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Shrinkflation

Updated on April 23, 2024
Article byNiti Gupta
Reviewed byDheeraj Vaidya, CFA, FRM

Shrinkflation Meaning

 Shrinkflation refers to a situation wherein, although the price of a product remains the same, the size of the product “shrinks” or reduces. When the size of the product reduces and the price remains constant, it means that the price per unit of weight of the product has increased and that the product’s price is inflated.

Shrinkflation Meaning

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It is a very powerful method that producers use to retain and expand their customer base as well as increase profitability. But if it is used without proper control, it may produce negative effects because the company gives less product to customers at higher prices.

Key Takeaways

  • Shrinkflation refers to the practice of decreasing a product’s size or quantity while its price remains the same. As a result, the price per unit of weight or volume increases, effectively raising the product’s price for consumers.
  • Increased manufacturing costs and intense competition in the market often cause shrinkflation.
  • While Shrinkflation can be an effective strategy for businesses to maintain profitability, its excessive use can lead to negative consequences and may impact consumer trust and satisfaction.

Shrinkflation Explained

Shrinkflation is the process adopted by many manufacturers where they offer less quantity of the product or reduce the product size, but keep the price constant of increase it.

If the size or volume of the product shrinks while the price remains the same, it follows that the price has increased in general of the product as the customers have to now pay more for obtaining one unit of weight of the product. This technique is used by businesses as an alternative to an immediate increase in prices, as the same does not impact the consumer indexes such as consumer price indexConsumer Price IndexThe Consumer Price Index (CPI) is a measure of the average price of a basket of regularly used consumer commodities compared to a base year. The CPI for the base year is 100, and this is the benchmark  point.read more to no change in price. However, in the true sense, prices indeed get inflated due to a reduction in the size of the product. Thus, it is a kind of hidden inflation.

Companies usually go for such a strategy when the cost of production increases or they face any issue related to the supply chain. However, this does not go unnoticed by the consumers which is very frustrating since they get less of the same product at the same or higher price. Basically, now they are paying more.

Products typically face this strategy are edible items like snacks, frozen food, bready or other bakery products, etc. Thus, food shrinkflation is a common phenomenon and consumers usually switch to other brands or purchase in bulk quantity instead of a single package to get it at a lower price.

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Shrinkflation: Explanation in Video

 

Examples

Example #1

Let us look at an example related to food shrinkflation.

Shrinkflation

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Shrinkflation is done most commonly in the food and beverage sector, though it may occur in any industry.

  • The size of a chocolate bar is reduced from 60 grams to 55 grams with no resultant decrease in price.
  • The pages of a notebook are changed from 1000 to 800 and price remains unaltered.
  • The size of the cold drink bottle is dropped to 750ml from 800ml and no change in price is done.
  • A 2 kg sugar-packed package is reduced to the package weighing 1.8 kg, and the price remains as it is

In all the above examples, we have seen that the size of the shrinkflation products has been reduced and the price of the product continues to be the same. The effect is that the price per unit of weight has increased due to the reduction in the quantity.

Example #2

According to a study made on the US market, many companies are trying to desperately cope with the problems related to rising cost and difficulties in supply chain. These entities are adopting shrinkflation as a measure to handle the situation by reducing the size, and quantity at same or higher price.

At per the data, 49% of the consumers are switching brands, and 33% are going for bulk purchase to get some discounts. Only 19% chose to accept with the change. One solution is to voice out consumer’s concern directly to the manufacturers so as to get some extra benefit in the next purchase.

Causes

Some of the main reasons of rise in shrinkflation statistics are jotted down below.

Causes of Shrinkflation

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#1 – Increased Manufacturing Cost

Due to the increase in the various elements of production costs such as raw materials, labor, power cost, and so on, the manufacturers are compelled to follow this strategy because shrinkflation products lead to increasing costs and eat up theirprofit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more. As a countermeasure, they reduce the quantity of the product offered while maintaining the retail price. It is done against immediate price increases, as customers need to pay attention to minor quantity reductions.

#2 – Strong Level Of Competition

Another main reason that leads to shrinkflation is high competition in the industry. To attract customers by maintaining the prices, the producers can maintain their profit margins by adopting this strategy. An example is that the supermarkets have a competitive edge due to their large-scale operations and do not pass on the burden of increased cost to the customers. The only option available to the small producers is to follow this strategy and retain customers by maintaining retail prices.

#3 –  Supply Chain Issues

Sometimes producers may face some issues or problems related to the supply chain, where  there are not able manage the picking, packing and transportation of the goods in an efficient way, leading to wastage. This is more eminent in the case of perishable goods. At that time it is necessary to adjust the product quantity. However, slashing prices along with it would lead to loss in revenue which will impact the company negatively. Thus they keep the prices constant.  

Implications

  • It gives rise to hidden inflation. It is because inflation indexes consider the changes in the average price levels but ignore minor changes in the sizes of the products. The indexes work on the assumption that the basket of products remains unchanged.
  • Although most of the customers might not notice minor changes in the quantity or size of the product, they may come across the truth and feel cheated at some later point in time. The rise in shrinkflation statistics maligns customer trust.

Advantages

The below mentioned advantages help us to understand how to deal with shrinkflation.

  • It helps the producers to cope with intense competition and thereby retain customers.
  • It also helps the manufacturers to maintain their profit levels even after the increase in input costs.

Disadvantages

The disadvantages help us to identify the problems regarding how to deal with shrinkflation.

  • It is against the general interest of the customers and is a kind of unfair practice against them.
  • It gives rise to hidden inflation and is thus dangerous.
  • The strategy may become a reason for the decline of a famous brand if customers recognize the injustice delivered to them through shrinkflation.

Frequently Asked Questions (FAQs)

1. Is Shrinkflation legal?

Shrinkflation, the practice of reducing the size or quantity of a product while maintaining its price, is generally legal as long as it is transparently communicated to consumers. As long as companies accurately label the product’s reduced size or quantity, it is not considered deceptive.

2. Is shrinkflation a type of inflation?

Shrinkflation is not a type of inflation. Inflation refers to the general increase in prices of goods and services in an economy over time. Shrinkflation, on the other hand, involves reducing the size or quantity of a product without changing its price.

3. What are the risks of shrinkflation?

The risks of shrinkflation include consumer dissatisfaction, as customers may feel they are paying the same price for less product. It can also impact purchasing power, as consumers may need to spend more to maintain the same level of consumption. If not properly disclosed, shrinkflation can erode trust between businesses and consumers.

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