Shrinking Toblerone

toblerone
Toblerone have increased the space between their ‘chocolate mountains’ in an attempt to cut costs. The weight of the chocolate bar has been reduced, with 400g bars now 360g and 170g bars now 150g. This has been achieved by increasing the gaps between triangles, rather than simply shortening/shrinking the whole chocolate bar.

Toblerone have cited rising costs of ingredients as the main reason for the change in product design. They argue that by reducing the size of the bar the retail price will remain the same. However, many customers are outraged by the move, saying “it must be the dumbest corporate decision of all time,” and “I’ll never buy one of those.” Furthermore, many critics are arguing Toblerone would have been better off increasing the price.

Some analysts are blaming Brexit for the change in shape, following price hikes by other companies such as Walkers and Birdseye, although Toblerone have denied these claims.

Business Questions:

  1. Explain why Brexit might be linked to Toblerone’s decision to change the shape of their chocolate bars (4 marks)
  2. Analyse the impact of Toblerone’s decision to change the shape of their chocolate bar on their brand image. (6 marks)
    • Suggested Structure
      • State an impact on the brand image of Toblerone
      • Use evidence in the case study that supports this impact
      • Explain why this impact is likely
      • Explain the long term consequences of this impact on Toblerone’s sales/revenue/profits
  3. Toblerone have seen an increase in the cost of ingredients. To cover the increased cost of production Toblerone could have raised prices but instead decided to change the size of the chocolate bar. Assess which of these two options is the most appropriate for Toblerone. (6/8 marks)
    • Suggested Structure
      • State a reason changing the size of the chocolate bar is appropriate compared to increasing the price
      • Use evidence in the case study that supports this reason
      • Explain the likely consequences for Toblerone of changing the size
      • Explain what this consequence depends on
      • State a reason raising the price of the chocolate bar is more appropriate
      • Use evidence in the case study that supports this reason
      • Explain the likely consequences for Toblerone of raising prices
      • Explain what this consequence depends on
      • Overall which option is most appropriate

Economics Questions:

  1. Analyse the impact of a fall in the value of the pound on firms such as Toblerone. (6 marks)
  • Suggested Structure
    • Explain what is mean by a fall in the value of the pound
    • State an impact of a fall in the value of the pound on Toblerone
    • Use evidence in the case study that supports this impact
    • Explain why this impact is likely referring to economic theory
    • Explain the long term consequences of this impact on Toblerone referring to economic theory/diagrams

2. Assess whether demand for Toblerone is likely to be price elastic or price inelastic. (8 marks)

  • Suggested structure
    • Define PED
    • State a reason Toblerone has an elastic PED
    • Use evidence in the case study that supports this reason
    • Explain why PED is elastic/what this means for Toblerone referring to economic theory
    • Explain why your assumption of Toblerone’s PED might not always be true
    • State a reason Toblerone has an inelastic PED
    • Use evidence in the case study that supports this reason
    • Explain why PED is inelastic/what this means referring to economic theory
    • Explain why your assumption of Toblerone’s PED might not always be true

3. Discuss the impact of Toblerone’s decision to reduce the size of chocolate bars on their profit. (12 marks)

    • Suggested structure
      • State a possible positive impact of Toblerone’s decision to reduce the size of the chocolate bars on profit
      • Use evidence in the case study that supports this impact
      • Explain the long term consequences of this impact on profit referring to economic theory
      • Explain what the validity of this impact depends on
  • State a possible negative impact of Toblerone’s decision to reduce the size of the chocolate bars on profit
  • Use evidence in the case study that supports this impact
  • Explain the long term consequences of this impact on profit referring to economic theory
  • Explain what the validity of this impact depends on
  • Overall is Toblerone’s decision going to have a positive or negative impact on profits?

Mark Scheme

Business Questions:

  1. Brexit has been linked to a fall in the value of the pound (1) This may increase the costs of production as imported ingredients become more expensive (1). Therefore, Toblerone reduced the size of the chocolate bar to save costs, as they require a smaller number of ingredients (1). This allows them to keep prices the same whilst remaining profitable (1).

