What Is Shrinkflation?
Shrinkflation is the practice of reducing the size of a product while maintaining its sticker price. Raising the price per given amount is a strategy employed by companies, mainly in the food and beverage industries, to stealthily boost profit margins or maintain them in the face of rising input costs.
Shrinkflation is also referred to as package downsizing in business and academic research. A less common usage of this term may refer to a macroeconomic situation where the economy is contracting while also experiencing a rising price level.
- Shrinkflation is the reduction in the size of a product in response to rising production costs or market competition.
- Rather than increase the price of a product, the company simply offers a smaller package for the same sticker price.
- Raising the price per given amount is a strategy employed by companies, mainly in the food and beverage industries, to stealthily boost profit margins.
- Changes are minimal and limited to a small range of products, yet are still enough to make accurate measures of inflation more difficult to gauge.
- Shrinkflation runs the risk of turning customers away from a product or brand if they notice they are getting less for the same price.
Shrinkflation is a term made up of two separate words: shrink and inflation. The "shrink" in shrinkflation relates to the change in product size, while the "-flation" part refers to inflation—the rise in the price level.
British economist Pippa Malmgren has been credited for coining the term shrinkflation in its most common usage.
Shrinkflation is basically a form of hidden inflation. Companies are aware that customers will likely spot product price increases and so opt to reduce the size of them instead, mindful that minimal shrinkage will probably go unnoticed. More money is squeezed out not by lifting prices but by charging the same amount for a package containing a little bit less.
Academic research has shown that consumers are more sensitive to explicit price increases than to package downsizing, but that this practice can result in negative consumer brand perceptions and intentions to repurchase the product, and to static or declining unit sales volume over time.
The effectiveness of shrinkflation as a pricing strategy appears to vary across different types of goods and markets.
Most consumers do not generally check the size of a product. Someone who loves potato chips, for instance, may not realize if their favorite brand reduces the size of the bag by 5%, yet will almost certainly be able to tell if the price goes up by the same amount.
Reasons for Shrinkflation
From a company perspective, shrinkflation is a useful way to boost or maintain profit margins without drawing too much attention. This tactic is most commonly executed in the situations below.
Retailers often engage in shrinkflation to combat higher production costs. When key inputs, such as raw materials or labor, shoot up in valuation, the cost to manufacture final goods rises. This subsequently weighs on profit margins; the percentage of revenue remaining after all costs.
Management can either sit back and hope investors do not become too despondent, or seek to find other ways to recoup some of these losses. For companies lacking strong pricing power, reducing the weight, volume, or quantity of products sometimes represents the best option to maintain a healthy profit without jeopardizing sales volumes.
Companies might also resort to shrinkflation to maintain market share. In a competitive industry, lifting prices could lead customers to jump ship to another brand. Introducing small reductions in the size of their goods, on the other hand, should enable them to boost profitability while keeping their prices competitive.
Drawbacks of Shrinkflation
Of course, shrinkflation tactics can also backfire badly. Most people won't notice small changes to the size of a product. If they do, it could have a detrimental effect on consumer sentiment toward the perpetrator, leading to a loss of trust and confidence.
That means companies can only make these types of changes so many times before consumers will cry foul. They also need to be subtle and careful not to reduce sizes too much.
Another downside of shrinkflation is that it makes it harder to accurately measure price changes or inflation. The price point becomes misleading since the product size cannot always be considered in terms of measuring the basket of goods.
How to Notice and Avoid Shrinkflation
One of the best ways to notice shrinkflation is by spotting a redesign on the packaging or a new slogan. This may signal the company has made a change and that change may be the size.
Shoppers can look at the price per unit to see if there has been a change; however, it may be difficult to remember the prior price per unit, but comparing price per unit to different products can help you get the best deal.
Companies often change the design of the product container so that shrinkflation is not visibly noticeable. The only way to be completely sure is by checking the numbers on the packaging.
One way to avoid shrinkflation is by buying competing brands. Competing brands may not have downsized as yet and so you may get more value for the price you pay. Another method is opting for the store brand rather than a name brand. Store brands in general are cheaper than name brands.
Lastly, learning the net weights of products and what you're paying for them can help you notice any changes and which products are going to be the better value.
The U.K. government regularly keeps tabs on shrinkflation. According to its Office for National Statistics (ONS), between the beginning of 2012 and June 2017 (latest information), 2,529 products decreased in size, while only 614 became bigger.
Interestingly, shrinkflation's effects on price changes were not visible, even within the food and nonalcoholic beverages category, though the ONS did calculate that the phenomenon boosted inflation in the sugar, jam, syrups, chocolate, and confectionery category by 1.2 percentage points from the beginning of 2012 to June 2017, as per the chart below.
An increase in the cost of cocoa will have a direct impact on companies that produce candy bars. Rather than increase the price of chocolate (and potentially lose customers), the company may choose to reduce the size of its product (and therefore, the amount of cocoa per bar) and keep the price point at the same level. Mars Inc. took this path in 2017, shrinking Maltesers, M&Ms, and Minstrels in the United Kingdom by 15%.
In 2021, in the U.K., Walkers removed two bags of crisps from its 24-pack but kept the price the same at GBP 3.50.
What Are the Reasons for Shrinkflation?
The primary reason for shrinkflation is the increase in production costs. If the cost of the raw materials needed to create a product increases, the company can pass those increased costs onto the customer by either increasing the price or keeping the price the same but reducing the size of the product; the latter being shrinkflation. Production costs would include the commodity needed to make the product, fuel to run machinery, electricity to run the plant, and labor costs.
What Is the Consumer Price Index?
According to the Bureau of Labor Statistics, the consumer price index (CPI), is "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."The CPI is used to measure the change in the cost of living for a nation, identifying periods of inflation and deflation.
Did Tuna Cans Get Smaller?
Yes, over time, tuna cans have been getting smaller but their price has remained the same—a common example of shrinkflation.
What Is Disinflation?
Disinflation is when prince inflation slows down for a temporary period. Prices are still increasing; however, it is a period of slowing inflation. In a period of disinflation, prices are not dropping and it is not a signal of an economic slowdown.