some vegetarian dishes are not just laughably cheap, they are preposterously cheap--like my Lentil Soup, which can be made for a mere 60c per serving.
Note that this strategy does not require you to give up meat. I'm only suggesting that you change a few of your weekly meals to vegetarian. You can still gain the immense costs savings and health benefits of vegetarian cuisine without having to switch permanently to a vegetarian diet.
But let's face it: the average American's diet, which typically includes a large amount of meat at every meal, contains far more protein (and unfortunately, far more saturated fats) than necessary for good health. Why pay extra for something that your body doesn't even need, especially when the cost of that something has gone up 15-20% in the past few months?
If you would like some ideas for inexpensive vegetarian dishes that you can cook for your family, feel free to search this blog under the label "vegetarianism." You'll find a selection of great recipes, including Spicy Eggplant Ratatouille, Wintry Tomato Vegetable Soup, Portuguese Kale and Potato Soup, as well as plenty of others.
I've also listed four of my absolute favorite vegetarian cookbooks below to help introduce you to this surprisingly diverse and creative cuisine. I recommend each of them highly. These four cookbooks will give you a lifetime of ideas for combating rising food prices.
Try adding more vegetarian meals to your weekly menu. You too can defeat food price inflation!
Related Posts:
Eight Tips to Make Cooking At Home Laughably Cheap
Two Useful Cooking Lessons From Another Cheap and Easy Side Dish
Garden Gumbo Recipe
How to Live Forever in Ten Easy Steps
Related Books:
Sundays at Moosewood Restaurant: Ethnic and Regional Recipes from the Cooks at the Legendary Restaurant
by the Moosewood Collective
Vegetarian Soup Cuisine: 125 Soups and Stews from Around the World
by Jay Solomon
The New Laurel's Kitchen: A Handbook for Vegetarian Cookery and Nutrition
The New Moosewood Cookbook by Mollie Katzen
* Full disclosure: if you enter Amazon via a link on my blog and buy something, I'll get a small commission on that purchase. Please think of it as my "tip jar"--and thanks so much to those readers out there who support me!
Would you like a simple idea that will help you cut your weekly food bill by 20-30% or more, and better still, will increase the health and nutritional content of your diet?
Here it is:
Switch three of your weekly meals to vegetarian.
Close readers of Casual Kitchen know about our predilection for part-time vegetarianism. And vegetarian recipes are typically healthier, higher in fiber and nutrients, and lower in fat.
But the truly underappreciated advantage of vegetarian cuisine is that it’s typically much, much easier on the wallet than meat-based meals.
For example, when we make a huge batch of Groundnut Stew in our kitchen (cost: around $10), we can feed ourselves for at least four large meals. If you're responsible for feeding a family of three or four, you can serve this soup for a couple of dinners as well as a lunch or two with little problem. Thus a meaningful portion of your week’s meals can be taken care of by dropping just one Hamilton!
It gets better. Some vegetarian dishes are not just laughably cheap, they are preposterously cheap--like my Lentil Soup, which can be made for a mere 60c per serving.
Note that this strategy does not require you to give up meat. I'm only suggesting that you change a few of your weekly meals to vegetarian. You can still gain the immense costs savings and health benefits of vegetarian cuisine without having to switch permanently to a vegetarian diet.
But let's face it: the average American's diet, which typically includes a large amount of meat at every meal, contains far more protein (and unfortunately, far more saturated fats) than necessary for good health. Why pay extra for something that your body doesn't even need, especially when the cost of that something has gone up 15-20% in the past few months?
If you would like some ideas for inexpensive vegetarian dishes that you can cook for your family, feel free to search this blog under the label "vegetarianism." You'll find a selection of great recipes, including Spicy Eggplant Ratatouille, Wintry Tomato Vegetable Soup, Portuguese Kale and Potato Soup, as well as plenty of others.
I've also listed four of my absolute favorite vegetarian cookbooks below to help introduce you to this surprisingly diverse and creative cuisine. I recommend each of them highly. These four cookbooks will give you a lifetime of ideas for combating rising food prices.
Try adding more vegetarian meals to your weekly menu. You too can defeat food price inflation!
Related Posts:
Eight Tips to Make Cooking At Home Laughably Cheap
Two Useful Cooking Lessons From Another Cheap and Easy Side Dish
Garden Gumbo Recipe
How to Live Forever in Ten Easy Steps
Related Books:
Sundays at Moosewood Restaurant: Ethnic and Regional Recipes from the Cooks at the Legendary Restaurant
by the Moosewood CollectiveVegetarian Soup Cuisine: 125 Soups and Stews from Around the World
by Jay SolomonThe New Laurel's Kitchen: A Handbook for Vegetarian Cookery and Nutrition
The New Moosewood Cookbook by Mollie Katzen
* Full disclosure: if you enter Amazon via a link on my blog and buy something, I'll get a small commission on that purchase. Please think of it as my "tip jar"--and thanks so much to those readers out there who support me!
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