2.    Toblerone’s decision to change the size of the chocolate bar may damage their brand              image (1). Customer satisfaction appears to have fallen as a result of the change (1).              Customers have said that they wouldn’t buy Toblerone’s anymore (1). This is because            customers feel they are getting less value for money (1). If this leads to negative word            of mouth Toblerone’s brand image is likely to be affected (1). This may lead to a fall                in sales, damaging revenue and profits (1).

3. Reasons for changing shape:

  • Reduce costs as lower variable costs due to fewer raw materials/ingredients needed
  • Toblerone are able to maintain profits despite the rising cost of ingredients
  • Toblerone may have an elastic PED as it is seen as a luxury product and there are many competitors e.g. Cadbury
  • An elastic PED means Toblerone are unable to increase prices without experiencing a fall in sales so changing the shape is possibly there only option
  • Toblerone operate in a competitive market so raising prices may not be possible without risking losing market share

Possible counterbalance:

  • Reducing the size of the chocolate bar may damage Toblerone’s brand image which may lead to a fall in sales
  • Risks negative word of mouth and extensive press coverage (although they could argue any press coverage is a good thing)
  • Consumers may feel that they are not getting value for money

Reasons for raising prices:

  • Toblerone would be able to cover the increased costs of production as they are charging a higher price
  • Consumers may be willing to pay a higher price as Toblerone is seen as a high quality product
  • Many other firms are increasing prices as a result of the weak pound so Toblerone may be able to increase prices and still remain competitive

Possible counterbalance:

  • PED is elastic so raising prices may lead to a fall in sales and damage revenue
  • Raising prices may mean Toblerone lose market share to companies who source raw materials from the UK

Economics Questions:

  1. A fall in the value of the pound means that the pound is worth less in terms of other currencies (1), e.g. £1 = €1.30 and now £1 = €1.10 (1). This means that it becomes for expensive for Toblerone to buy ingredients from abroad (1) increasing costs of production (1). As a result Toblerone have reduced the sizes of their chocolate bars by 10 – 11% (1). As most firms aim to profit maximise it can be assumed that Toblerone have cut costs in order to maintain profits without having to increase prices (1).

2. Assess the price elasticity of demand of Toblerone. (8 marks)

  • PED is the responsiveness of quantity demanded to changes in price, PED=%change in Qd/%change in price (2 KN marks)
  • Reasons may be elastic
    • Toblerone may be seen as a luxury rather than necessity
    • Toblerone choosing to keep prices the same suggest PED is elastic
    • Market for chocolate bars is competitive
    • Large number of substitutes
    • Toblerone is relatively expensive compared to other chocolate bars
  • Reasons may be inelastic
    •  Brand loyalty
    • Toblerone may be seen as high quality
    • Toblerone has quite a strong USP
    • Toblerone still takes up a small proportion of income despite being relatively expensive for a chocolate bar
    • Consumers will not respond immediately to changes in price so inelastic in the short term

3. Discuss the impact of Toblerone’s decision to reduce the size of chocolate bars on their profit. (12 marks)

  • KN:  Profit is the money left over once costs have been taken into account, calculated by Total Revenue – Total Costs (up to 2 marks)
  • Reasons profit may increase
    • Costs may decrease as a smaller quantity of ingredients is needed. Therefore profit margins may increase as price remains the same.
    • If other firms increase prices, e.g. Galaxy, consumers may switch to Toblerone as their chocolate bars are relatively cheaper. This may lead to an increase in revenue therefore profit may increase
  • Possible counterbalance:
    • Negative publicity as a result of a reduction in the size of the chocolate bar may damage Toblerone’s brand image. This may lead to a decrease in sales, reducing revenue and consequently damaging profits.
    • Consumers may no longer feel that are getting value for money, leading to them switching to substitute chocolate bars such as Galaxy. Therefore, sales may fall, leading to a fall in revenues and profits.
    • Costs may not fall by that much if the price of imported ingredients increases significantly due to a weakening pound. Therefore, profits may remain unchanged rather than increasing.
  • Overall it depends on the reaction of consumers to a change in the shape of Toblerone. There may also be differing consequences in the short term vs long term. Furthermore, if other products such as Maltesers  follow Toblerone the effect may be minimal.

Credit: Lucy Temple.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s