Inflation is everywhere. Supply chain bottlenecks, labor shortages, and increasing post-pandemic demand were already escalating the costs. Now the invasion of Russia in Ukraine is narrowing the supply of energy and food. Amidst all this, a new term popped up in the world economy and that is shrinkflation.
You all have heard of inflation, deflation. But what is this economic strategy? Some big entities seemed jolly to push the pain via their users. Unilever and Procter & Gamble bragged that value increases had boosted revenue the previous year as they declared plans for more. But at times, the manufacturers prefer to be sneaky or fear that the users will go away. So how does this new concept in world economics work?
What Is Shrinkflation?
Shrinkflation is when quantities decrease the number of their products but keep the price the same. This is linked to hidden inflation. Behaviourally, users are more sensitive to price changes in comparison to quantity alterations, and entities are exploiting this to dodge their increased costs of production onto the customers. The prevailing pandemic fueled a mixture of supply chain crises related to raw materials, fuel, packaging, labor, and tracking. Moreover, the prevailing crisis in Ukraine has resulted in the skyrocketing cost of fuel and the increasing cost of many other primary commodities.
Does It Apply To All Commodities?
A number of surveys that have been conducted this year portray how you are most likely to witness shrinkflation in packaged consumer commodities like snacks and drinks. You might also encounter this in things like paper and cleaning products like paper towels and napkins.
Experts add that the common practice or retail strategy for several industry giants across the globe is just to alter little portions at a time so that the people do not notice. There is no obligation for most entities to keep their items the same quantity or size just as there is no forcefulness for the shoppers to purchase the products.
How Does This Work?
If a company decreases the size of a product by a small quantity, for instance, a 5 percent reduction, most users probably will not notice. However, if the same company decreases the size of their products by 50 percent, users would notice right away. So the alteration would be small but would be spread out across a vast range of products and the company could save a good amount of money.
This is the reason retail consultants advise users who are price sensitive to read the price of each unit and not look at the retail price only.
How Does Shrinkflation Occur?
The main reason why this occurs is that companies encounter higher prices for their supplies and may aim to pass that onto the users. Decreasing the products reduces costs for the manufacturers. Even though shoppers tend to be price-sensitive, they may not fully notice subtle alterations in packaging, or read the complete print on the size or weight of a commodity.
The outcome is that users are less likely to notice getting less if the value is the same. Historical patterns portray how downsizing comes in waves, and it tends to occur during times of increased inflation. When the bottom lines of a manufacturing company are being pinched, they fundamentally have three basic choices: raise the price directly, reformulate the product with cheaper ingredients, or take a little bit out of the product.
However, entities most often want to keep their users happy without direct raise in the price of a product. They also wish to keep their values competitive with entities selling similar products. So not all product size alters stem from profit seeking. New regulations that limit calories or the portion of sugar in an item can cause the size of the product to change. Businesses use a PPP model, or Price Pack Purchase model, to evaluate how to target products in specific channels for the right values.
Shrinkflation: Now Rampant With Cost Increases Across The Board
This is broadly used by producers in the beverage and food industry. It has become a common strategy to help producers deal with their own inflation issues from suppliers. Companies researching the mentality of the shopper determined that their users would perhaps start to look for substitute items if confronted with yet another price rise. Shrinkflation is the fix they evaluated.
Increasing costs of production are generally the basic cause for the implementation of this strategy. A rise in the cost of commodities or raw materials, energy items, and labor increase production costs and afterward diminish the profit margins of the producer.
Decreasing the weight of the products, volume, or even quantity while keeping the same retail price tag can enhance the profit margin of the producer. At the same time, the average user will not notice a small decrease in quantity. Thus, sales volume will not be impacted.
Fierce competition in the industry may also cause shrinkflation. The beverage and food sector is generally a highly competitive one, as users are able to access a variety of available substitutes. Hence, producers look for choices that will allow them to keep the favor of their users and maintain their profit margins at the same time.
Difference Between Shrinkflation And Downsizing
Until a decade ago, this term was referred to by its real name, downsizing. This term was rechristened to ‘shrinkflation’ by US technology entrepreneur and economist Pippa Malmgren, and the term stuck.
Shrinkflation 2022 and Downsizing both imply the same thing: companies decreasing the size or quantity of their items while charging the same value or even more. Retail experts often indicate downsizing as a “sneaky price increase”. Shoppers tend to be price conscious, but they are not net-weight conscious. With that let us have a look at a shrinkflation example 2022.
Studies portray how shoppers can tell instantly if they are used to paying Rs 2500 for a carton of orange juice and that increases to Rs 3200. But if the orange juice container goes from 64 milliliters to 59 milliliters, they are probably not going to notice. Shrinkflation in India and abroad has become very common now.
Conclusion: How To Factor This In Your Shopping Budget?
Shrinkflation is a type of hidden inflation. Instead of raising the price of a product, something that would be instantly evident to shoppers, producers decrease the size of the product while keeping the same price. The absolute value of the product does not increase, but the price of each unit of weight or volume has risen. The small decrease in quantity is usually unnoticed by the consumer.
However, keep in mind that this strategy cannot be viewed as a misrepresentation or fraud of products. Producers always highlight the weight, quantity, or volume of their products on packaging labels. It is not illegal – it is just a sneaky way to pass the cost of inflation to users or shoppers like us. Though many states that shrinkflation should be illegal, but it is not.
Even though the shopper finally pays more money for this, since they pay the same value for a lesser amount, the reality is they may not notice without reading the fine print on packaging.
Users can fight shrinkflation by looking at a ‘unit pricing’ of the product at the store, which shows the unit of measure or cost per ounce, allowing purchasers more easily to judge which brand provides the ideal relative value.
Financial and retail experts reiterate that ‘cost per unit is your best weapon against this. Consumers should also get more used to examining packaging for net weight, looking beyond the marketing of a brand.