‘Economics without philosophy is equivalent to ethics without morality.
Yet, sometimes players in the economic framework need to resort to veiled means to keep their businesses running. These practices also find a place in popular culture, with consumers complaining of alleged ‘downsizing’ without notice.
Major global packaged food and beverage producers and distributors have recently shrunk their food packages and other products without changing the price of their products. Companies have been following this procedure lately to cushion the ill effects of inflation on their production.
‘But what is this practice called, and is it even legal?’ you may ask.
Let’s find out more about it.
Shrinkflation: The Subtle Technique of Justifying Quantity Discounting
Inflation refers to a general rise in price levels. Cost-push and demand-pull are two fluctuations of inflation that negatively affect the economy. Hyperinflation, for example, is a special case where inflation rises extraordinarily, resulting in the devaluation of the currency.
However, unlike inflation and its types, companies follow certain procedures to withstand the effects of inflation. For example, Shrinkflation refers to the product’s downsizing in size, quantity and even quality without altering the price. Shrinkflation, a recently popular term, is a combination of two terms, as evident, ‘shrink’ and ‘inflation’.
Following the laws of demand, price change is inversely proportional to change in demand. Thus, to prevent customers from abandoning their products due to price rises, companies follow shrinkflation. The alleged ‘hidden’ form of inflation aims to boost profits or keep them unchanged steadily.
Why Do Companies Adopt Shrinkflation?
In a monopolistically competitive market structure, competitors tend to differentiate their products either by actual changes in competition or by fancied means like advertisements. However, with the rise in factors of production like capital and labour, it becomes difficult to maintain their profit margin.
Shrinkflation is the by-product of coping with such a phenomenon.
But why don’t companies simply raise the prices and cite inflation as a reason?
- Ever-increasing production costs: Companies cite the rise in production costs as the primary reason for shrinking food packages and other manufactured products. Since costs of labour (wage rates) and capital (rent) is constantly on the rise, profit margins fall. Moreover, since frequent price changes diminish the general likeliness of a product, they choose to keep prices constant and decrease the quantity.
- Market competition: Particularly in a competitive market with no significant differences in quality or product composition, shrinkflation is the obvious choice. Imagine being a hard-core fan of Coke and despising the taste of Pepsi. If Pepsi reduces the price of their 1-litre bottle, Coke follows suit. However, Coke might not be economically viable to continue selling at the same price. So instead, they might choose to introduce a 750ml bottle at the same price.
As a customer, you consider this a win-win situation, but actually, you are just a victim of shrinkflation.
Adverse Effects of Shrinkflation
Shrinkflation affects consumer sentiment more than anything else. Customers might feel cheated and might shift to their next best alternative. However, companies generally follow a ‘short and sweet’ quantity tweaking.
Since inflation can force companies to adopt this policy, they should make sure they do not lose customers in this process. Shrinkflation can also make the price change fuzzy, thus making it difficult to register inflation and other economic indicators.
Identifying and Evading Shrinkflation
Global beverage giants like Pepsi and Coke, FMCG brands etc., exercise the subtle price changes through packaging and advertising. However, customers should check the numbers since the packaging is often misleading and subject to objects of ridicule (classic case of an air-filled packet of chips).
- Price per unit helps determine the precise changes. Therefore, whenever you purchase a product, make sure you check the quantity and its price point. Shrinkflation will decrease the quantity per unit of price, and therefore, any changes can easily be detected. In addition, since companies may try to befuddle customers through packaging transformations, any changes in packaging might be a good way to detect shrinkflation.
- Since competition is one of the primary causes of companies adopting shrinkflation, shifting to a competitor might solve the problem momentarily. Consumer awareness forums thrive on awakening and educating customers on detecting and combatting malpractices that companies adopt to keep their business running.
Exceptions and Considerations
Government institutions tend to identify changes in price and quantity. Although there are no rules barring shrinkflation, consumer forums make it mandatory for companies to inform customers when they make the change.
Maintaining competitive pricing amongst a general rise in raw materials is challenge companies face every day. However, although they are bound by legal means, shrinkflation is a common practice followed by manufacturing companies. Thus, although shrinkflation is not necessarily illegal, they are subject to constant scrutiny and consumer woes if detected.
To sum it all up
Manufacturing companies (especially food and beverages) cite intense market competition as one of the primary reasons for adopting shrinkflation and thus shrinking food packages. Producers adopt shrinkflation to keep their profit margins intact.
What is to be done, then?
Understanding and early detection of the problem may help recognise shrinkflation. Interestingly, the Ministry of Consumer Affairs in a circular provided in March this year has made FMCGs, food and beverage companies mandatorily mention prices for each gram, kilogram or litre. This might effectively stop companies from reducing grammage on the products.