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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 practice 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 may indicate lowering the quality of a product or its ingredients while the price remains the same.

British economist Pippa Malmgren is generally credited for inventing the term in 2009. The phenomenon has become 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, something that would be immediately evident to consumers, producers reduce the size of product while maintaining the same price. The absolute price of the product doesn’t go up, but the price per unit of weight or volume has increased. The small reduction in quantity is usually unnoticed by consumers (at least that’s what the manufacturer is hoping).

Shrinkflation is widely used by producers in the food and beverage industry. It has become a common tactic to help producers deal with their own inflation problems from suppliers. Many companies determined that their customers would balk, and perhaps begin to look for substitute products if confronted with yet another price increase. The solution? – Shrinkflation.

Note that shrinkflation cannot be viewed as a fraud or misrepresentation of products. Producers always indicate the weight, volume, or quantity of their products on packaging labels. It’s not illegal – it’s just sneaky.

 

What Causes Shrinkflation?

 

1. Higher production costs

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

Reducing the weight, volume, or quantity of the products while keeping the same retail price tag can improve the producer’s profit margin. At the same time, the average consumer will not notice a small reduction in quantity. Thus, sales volume will not be affected.

 

2. Intense market competition

Fierce competition in the marketplace may also cause shrinkflation. The food and beverage industry is generally an extremely competitive one, as consumers are able to access a variety of available substitutes. Therefore, producers look for options that will enable 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 have adopted using shrinkflation with their products, including:

  • Coca-Cola: in 2014, Coca-Cola reduced the size of its large 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 this 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. Eventually, consumers do “wise up” to what’s going on. Cereal boxes that are the same size as before, but seem only about half full, have almost become a sort of shared joke between companies and consumers

 

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 CFI resources below:

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

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!