What is Shrinkflation?
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 price of the product is inflated.
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 direct 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. due to no change in price. However, in actual sense, prices indeed get inflated due to a reduction in the size of the product. Thus, it is a kind of hidden inflation.
Examples of Shrinkflation
Shrinkflation is done most commonly in the food and beverage sector, though it may take place 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 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 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.
Causes of Shrinkflation
Some of the main reasons are jotted down below.
#1 – Increased Manufacturing Cost
Due to the increase in the various elements of production costs such as the cost of raw materials, labor, power cost, and so on, the manufacturers are compelled to follow shrinkflation as the increasing costs eat up their profit 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. . As a countermeasure, they reduce the quantity of the product offered, while maintaining the retail price. This is done as against direct price increase as customers, in general, do not pay attention to minor quantity reductions.
#2 – Strong Level of Competition
Another main reason that leads to shrinkflation is a high level of competition in the industry. In order to attract customers by maintaining the prices, the producers are able to maintain their profit margins by adopting this strategy. An example of the same 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 that is available to the small producers is to follow this strategy and retain customers by maintaining retail prices.
- It gives rise to hidden inflation. This is because inflation indexes take into account 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, at some later point of time they may come across the truth and feel cheated. This maligns customer trust.
- It helps the producers to cope up with intense competition and thereby retain customers.
- It also helps the manufacturers to maintain their profit levels even after the increase in input costs.
- 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 by way of shrinkflation.
Thus, although shrinkflation is a powerful strategy used by the producers in order to maintain their customer base as well as profitability, its usage shall be limited, otherwise, it may lead to adverse effects.
This has been a guide to What is Shrinkflation?. Here we discuss examples, causes of shrinkflation along with its implications, advantages, and disadvantages. You may learn more about financing from the following articles –