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Shrinkflation refers to the practice of companies subtly reducing the size or quantity of a product while still charging the same price. This allows companies to avoid significantly raising prices, which could shock or alert consumers, while still increasing profit margins.
The Origin of Shrinkflation The term "shrinkflation" is a portmanteau of the words "shrinking" and "inflation." It was first used in 2009 when the global financial crisis and rising production costs led companies to shrink package sizes without lowering prices accordingly. This allowed companies to offset rising input prices without consumers realizing they were getting less for their money.
However, the practice of sneakily downsizing products predates the term shrinkflation. Economists note that packaging sizes have been very gradually getting smaller for decades - ever since the 1970s. This may have begun due to rising inflation and production costs. However, shrinkflation appears to have accelerated since 2009 for a variety of economic reasons.
Why Companies Are Using Shrinkflation Shrinkflation has become an increasingly common tactic for consumer goods companies today. There are several key economic factors driving the growth of shrinkflation:
- Rising Inflation: With transportation, raw materials, labor and other input costs rising, shrinkflation is an easy way for companies to maintain profit margins. Shrinking product sizes allows them to avoid significantly hiking prices which could scare off consumers. Subtly reducing quantities means companies can offset rising costs without consumers realizing it.
- Increased Competition: In competitive, low-margin categories like food, shrinkflation can give companies an advantage. Consumers tend to be very price sensitive and notice even small price per unit increases. By subtly reducing product sizes, companies can avoid raising red flags for consumers used to specific price points while still improving profitability. This then allows more flexibility with promotional pricing as well.
- Consumer Habit: Consumers get used to package sizes and price points. By making small, gradual reductions to sizes, companies can benefit from this consumer habit and inertia. The differences from one month to the next are small enough that many consumers simply don't notice slight downsizes over time. This "boiling frog" effect means companies can slowly reap more margin without consumers realizing.
Examples of Shrinkflation Shrinkflation is now found across a huge variety of consumer product categories:
Food & Beverages: This category has seen some of the most egregious examples of shrinkflation over the past decade. Candy bars, sodas, cereals, cookies and more have subtly shrunk in size while still being sold for the same price. For example, family-size chocolate bars like Snickers which used to weigh 2.07 ounces now weigh 1.4 ounces. Packages of 16 ounces of orange juice are now sold as 12 ounces. A tub of Nestle cookie dough went from 16.5 to 14 ounces. Shrinking package sizes by an ounce or two may seem trivial, but it leads to significant extra margins for these companies over time.
Other Consumer Goods: Shrinkflation extends far beyond just the grocery aisle. Toilet paper rolls have gradually reduced the number of sheets per roll from 340 to just 264 sheets. Paper towel rolls are noticeably narrower in diameter. Boxes of tissues went from 160 tissues per box to just 120. Laundry detergent bottles are now sold with 20% less detergent. Aluminum foil and plastic wrap boxes are sized to appear the same but now contain much thinner sheets, reducing the total square footage of the product.
Beyond household items, apparel has seen signs of shrinkflation too. "Vanity sizing" with clothing ensures sizes themselves aren’t reduced to alert consumers. But t-shirts, jeans, dresses and more have been subtly getting thinner and using less fabric over time - meaning consumers pay more per unit of fabric today.
Restaurants & Food Service: Restaurant chains rely heavily on habits and price points when it comes to menus. By slightly reducing drink and food sizes over many years, most consumers won’t notice and still pay what they expect. For example, McDonald’s eliminated their 42-ounce "super-size" drink option. Their large 32-ounce is now what a medium used to be, while prices stay consistent. Fast food french fries have very gradually gotten smaller as well to squeeze out more servings per batch in the fryer. The trend spreads far beyond fast food too. Even Starbucks has faced some criticism for reducing their latte sizes by an ounce over the past decade while still charging typical coffee shop prices.
Impacts of Shrinkflation There are several notable effects and implications tied to the spread of shrinkflation as a corporate strategy today:
Financial Performance: For companies, shrinkflation clearly works to improve profitability metrics thanks to subtle price hikes. By shrinking products just enough that most consumers don’t notice over time, they enjoy increased revenue and margins. Food and beverage companies who have shrunk their packages have seen stock valuations rise. As long as competition doesn't ruin the effect, shrinkflation boosts financials.
