What is ‘shrinkflation’?
Shrinkflation is a term coined by British economist Pippa Malmgren in 2009 to describe the act of implementing a concealed price increase by shrinking the product on offer. This method has long been used in the food and beverage business, as well as the fast-moving consumer goods industry. This is because more and more producers are attempting to pass on their inflation difficulties from suppliers to their customers.
What effect does shrinkflation have on consumption?
Consider buying a bottle of Coca-Cola or a bag of potatoes: you’d notice a difference in price, especially if you make these purchases frequently. Would you notice if the manufacturer reduced the price of your bottle of cola by 10%? Or took away a couple of potatoes while keeping the price the same?
Most likely not.
The majority of people are cost-conscious but not net-weight-conscious; this is shrinkflation in action. The Consumer Price Index (CPI), which measures the average price of a basket of commodities relative to a base year, is unaffected by shrinkflation. However, prices do soar in response to a diminishing product in reality.
Shrinkflation is thus a form of concealed inflation. As a result, customers are paying more, receiving less value for their money, and having less purchasing power.
The differences between inflation and shrinkflation
Consider a product that comes with a price tag. Inflation causes the price tag number to slowly increase, whereas shrinkflation maintains the price tag number constant while the product shrinks.
“Inflation is the loss in the purchasing power of a specific currency over time,” according to Investopedia. As prices grow, each unit of cash can buy fewer products and services than in previous periods.
Shrinkflation, on the other hand, shrinks a product while keeping its price the same. This improves the price per unit while also assisting brands and businesses in increasing or maintaining profit margins in the face of growing production costs.
What causes shrinkflation?
Rising production costs
Prices have risen tremendously due to supply chain volatility, but so have weather, disease, war, and climate change. Ingredients, raw materials, energy, and labour expenses, to name a few, have all increased as a result of this. Consumers have suffered as a result of this. Shrinkflation is mostly caused by growing manufacturing costs, as businesses seek to pass inflation on to their customers while retaining sales volume.
Competition
Customers’ demands for choice, choice, and more choice have formed battle lines across every business, particularly in the Consumer Packaged Goods (CPG) market in relation to food and beverages. Consumers looking for alternatives that better meet their demands in terms of quality or price, for example, can now choose from a wide choice of options.
With the rise of ‘clean’ and economical skincare, the beauty sector is another fantastic illustration of this. Producers have been obliged to look for ways to keep their profit margins while also inspiring client loyalty.
What does shrinkflation mean for businesses?
It depends on whether you’re employing Shrinkflation as a business or if you have a large inventory of stored items. Buyers who are compelled to pay more money will be increasingly hesitant to do so as their purchasing power declines over time.
Where is shrinkflation most common?
In recent years, shrinkflation has wreaked havoc on the United Kingdom and the United States. “A rapid jump in the price of berries and other components left it no choice,” according to CBS News, “so it would “lower the carton size from 56oz to 48oz and keep the price the same” rather than shock buyers with a big price hike.”
Meanwhile, the Office for National Statistics (ONS) in the United Kingdom reported that 206 goods fell in size between September 2015 and June 2017. According to analysts, shrinkflation is linked to the huge drop in the value of the Pound Sterling. Which has lost 20% of its value against major currencies since the Brexit referendum.
Is shrinkflation illegal?
Unfortunately for customers, shrinkflation is not prohibited. For a long time, businesses have passed on production expenses to their customers. However, most businesses are aware that intelligent customers will flatly refuse price hikes, especially in the age of e-commerce, when price matching, sales, discounts, and promotions are used to maintain a competitive brand.
Wrapping up
While reducing product size, quantity, or quality may not seem like a good idea. There are methods to avoid a trend that appears to be here to stay. While passing on your costs to your customers may appear to be a good idea from a business standpoint. This practise is frowned upon by regulatory organisations and consumer forums alike. This is before you consider the effect the strategy has on your brand’s perception, customer loyalty, and the faith people have in your brand to deliver ethical service or a high-quality product at a reasonable price.
