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Shrinkflation

The process of reducing the size or quantity of product while the price of product remains the same or slightly increases

What is Shrinkflation?

In economics, shrinkflation is the process of reducing the size or quantity of a product while the price of the product remains the same or slightly increases. In some cases, the term also indicates the lower quality of a product or its ingredients while the price remains the same.

The word “shrinkflation” is a combination of the words shrink and inflation. British economist Pippa Malmgren is generally credited for inventing the term in 2009. The phenomenon is quite common in the food and beverage industry.

 

Shrinkflation

 

Breaking Down Shrinkflation

Essentially, shrinkflation is a form of hidden inflation. Instead of increasing the price of a product that would be evident to consumers, producers reduce the size of products, and thus raises the price per unit of weight or volume. The small reductions are usually unnoticed by consumers. Shrinkflation is mostly used by the producers in the food and beverage industry whose consumers are concerned only with the price of goods and less concerned with their quantity.

Note that the shrinkflation cannot be viewed as a fraud or misrepresentation of products. Conversely, producers always indicate the weight, volume, or quantity of their products on packaging labels.

 

What Causes Shrinkflation?

 

1. Higher production costs

Rising production costs are generally the primary cause of shrinkflation. Increases in the costs of ingredients or raw materials, energy commodities, and labor raise production costs and subsequently diminish the profit margins of producers.

Higher products prices may negatively affect consumers as they may turn to cheaper products. However, reducing the weight, volume, or quantity of the products while keeping the same price may improve the producer’s profit margins (by lowering the production costs). At the same time, the average consumer will not notice the small reduction; thus, the sales volumes will not be affected.

 

2. Intense market competition

Fierce competition in the market also causes shrinkflation. The food and beverage industry is generally an extremely competitive one, as consumers are able to access a variety of available substitutes. Due to this reason, producers look for options that will allow them to keep the favor of their customers and maintain their profit margins at the same time.

 

Examples of Shrinkflation

Even some of the most famous companies and brands undertook shrinkflation with their products, including:

  • Coca-Cola: in 2014, Coca-Cola reduced the size of its bottle from 2 liters to 1.75 liters.
  • Toblerone: in 2010, Kraft slashed the weight of Toblerone bars from 200 grams to 170 grams.
  • Tetley: in 2010, Tetley reduced the number of teabags sold in one box from 100 to 88.

 

Final Word

Nowadays, shrinkflation is a common practice among producers. The number of products that undergo downsizing increases every year. Large producers in the European and North American markets rely on the strategy to maintain the competitive prices of their products without significantly reducing their profits. At the same time, shrinkflation can frequently lead to customer frustration and deteriorating consumer sentiment regarding the producer’s brand.

 

Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Deflation
  • Fast Moving Consumer Goods (FMCG)
  • Law of One Price (LOOP)
  • Supply and Demand

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