Consumer Prices: While shrinkflation flies under the radar, it does contribute to real consumer price inflation. Consumers end up paying more per ounce or pound of a product thanks to downsizing. Experts note that things like cereal, soda and tissues would cost 20-30% more if packages hadn’t shrunk over the years. In economic terms, shrinkflation worsens the purchasing power of consumer dollars over time.
Consumer Perceptions: Since changes are so gradual, shrinkflation thrives on low consumer awareness. Most shoppers simple don't notice minor downsizes. Consumer watchdog groups argue that shrinkflation essentially amounts to deceptive advertising and exploits how habitual people are about brands, prices and packaging. Once consumers do become aware of the practice, it can seriously damage brand reputations and trust.
Economic Indicator: Economists observe that shrinkflation tends to rise and accelerate during periods of economic distress and rising business costs like today. Tracking increases in shrinkflation across categories can signal areas with strained profit margins or rising inflationary pressures. It represents businesses struggling to absorb costs and stay price competitive. The current wave of shrinkflation flags wide challenges with production expenses and consumer spending power.
Sustainability Impacts: Packaging reduction has some environmental benefits on its own thanks to reduced paper, plastics and materials. However, critics point out that shrinkflation means increased packaging turnover and waste to achieve the same actual quantity of product usage. Consumers buying smaller packages more frequently contribute more to landfill waste with extra packaging per ounce of product over time.
Government Responses: Lawmakers, regulatory agencies and consumer advocacy groups have put some pressure on companies over shrinkflation, arguing it reflects deceptive business practices, false advertising and inflated pricing. In countries like Argentina and the UK, calls for inquiry and regulation around shrinkflation have increased. But legal restrictions face challenges since products still note accurate net weights. Proving intentional consumer deception to restrict the practice has been difficult.
Ongoing Trend: Shrinkflation has accelerated across categories in recent years as companies face rising business costs, inflation, supply chain issues and demand fluctuations. With these economic factors persisting, observers expect shrinkflation to continue spreading. Subtle downsizing enables brands to offset financial pressures without altering consumer price perceptions or loyalty for now. And in low-transparency, habit-driven purchases like food and household items, the strategic benefits typically outweigh consumer backlash risks.
The Future of Shrinkflation While often viewed negatively in consumer and economic terms, shrinkflation persists because it works for companies facing cost and competition challenges. The practice stands to continue growing in usage for these key reasons:
- Ongoing Inflationary Issues: From recurring COVID-19 impacts to Ukraine war ripple effects, rising business expenses will drive shrinkflation. As costs outpace general inflation, subtle size decreases help companies maintain profit goals without shocking consumers with actual price hikes.
- Lack of Transparency: Consumers tend to have low size awareness or habitually purchase brands and products. As long as shrinkflation flies under the radar, companies can strategically leverage it to improve unit pricing. Clear packaging and net weight labels haven’t hindered the strategy so far.
- Low-Risk Appetite: Consumers have shown a willingness to keep paying for beloved brands despite gradual shrinkflation over decades. And the risk of customer defections or public backlash so far hasn’t outweighed financial gains for most companies. Unless brands cross a compulsory tipping point of consumer perception, small reductions carry on.
- Weak Monitoring & Enforcement: Regulators face an uphill battle restricting shrinkflation in free markets exporting accurate net contents. Companies can claim routine production adjustments, cost pressures, or environmental goals for downsizing. And oversight resources tend to focus on explicit consumer harms over opaque pricing tactics.
While economists hope rising inflation eases in coming years, the genie may be out of the bottle for shrinkflation. Once companies discover this reliable profit engine, reversing course faces internal reluctance. -
Thank you for listening to Food & Beverage Talk! This podcast has concluded; we appreciate your support. Please join us on our other podcast, M&A Talk, where we bring you interviews with experts in private equity, business valuations, law, finance, and all topics related to M&A. Our past experts have included CEOs, authors, investment bankers, attorneys, CPAs, private equity partners, business appraisers, VC investors, and more.For more content from us, please visit our website: https://morganandwestfield.com/podcast/
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