What is Shrinkflation?
Shrinkflation is different from inflation in that producers don’t increase the price of an item. Instead, they reduce the size. Companies increase the price per given amount to achieve a clandestine boost of profit. This is typical of businesses in the food and beverage industries. This way, the term “shrinkflation” becomes a combination of two different words. Inflation denotes the price increase, while the “shrink” part indicates a change in product size.
Origins of the term
The term was coined by British economist Pippa Malmgren. In essence, it’s a form of hidden inflation. Producers understand buyers will notice a product price increase and might look elsewhere, so they decrease the amount of the product ever so slightly, hoping it goes unnoticed. It usually does because most buyers tend not to check the size of a product. A reduction of 5% of your favorite cheese or ham wouldn’t be a big deal to you even if you knew. Companies profit from the fact that this is the predominant buyer mentality. A 5% reduction of even just 1000 items is already major savings for a producer given that he’s still charging the same price.
What’s more, a price increase of 5% will definitely be noticed. This is a win-win situation for companies. What’s more, it seems to be perfectly legal.
Examples of Shrinkflation
In 2017, Mars shrunk M&Ms, Maltesers, and Minstrels by 15% in the UK. This came in the wake of an increase in the cost of cocoa. In 2014, Coca Cola reduced the size of its bottle in the UK – from two to 1.75 liters.
A notebook producer might start making notebooks with fewer pages, ex. 500 instead of 600, without changing the price. A sugar producer can reduce the size of a sugar package by 100 grams.
The following changes occurred after 2020:
- Powerade (Was: 32 oz.; Now: 28 oz.)
- Scott toilet paper (Was: 115.2 sq. ft.; Now: 104.8 sq. ft.)
- Lay’s Potato Chips, party bag (Was: 15.25 oz.; Now: 13 oz.)
- Nutella (Was: 14.1 oz.; Now: 12.3 oz.)
- Puffs tissue (Was: 56 count; Now: 48 count)
- Breyer’s ice cream (Was: 64 oz.; Then: 56 oz.; Now: 48 oz.)
- Canned vegetables (Was: 16 oz.; Now: 14.5 oz.)
- Mayonnaise (Was: 32 oz.; Now: 30 oz.)
- Yogurt (Was: 8 oz.; Now: 6 oz.)
Causes of Shrinkflation
The phenomenon has causes just like everything else in economics. What’s more, motivation related to higher profit is just one reason why shrinkflation exists. Two other major causes are increased production costs and greater market competition. Generally, the main cause of the phenomenon are rising production costs. Rising labor costs, rising energy costs, and increases in the cost of ingredients or raw materials result in a spike of production costs, leading to lower profit.
Producers’ profit margins improve when they cut the volume, weight, or quantity of the products without changing the retail price. Sales volume isn’t impacted because almost no one notices a small reduction in quantity.
Intense market competition is another factor behind shrinkflation. In general, the food and beverage industry is really competitive because buyers have access to many substitutes. As a result, producers look for options letting them keep their customers while sustaining their profit margins.
Benefits of Shrinkflation
From the perspective of producers, shrinkflation is a good way to keep making the same or even more profit without attracting too much attention. Managers, especially in production, are always looking for ways to recover losses from rising fuel or labor costs. It’s no good just sitting there hoping investors don’t become overly disappointed and leave. Companies without solid pricing power find that reducing the product size is often the best way to keep making a healthy profit without this threatening sales volume.
Pricing power explained
Companies with good pricing power are those who offer a unique or rare product with little competition, if any. Those without it find a price increase lowers demand for their products. If a company with solid pricing power raises its prices, this probably won’t have an impact on demand because consumers have no alternative products to choose from on the market. In the field of services, this exists as well. A private lesson that costs $10 or 10 euros an hour might be reduced to 45 minutes for the same price.
Limitations of shrinkflation tactics
Can these tactics ever backfire? Only if the changes to the size of a product are noticed. In that case, the consumer might lose trust and confidence in the brand. Companies have to be careful not to make any major changes. Another disadvantage of shrinkflation is that it makes it more challenging to measure inflation or price changes with accuracy. As you can’t consider size in terms of measuring the basket of goods, the price point becomes misleading.