SHRINKFLATION-PAY MORE FOR LESS?
Updated: Sep 19, 2021
“Lays used to be a full packet of chips, now it's just 70% air at the same price.”
“The size of the Dairy Milk bar has reduced so much!”
Every Lays and Dairy Milk consumer is bound to have made this statement at least once. Consumers would have noticed a similar occurrence with multiple other brands. Termed as Shrinkflation, this is a practice involving reduction in the size of the product while maintaining its price. It is also referred to as package downsizing in business. For instance, Coca-Cola Co., in 2014 reduced its quantity from 2 litres to 1.75 litres while keeping the price the same. It comprises two words ‘shrink’ and ‘inflation’ where shrink indicates a change in the size of the product while inflation refers to the rising price level.
Why opt for Shrinkflation?
Termed by the British economist Pippa Malmgren, Shrinkflation may often come across as a fraud or misconception of products. Producers adopt this practice due to an increase in production costs. When there is an increase in the costs of production, firms are presented with two options. One being to raise the price of the goods they produce and the other being to shrink the quantity per unit and thus maintain the existing price. An increase in the cost of cocoa would directly affect the companies that produce candy bars. Instead of increasing the price of the chocolate and potentially losing customers, the company will instead choose to reduce the size of its product which would decrease the quantity of cocoa per bar while keeping the price the same. Mars Inc. chose to do this in 2017 by shrinking Maltesers and M&Ms in the United Kingdom by 15%.
Companies opt for Shrinkflation simply because they fear losing their market share if they increase their prices. Market share is often directly correlated to performance of a company in the stock market. Companies are of the belief that if they lose their market share, it will negatively impact their share prices. There is a major concern about how financial markets will react to such changes and hence a change in quantity is a safer option for producers.
Shrinkflation in the real world
An example to best express this would be the entry of Jio in the telecom market. Jio entered the market offering low and attractive prices which made the prices of competitors like Airtel and Vodafone relatively higher. Jio gained a positive response and also saw market share gains while its competitors faced losses in the market. Airtel, Vodafone,etc. tried to retain their market share by reducing prices and also shrinking the bandwidth offered which went unnoticed. Another reason to resort to this practice is the intense market competition. Shrinkflation is noticed a lot in the extremely competitive food and beverage industry. There are multiple easily available substitutes and hence producers take to shrinkflation in order to retain consumers while maintaining their profit margins.
Shrinkflation is also referred to as hidden inflation. Instead of increasing the price of a product, producers reduce the size of the product while maintaining the same price. They do not change the price as price is the first thing a consumer looks at while making a purchase and hence a change in the same will be easily noticeable. The absolute price of the product doesn’t go up, but the price per unit increases. A small reduction in quantity is usually unnoticed by consumers and hence this undercover act came to light only in the 1970’s. Since a consumer is more likely to notice a flat increase in the price than the fact that there is more air inside a box of Pringles, manufacturers tend to adopt this technique.
Shrinkflation as a marketing tool
A prime example is when Toblerone halved the amount of chocolate “mountains” which made the bars 10% smaller. The change in Toblerone’s size was obviously noticeable to people who bought it. If Toblerone had reduced the size by 10% but kept the price the same – people probably wouldn’t have noticed the change. But, by increasing the price, it became of viral interest which gave Toblerone lots of publicity. This is simply because a consumer notices the price more than the quantity while making a purchase. This goes to show how shrinkflation can also aid in increasing a brand's reach and bringing it to the spotlight.
A double edged sword
Like every coin has two sides, shrinkflation has its own share of advantages and disadvantages. The two main advantages are that it allows a firm to retain its market share despite the competition and it helps the brand retain consumers and also maintain their profits despite the increase in input prices. However, it is accompanied by various implications. This is a form of hidden inflation which can prove to be dangerous to the economy. Since the price of the commodities remains the same, this process does not reflect in estimates such as the Consumer Price Index or the Wholesale Price Index. Hence, it doesn’t get included while calculating the rate of inflation, giving it its other name, hidden inflation. It is, in theory, an unfair practice towards the customers. It can prove to be detrimental to the brand if the consumers become aware of the injustice being meted towards them. Customer loyalty is of utmost importance to a brand and the practice of shrinkflation is a major threat to the same.
Economists suggest that shrinkflation can prove to be an effective economic indicator, specifically in the case of inflation. Analysts suggest that it can help make accurate predictions about the price level trends in an economy. However, a serious drawback on this front is the lack of research conducted primarily due to lack of reliable data availability and credibility of the phenomenon.
Shrinkflation is a form of financial manipulation that affects the working class adversely. Though not illegal, this process must be regulated. Firms do not necessarily have to employ this method. Increasing production costs can be managed by consolidating supply chains in order to reduce the overhead costs and also adopt alternative packaging solutions. Brands should focus on product innovation because consumers will be willing to pay more for less if they are assured about the improved quality or value. A strategy that comes with risks, its usage must be limited in order to prevent the adverse effects on brand image and the economy.