What is Shrinkflation?
Shrinkflation is the reduction in size, weight or volume of a product, with the aim of reducing its production costs, instead of raising its prices.
The term has been coined by economist Pippa Malmgren, who is credited with using it for the same time.
While the term shrinkflation is usually used for consumer packaged goods, the practice itself of saving on cost, while keeping price the same, by skipping on many product features, has been found in other areas of business. In 2021, another term called “skimpflation” was coined by NPR, after different hospitality and entertainment businesses started degrading their services to save on costs.
Example of Shrinkflation
One of the most popular examples of shrinkflation is when Mondelez changed the design of the Toblerone bar in 2016, by spacing the gaps between the chocolate chunks, and thereby reducing the weight of the bars from 170 gm and 400 gm to 150 gm and 360 gm respectively, without changing the size of the package.
In this example, the size of the package was maintained, but the weight has been reduced.
Other examples of shrinkflation include:
- Reducing the quantity inside the package
- Reducing the volume of the product
- Reducing the weight of the product
Some of the most recent shrinkage examples in 2022 include Cadbury’s reduction of the dairy milk bar from 200 gm to 180 gm.
Due to the rise of such instances, consumers have started taking note of the different examples of product size shrinkage, and started sharing them online on a Reddit board
The Business Rationale Behind Shrinkflation
When the costs of inputs, labor and raw materials increase, manufacturers of goods have two options:
- Pass the increase to the end consumer, in the form of higher prices
- Absorb the costs themselves, and reduce their own margins
The problem with increasing prices is that price always affects demand, especially in competitive, undifferentiated products, as is the case for most consumer packaged goods. There are always many alternatives for the same product, and consumers are quick to switch to those alternatives when prices get too high.
Manufacturers of such products usually have low, or no, pricing power; i.e. they can only increase price so much, before demand gets affected.
Furthermore; the price increases of labor and raw materials tend to happen during inflationary times, and so they affect the consumers budgets overall. With increases across the board in rents, gas, service fees, ..etc., consumers will have strained budgets, and they will start reducing their consumption or switching to cheaper alternatives.
In order to protect their market share and also reserve their profit margins (a lot of manufacturing businesses run on very thin margins), manufacturers found a way to keep prices the same ( or increase by a lower percentage), while reducing costs of the products, by reducing the amount of the product being sold to the customer.
And so shrinkflation was born.
It was found that consumers pay much more attention to the sticker price than to the weight of the product. And for many CPG, consumers are not sensitive to reductions in the amount of the product, compared to increases in retail price.
Does it Work?
Consumers are very smart. And such changes, especially when they start happening on a large scale, get noticed.
In fact, in the Toblerone example we mentioned above, the company decided to bring back the old design, after facing a backlash from customers.
On the other hand, the tactic of shrinkflation itself does work in preventing sticker price shocks, and thereby preventing big slumps in demand. This is because, during inflationary times, consumers would rather get less for the same price, than pay extra with an already strained budget.