What is shrinkflation and how does it work?

What is Shrinkflation? Why is it important to know this as a consumer? Shrinkflation is the practice of reducing the size of a product while keeping the same price or even increasing it. A less common use of this term can refer to a macroeconomic situation where the economy is contracting while also experiencing an increase in the price level. Let's see all the details together.

Shrinkflation: what it is and how it works

Shrinkflation is a term composed of two separate words: "shrink", i.e. shrinkage and "inflation", i.e. inflation. The term "shrink" therefore refers to the change in product size, while "inflation" refers to the increase in prices.

Shrinkflation is basically a form of covert inflation. Companies are aware that customers will likely notice increases in the price of products and therefore opt to downsize, recognizing that minimal shrinkage will likely go unnoticed.

In essence, the company will increase profits not by increasing prices, but by charging the same amount for a package that contains slightly less product. Academic research has shown that consumers are more sensitive to explicit price increases than to packaging downsizing. The effectiveness of reducing inflation as a pricing strategy appears to vary across different types of goods and markets.

Most consumers generally don't check the size of a product. Those who love potato chips, for example, may not realize if their favorite brand reduces the bag size by 5%, but they will almost certainly be able to tell if the price goes up by the same amount.

Shrinkflation: advantages and disadvantages for companies

From a business perspective, reducing inflation is a useful way to increase or maintain profit margins without attracting too much attention. This tactic is most commonly performed in the following situations: when production costs or target market competition increase.

Retailers often turn to loss reduction to combat higher production costs. As key inputs, such as raw materials or labor, increase in value, the cost of producing final goods increases.

This subsequently weighs on profit margins, the percentage of revenue remaining after all costs. For companies that lack strong pricing power, reducing product quantity is sometimes the best option to maintain a healthy profit without compromising sales volumes.

Firms could also resort to shrinkflation to maintain market share. In a competitive industry, rising prices could lead customers to switch to another brand. Introducing small reductions in the size of their goods, on the other hand, should allow them to increase profitability while keeping prices competitive.

However, shrinkflation tactics can also backfire. Most people won't notice small changes to the size of a product but if they do, it could have a detrimental effect on consumer sentiment towards the brand, leading to a loss of trust and confidence. This means that companies also need to be subtle and careful not to downsize too much.

Another downside of shrinkflation is that it makes it more difficult to measure price changes or inflation accurately. Price becomes misleading, as the size of the product cannot always be thought of in terms of measuring the basket of goods.

Shrinkflation: a practical example

An increase in the cost of cocoa will have a direct impact on companies that produce chocolate bars. Rather than raise the price of chocolate (and potentially lose customers), the company may choose to reduce the size of its product (and therefore the amount of cocoa per bar) and keep the price at the same level.

Other big brands making efforts to curb inflation include Coca-Cola, which in 2014 reduced the size of its two-litre bottle to 1.75 liters in the UK to pass the cost of a new tax onto their product.