Shrinkflation is a process of items shrinking in size or quantity, or even sometimes reformulating, while their prices of the product remain the same or slightly increase. It is a tactic used as an alternative to raising prices in line with market inflation.
Shrinkflation is also known as package downsizing. This means your everyday products shrink in size and quantity with the same price tag.
The term “shrinkflation” is derived from two separate words: shrink and inflation. Pippa Malmgren, a British economist, is often credited with coining shrinkflation. It is a practice generally followed in the fast moving consumer goods (FMCG) industry.
What causes shrinkflation?
Shrinkflation helps FMCG companies to increase their operating margin and profitability by reducing costs whilst maintaining sales volume, and is often used as an alternative to raising prices in line with inflation.
If a fast moving consumer goods company (FMCG) thinks that the product at a price will not be acceptable by many customers due to inflation or rise in cost, then instead of increasing the price of a product, then they prefer to reduce the size of the product while maintaining the same price. In this way, the actual price of the product does not increase but the price per unit of weight has increased to maintain the profit margin.
FMCG companies follow this practice during high inflation or when they think that the cost of raw material will be higher for a longer duration. If they don’t follow this practice, then customers might look for a substitute product at the same or lower price offering similar features. In this case, getting back customers will be very difficult.
Increase in production costs is the main reason for shrinkflation.
Rise in raw material costs, energy, salaries and wages, and other production costs due to high inflation is the main reason for following the practice of shrinkflation. To maintain profitability, they reduce the size to lower the cost per unit and sell it at the same price. Please note, it’s not illegal as these FMCG companies clearly show the weight and other details in the product that they sold. However, the customer does not pay much attention to it as he is paying the same price for the product.
Market competitors can be another factor why companies use these tactics to maintain market share at a price that is affordable to the customers.
Shrinkflation is a very common practice followed by companies.
Example of shrinkflation
A beverage company which is selling 2 liters of cold drinks at Rs 100, may charge you the same price by offering 1.75 liters at the same price of Rs 100 instead of offering 2 Liters.
A company selling 100 items in a pack at Rs 500, may charge you the same price by offering 90 items in that packet.
Price of a notebook has not changed but pages of the notebook have been reduced from 100 pages to 80 pages.
Fewer potato chips in the bag at the same price of Rs 10.
If not managed properly, then shrinkflation tactics might backfire badly.
Also Read: Inflation: How It’s Measured and Managed
