What is Value Deflation

Value deflation, or shrinkflation, occurs when retailers and service providers cut their costs and sell smaller packages, give out smaller portions and generally provide less for the same price, so as to maintain the same sticker price.

BREAKING DOWN Value Deflation

Value deflation is a way of raising prices, so the consumer is less likely to notice, and it can take the form of reductions in the amount of food in a typical package, reduced portion sizes at restaurants or fewer cleaning services at hotels.

It can be a successful tactic because a lot of shoppers are more sensitive to a price change than to a weight change — and shrinking packages is better than raising prices from a marketing standpoint. But value deflation can backfire, as Kraft discovered in 2010 when it shrunk its Toblerone bar in 2010 and made headlines in the United Kingdom. British food retailers have made such extensive use of value deflation to compensate for the weak pound and the increased cost of imported ingredients, that shrinkflation has become a phenomenon. Over 2,500 products were subject to value deflation from 2012 to 2017, according to the Office for National Statistics.

Value deflation may not show up in inflation measures such as the consumer price index or the retail price index. Many economic statistics agencies use quality adjustment processes to isolate price movements from the changes in product’s weight or quality, so shrinkflation still shows up in official inflation statistics.

Whether value deflation amounts to the "perfect business crime," or not, consumers around the world should be on the lookout for these packaging tricks. The question is, how far can big fast-moving consumer goods companies take value deflation — and risk damaging their brands — before they are forced to raise sticker prices, or face squeezed operating margins.