Shrinkflation

What Is Shrinkflation?

Shrinkflation is the practice of reducing the size of a product while maintaining its sticker price. Raising the price per given amount is a strategy employed by companies, mainly in the food and beverage industries, to stealthily boost profit margins or maintain them in the face of rising input costs.

Shrinkflation is also referred to as package downsizing in business and academic research. A less common usage of this term may refer to a macroeconomic situation where the economy is contracting while also experiencing a rising price level.

Understanding Shrinkflation

Shrinkflation is a term made up of two separate words: shrink and inflation. The "shrink" in shrinkflation relates to the change in product size, while the "-flation" part refers to inflation — the rise in the price level.

British economist Pippa Malmgren has been credited for coining the term shrinkflation in its most common usage.

Shrinkflation is basically a form of hidden inflation. Companies are aware that customers will likely spot product price increases and so opt to reduce the size of them instead, mindful that minimal shrinkage will probably go unnoticed. More money is squeezed out not by lifting prices but by charging the same amount for a package containing a little bit less. 

Academic research has shown that consumers are more sensitive to explicit price increases than to package downsizing, but that this practice can result in negative consumer's brand perceptions and intentions to repurchase the product and to static or declining unit sales volume over time. The effectiveness of shrinkflation as a pricing strategy appears to vary across different types of goods and markets.

Most consumers do not generally check the size of a product. Someone who loves potato chips, for instance, may not realize if his or her favorite brand reduces the size of the bag by 5%, yet will almost certainly be able to tell if the price goes up by the same amount.

Advantages of Shrinkflation

From a company perspective, shrinkflation is a useful way to boost or maintain profit margins without drawing too much attention. This tactic is most commonly executed in the following situations: 

Production Costs

Retailers often engage in shrinkflation to combat higher production costs. When key inputs, such as raw materials or labor, shoot up in valuation, the cost to manufacture final goods rises. This subsequently weighs on profit margins — the percentage of revenue remaining after all costs.

Management can either sit back and hope investors do not become too despondent, or seek to find other ways to recoup some of these losses. For companies lacking strong pricing power, reducing the weight, volume, or quantity of products sometimes represents the best option to maintain a healthy profit without jeopardizing sales volumes.

Market Competition

Companies might also resort to shrinkflation to maintain market share. In a competitive industry, lifting prices could lead customers to jump ship to another brand. Introducing small reductions in the size of their goods, on the other hand, should enable them to boost profitability while keeping their prices competitive.

Downsides of Shrinkflation

Of course, shrinkflation tactics can also backfire badly. Most people won't notice small changes to the size of a product. If they do, it could have a detrimental effect on consumer sentiment toward the perpetrator, leading to a loss of trust and confidence. 

That means companies can only make these types of changes so many times before consumers will cry foul. They also need to be subtle and careful not to reduce sizes too much.

Another downside of shrinkflation is that it makes it harder to accurately measure price changes or inflation. The price point becomes misleading, since the product size cannot always be considered in terms of measuring the basket of goods. 

Examples of Shrinkflation

An increase in the cost of cocoa will have a direct impact on companies that produce candy bars. Rather than increase the price of chocolate (and potentially lose customers), the company may choose to reduce the size of its product (and therefore, the amount of cocoa per bar) and keep the price point at the same level. Mars Inc. took this path in 2017, shrinking Maltesers, M&Ms, and Minstrels in the United Kingdom by 15%.

Other big-name brands that have engaged in shrinkflation include Coca-Cola Co., which in 2014 reduced the size of its bottle from two liters to 1.75 liters in the United Kingdom in order to pass on the cost of a new tax on their product.

Special Considerations

The U.K. government regularly keeps tabs on shrinkflation. According to its Office for National Statistics (ONS), between the beginning of 2012 and June 2017, 2,529 products decreased in size, while only 614 became bigger.

Interestingly, shrinkflation's effects on price changes were not visible, even within the food and nonalcoholic beverages category, though the ONS did calculate that the phenomenon boosted inflation in the sugar, jam, syrups, chocolate, and confectionery category by 1.2 percentage points from the beginning of 2012 to June 2017, as per the chart below.

Source: ONS.

Recently, British retailers have attributed shrinkflation tactics to rising costs, increased competition, and Brexit — the depreciation of the pound sterling (GBP) caused by the decision to leave the European Union (EU) has made it more expensive for them to import goods from overseas.