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At the time of writing, we're currently in the midst of earnings season. These are the months of the year during which most quarterly corporate earnings are released to the public, which has led analysts to look closer at the effects of inflation. And what they've found is astonishing.
What is 'shrinkflation'?
Coined by British economist Pippa Malmgren in 2009, 'shrinkflation' is the act of applying a hidden price increase by downsizing the product on offer. The food and drinks industry and fast-moving consumer goods sector have been using this technique for a while. This is because producers are increasingly looking at passing their experience of inflation problems from suppliers on to their customers.
What effect does shrinkflation have on consumption?
Imagine buying a bottle of Coca-Cola or a bag of potatoes: you'd notice a price change, especially if you count these as a regular purchase. But would you notice if the manufacturer shaved 10% off your bottle of cola or docked a couple of potatoes while charging you the same price?
Probably not.
Most people are price-conscious but not net weight-conscious; this is shrinkflation in practice. Applying shrinkflation does not impact the Consumer Price Index (CPI), which measures the average price of a basket of commodities relative to a base year. But in reality, prices do indeed get inflated relative to a shrinking product.
In this way, shrinkflation is a kind of hidden inflation. Ultimately, this means consumers are spending more, getting less for their money, and having less purchasing power as a result.
The differences between inflation and shrinkflation
Picture a product with a price tag attached. Inflation would cause the number on the price tag to go up slowly, while shrinkflation keeps the numbers on the price tag still while the product itself gets smaller.
In the words of Investopedia, "Inflation is the decline of purchasing power of a given currency over time." This means as prices rise, each unit of currency buys fewer goods and services than it did in prior periods.
Shrinkflation, on the other hand, reduces the size of a product while retaining its price. This raises the price per given amount while helping brands and companies boost profit margins or maintain them in the face of rising production costs.
What causes shrinkflation?
- Rising production costs
Volatility in the supply chain has made prices rise exponentially, but so has weather, disease, war, and climate change. This has had a knock-on effect on the cost of ingredients, raw materials, energy, and labor costs, to name but a few. This has resulted in bad news for consumers. These rising production costs are the primary cause of shrinkflation, as companies look to pass inflation on to their customers while maintaining sales volume.
- Competition
Choice, choice, and more choice for customers mean that battle lines have been drawn across every industry, particularly the Consumer Packaged Goods (CPG) industry in relation to food and beverages. Consumers looking for substitutes that better suit their needs when it comes to quality or price, for example, are now able to access a broad range.
The beauty industry is another great example of this with the emergence of 'clean' and affordable skincare. Producers have been forced to seek out options that inspire customer loyalty while allowing them to maintain their profit margins.
What does shrinkflation mean for businesses?
It depends on whether or not you're using shrinkflation yourself, as a business, or whether you have a lot of stocked commodities. But because of reduced purchasing power over time, buyers required to shell out more money will be more reluctant to do so.
It's worth noting that while inflation is widely recognized as something that eats into a company's margins or dents volume as rising prices erode consumer purchasing power, the effect of shrinkflation is much more difficult to assess.
Where is shrinkflation most common?
Shrinkflation has hit the UK and the US hard in recent times. As CBS News comments, "Ice cream maker Tillamook said in a recent blog post that a sharp rise in the price of berries and other ingredients left it no choice: It would "reduce the carton size from 56oz to 48oz and keep the price the same" rather than shock shoppers with a sharp price hike".
Meanwhile, Britain's Office for National Statistics (ONS) has observed that between September 2015 and June 2017, 206 products shrank in size. Analysts correlate the shrinkflation with the dramatic decrease in the value of the Pound Sterling, which lost 20% of its value against major currencies following the Brexit referendum.
Is shrinkflation illegal?
Sadly for consumers, shrinkflation is not illegal. Companies have passed production costs on to their customers for a while. However, most companies know that savvy consumers reject price increases outright, especially in an age of e-commerce, where price matching, sales, discounts, and promotions are a way of ensuring an attractive and competitive brand.How do you stop shrinkflation?
Companies often change the aesthetics of a product, which includes its packaging, to disguise the reduced weight. Redesigned packaging or a new slogan could be a sign that a company has changed its product in some way, and that could be its size. Although it can be difficult to remember how much the product cost (and certainly how much it weighed) before you arrive at the supermarket, pay close attention to the price per unit to see if there has been a change.
Shop competing brands to avoid shrinkflation. Shops and stores often group similar products, so the best way to ensure you're getting value for money is to compare and contrast the cost per unit across every product you want to buy. Check online channels for discounts and promotions on the same product and try opting for store brands rather than a brand name.
