Shrinkflation

Context

Due to rising costs many companies are practicing “Shrinkflation”.

What is Shrinkflation?

• In economics, shrinkflation, also known as the grocery shrink ray, deflation or package downsizing,
• It is the process of items shrinking in size or quantity, or even sometimes reformulating or reducing quality, while their prices remain the same or increase.
• The word is a portmanteau of the words shrink and inflation.
• First usage of the term “shrinkflation”, has been attributed to both Pippa Malmgren and Brian Domitrovic.
• 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.
• 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.

What are the Major Causes of Shrinkflation?

• 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 labour increase production costs and subsequently diminish producers’ profit margins.
  • Reducing the products’ weight, volume, or quantity 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.
• 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 favour of their customers and maintain their profit margins at the same time.

What are the implications of Shrinkflation?

Shrinkflation runs the risk of turning customers away from a product or brand if they notice they are getting less for the same price.

Shrinkflation makes it harder to accurately measure price changes or inflation. The price point becomes misleading since the product size cannot always be considered in terms of measuring the basket of goods.

Other Economic terms:

Stagflation: A type of inflation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.

Bottleneck inflation: A type of inflation that takes place when supply falls drastically due to supply-side accidents or mismanagement, but demand remains at the same level.

Skewed inflation: A type of inflation in which the prices of a single commodity or a set of commodities rise while the overall price level remains stable.

Inflation

• The general rise in the price level of goods and services is called Inflation.
• It is estimated as the percentage rate of change in price index over the reference time period.
• In India, inflation rate is measured with the help of the Consumer Price Index- combined (Base year- 2012).
• Rate of Inflation= (Current period price index-Reference period price index)/(Reference Period Price Index)×100

Measures to fight/Contain Inflation

In India, Inflation is a complex phenomenon. It is caused not by one, but by several factors such as demand pull factors, Cost push factors and structural factors. These factors act together or alternatingly to cause inflationary price increase in the economy.

Therefore, we need a mix of macro-economic policies to manage the demand and the supply side as also to address the structural rigidities that exist in the economy.

Following methods are used by government to fight Inflation

1. Monetary Policy Measures
2. Fiscal Policy Measures
3. Other Measures

Source: World Economic Forum

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