The term Shrinkflation refers to the phenomenon where companies reduce the size or quantity of their products, while keeping the price the same, or even increasing it. This means that consumers are effectively paying more for less. This tactic is used by companies to maintain their profit margins in the face of rising production costs, such as increases in raw material prices, transportation costs, and other expenses. The term “Shrinkflation” was introduced by the British Economist, Pippa Malmgren in 2009.
The concept of shrinkflation is grounded in basic economics. When a company is faced with increasing production costs, such as rising raw material prices or wages, it has several options. It can either absorb the cost and accept lower profit margins, raise the price of the product, or reduce the size or quantity of the product. In most cases, companies choose to maintain their profit margins, which means they will either raise the price or reduce the size of the product. According to behavioral economics, more people are sensitive to price rather than package weight or volume. Therefore, reducing the size or quantity of the product has the added benefit to firms of being less noticeable to the consumer than simply raising the price. Consumers are more likely to notice when a product’s price goes up, whereas they may not immediately notice if the product’s size or quantity is reduced. This allows companies to maintain their profit margins without risking a backlash from consumers.
A major concern that consumers might have is whether this practice is illegal. Shrinkflation is not illegal, if product price and weight/volume are clearly shown in the packaging. Companies are not obligated to sell their products in a certain size or quantity. It is simply a free market acting according to the woes of the market. It all boils down to business ethics. Is it really ethical for firms to downsize a product without communicating such revisions to the consumer? One might also think that it would be unfair for the consumer to spend time scrutinizing the packaging given their fast-paced lifestyles. As a result, this can lead to a loss of consumer and brand loyalty, which would be counterproductive to the very thing firms are trying to maintain – profitability.
From a firm’s perspective it might be a smart way to tackle an unexpected rise in costs, which will allow them to survive when the economic environment is tough. A loss of 5 grams per product may not seem like a lot for the consumer, but it can save thousands for firms when it is spread across a million units. This is also where a product’s USP (Unique Selling Point) can serve a huge purpose. Distinct characteristics of products are what keeps consumers from swapping its competitors and might allow a firm a get away with product downsizing without losing sales. One might argue that it is the customer’s obligation to check not only the price but the weight, quantity and the serving size before purchasing which are clearly stated in the packaging and that it is ultimately the customer who makes the final purchasing decision.
Sri Lanka has experienced shrinkflation especially in the fast-moving consumer goods (FMCG) sector, with companies reducing the size of products such as biscuits and chocolates while keeping the prices same. While this has been a longstanding practice, there has been a frequent revision in the packaging of such products and has gained a greater attention post the country’s economic crisis. With inflation reaching its record high during the crisis and with the subsequent increase in taxes, it is not surprising that companies actively practice shrinkflation. On the contrary, consumers are faced with a greater financial burden, and they have become more vigilant in their spending habits, paying closer attention to both price and quantity as they try to make the most of their limited budgets in the face of rising inflation.
Shrinkflation is a practice that has become increasingly common in the fast-moving consumer goods industry. While this can be a way for companies to maintain profit margins in the face of rising costs, it can also have negative consequences for consumers who feel shortchanged and misled. As we have seen, consumers in various countries have taken matters into their own hands to protect their rights and interests. This highlights the power that consumers hold in shaping business practices and holding companies accountable. As for a firm, it might want to adapt this practice as a short-term strategy to survive in negative economic climates and may not view it as a long-term practice. It is important for businesses to be transparent with their customers about any changes to their products. Companies should clearly communicate any changes in size or quantity, and possibly provide a reason for the change. Ultimately, it is the consumers who have the final say in the success or failure of any business, and companies that fail to take this into account do so at their own peril.
By Trent Hemachandra
The Ceylon Chamber of Commerce
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