Shrinkflation

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Context

• As input prices transition from being stable to inflationary, the FMCG sector faces the looming possibility of downsizing product packaging to mitigate costs.

Shrinkflation

• Shrinkflation refers to a rise in the price level of goods per unit of weight or volume, resulting from a reduction in the size or weight of the product sold.

Impact on Inflation Measures:

• Shrinkflation may not directly impact measures like the Consumer Price Index (CPI) or Retail Price Index (RPI), but it affects indicators of price levels linked to product volume or weight.

Origin of Term:

• The term "shrinkflation" was first used by economist Pippa Malmgren, although historian Brian Domitrovic had previously used it to describe an economy experiencing both shrinking and high inflation.

Causes of Shrinkflation

Competitive Market Dynamics:

• Shrinkflation often occurs in competitive markets, where businesses face pressure to maintain profitability amidst rising production costs.
• Businesses opt for downsizing products rather than direct price increases to mitigate risks in competitive environments.

Consumer Behavior and Brand Loyalty:

• Firms selling branded products may choose to maintain prices to retain customer loyalty, resorting to shrinking product sizes as a response to inflation.

Impact on Consumers

Consumer Awareness and Unit Pricing:

• Consumer advocates criticize shrinkflation for reducing product value without clear disclosure to customers.
• The subtle reduction in pack size may go unnoticed by consumers, affecting their ability to make informed purchasing decisions.
• Calls for transparency urge suppliers and retailers to notify customers of any reductions in pack sizes.

Corporate Response:

• Companies often employ messaging like "less is more" to justify product shrinkage, citing health or environmental benefits.
• Some customers prefer smaller package sizes, particularly in junk food categories.

Case Examples:

• Yogurt manufacturers, like Dannon, reduced package sizes in response to consumer perceptions of overall product cost, maintaining prices for the smaller packages despite the reduction in volume.

Conclusion

• Shrinkflation serves as a strategy for businesses to navigate cost pressures while maintaining competitiveness. However, consumer advocates emphasize the importance of transparency and disclosure to ensure fair practices in the marketplace.

Trivia

Skimpflation

• Skimpflation involves a decrease in product quality or reformulation, complementing shrinkflation's focus on size or quantity reduction.

PRACTICE QUESTION Q. Which of the following best defines the concept of "skimpflation"? A) Skimpflation refers to a decrease in the size or quantity of a product without a corresponding decrease in its price. B) Skimpflation occurs when the quality of a product is reduced while its price remains unchanged. C) Skimpflation describes a situation where the price of a product increases due to inflationary pressures. D) Skimpflation refers to a scenario where the size or quantity of a product increases, but its price remains the same. Answer B)