Shrinkflation Risks Consumer Blowback – Enterra Solutions

Consumers are not so dumb that they fail to see when they are getting less product for their money. It’s called “shrinkflation.” The Merriam-Webster Dictionary notes, “Shrinkflation is the practice of reducing a product’s amount or volume per unit while continuing to offer it at the same price.” In case you missed it, Sesame Street’s beloved Cookie Monster weighed in on this issue. On X (formerly Twitter), Cookie Monster wrote, “Me hate shrinkflation! Me cookies are getting smaller.” This two-line rant received a lot of media attention. For example, journalist Melvin Backman wrote, “Everyone’s favorite ravenous blue puppet took to social media … to add his gravelly voice to a resounding chorus that has grown louder and louder in recent years, decrying one of corporate America’s favorite margin-bumping tricks.”[1] Even the White House took notice. In response to Cookie Monster’s lament, the White House wrote, “C is for consumers getting ripped off. President Biden is calling on companies to put a stop to shrinkflation.”

 

CPG’s Rock and a Hard Place

 

Consumer packaged goods (CPG) manufacturers are well aware of public’s attitude towards shrinkflation. They also know they are caught between the proverbial rock and a hard place during inflationary times. They must respond to rising costs while at the same time try to maintain market share by keeping consumers buying their products. Shrinkflation is often the solution they use. Wikipedia notes:

 

Shrinkflation, also known as the grocery shrink ray, deflation, or package downsizing, is the process of items shrinking in size or quantity, or even sometimes reformulating or reducing quality, while their prices remain the same. The word is a portmanteau of the words shrink and inflation. First usage of the term ‘shrinkflation’ with its current meaning has been attributed to the economist Pippa Malmgren. Barak Orbach, an academic economist, argues that competition typically drives shrinkflation: ‘When supply shocks or other factors inflate production costs, businesses must pass on cost increases to maintain profitability. However, in competitive markets, direct price increases are risky. Under such conditions, businesses often choose to raise prices indirectly through downsizing.’ Without explicitly using the term Shrinkflation, macroeconomist Vivek Moorthy much earlier documented and analyzed the shrinkage effect of inflation, explaining, ‘Prices are … based on notions of trust and fairness. it is considered acceptable for firms to respond to cost increases, but not to demand increases. Firms selling a branded product will make deliberate efforts to continue selling at the same price thereby retaining loyal customers. Hence, to cope with inflation, fast moving consumer goods firms would often resort to shrinking the product size to avoid raising prices.’ Shrinkflation allows companies to increase their operating margin and profitability by reducing costs whilst maintaining sales volume, and is often used as an alternative to raising prices in line with inflation.”

 

The emotionally charged responses to Cookie Monster’s shrinkflation lament confirms that many consumers and politicians view shrinkflation as a ploy by greedy manufacturers to increase profits rather than a way of addressing rising costs. It’s definitely a conundrum for CPG manufacturers and shrinkflation is a strategy that could backfire. Freelance journalist Daniel Liberto reports, “Academic research has shown that consumers are more sensitive to explicit price increases than to package downsizing, but this practice can result in negative consumer brand perceptions.”[2] Liberto adds, “The effectiveness of shrinkflation as a pricing strategy appears to vary across different types of goods and markets. Most consumers do not generally check the size of a product. Someone who loves potato chips, for instance, may not realize if their favorite brand reduces the size of the bag by 5%, yet will almost certainly be able to tell if the price goes up by the same amount.” He goes on to explain two of the reasons CPG manufacturers resort to shrinkflation. They are:

 

• Rising Production Costs. “Retailers often engage in shrinkflation to combat higher production costs. When key inputs, such as raw materials or labor, shoot up in valuation, the cost to manufacture final goods rises. … Management can either sit back and hope investors do not become too despondent, or seek to find other ways to recoup some of these losses. For companies lacking strong pricing power, reducing the weight, volume, or quantity of products sometimes represents the best option to maintain a healthy profit without jeopardizing sales volumes.”

 

• Increased Market Competition. “Companies might also resort to shrinkflation to maintain market share. In a competitive industry, lifting prices could lead customers to jump ship to another brand. Introducing small reductions in the size of their goods, on the other hand, should enable them to boost profitability while keeping their prices competitive.”

 

If CPG manufacturers were hoping that the current round of shrinkflation would go unnoticed by consumers, they were wrong. Economics journalist Jeanna Smialek reports, “Grocery store shoppers are noticing something amiss. Air-filled bags of chips. Shrunken soup cans. Diminished detergent packages. Companies are downsizing products without downsizing prices, and consumer posts from Reddit to TikTok to the New York Times comments section drip with indignation at the trend. … Outrage today is acute.”[3] She adds, to the surprise of many, “It might be hard to believe, but shrinkflation appears to be happening less often today than it was a few years ago. … Downsizing was frequent back in 2016, when overall inflation was low. It became rarer after the start of the pandemic in 2020, and more recently it has begun returning to pre-pandemic levels, analysts from the Bureau of Labor Statistics said.”

 

Food journalist Mackenzie Filson reports that one reason consumers have been so quick to pick up on shrinkflation this time around is because it is affecting necessities. She writes, “According to AARP, some of the most necessary products are sadly often the most shrinkflated: toilet paper, cereal, yogurt, laundry detergent, and shampoo and conditioner.”[4] Another area that has been hit hard by shrinkflation, she notes, is snacks.

 

Concluding Thoughts

 

When the “grocery shrink ray” is aimed at products during non-inflationary times, it’s fair to call shrinking sizes and maintained prices the result of corporate greed. The picture is not quite so clear when inflation is involved. Liberto concludes, “Of course, shrinkflation tactics can also backfire badly. Most people won’t notice small changes to the size of a product. If they do, it could have a detrimental effect on consumer sentiment toward the perpetrator, leading to a loss of trust and confidence. That means companies can only make these types of changes so many times before consumers will cry foul. They also need to be subtle and careful not to reduce sizes too much.” Filson insists that blowback from consumers is likely to affect the bottom line of many brand name products. She explains, “One way to combat shrinkflation is to switch to cheaper, store-brand items. Consumer can vote with their wallets, which is the best way to send a message to manufacturers that shrinkflation should not be here to stay.” Making Cookie Monster mad is not a winning long-term strategy.

 

Footnotes
[1] Melvin Backman, “Even Cookie Monster hates ‘shrinkflation.’ Here’s what that is and how much it matters,” Quartz, 5 March 2024.
[2] Daniel Liberto, “Shrinkflation: What It Is, Reasons for It, How to Spot It,” Investopedia, 16 November 2023.
[3] Jeanna Smialek, “Shrinkflation 101: The Economics of Smaller Groceries,” The New York Times, 1 March 2024.
[4] Mackenzie Filson, “You’re Not Just Imagining It: Groceries Are Getting Smaller,” Delish, 3 November 2023.

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