Simply Put: Shrinkflation

Hari Viswanath |BL Research Bureau | Updated on: Apr 16, 2022

How some companies tackle inflationary pressure on costs by reducing the weight of the products

Two  friends catching up after a long time got nostalgic and ended up watching one of their favourite childhood movies, Honey, I Shrunk the Kids. As they finished watching, they got into an interesting conversation.

Ram: Good science-fiction movie for these times.

Veena: Oh yes.

Ram: Do you think with all the technological advancements humans are making, shrinking will really be possible one day?

Veena: It looks impossible for now, but who knows what the future has in store! However shrinking is playing out in a different way these days.

Ram: Don’t understand. What are you saying?

Veena: Did you hear about the CPI inflation data that came out few days ago?

Ram: Yes I read in BusinessLine that it came in at a 17-month high for the month of March at 6.96 per cent.

Veena: Well, inflation has been in an upward trajectory for quite a while now. Have you felt the increase in prices across the items you purchase?

Ram: Well in some, I have felt the impact — like vegetables, edible oils, fuel etc. Surprisingly though, I have found prices haven’t changed much when it comes to some of the snack items I consume or in items like soaps.

Veena: Hahaha! That was what I was coming to. What you may have not realised is that while you may have paid the same price, the quantity would have reduced. This is called shrinkflation.

Ram: Shrinkflation? Can you explain further?

Veena: Yes. Some FMCG companies resort to shrinkflation when inflation is impacting their manufacturing costs – raw materials, packaging, cost of operations etc. At the same time, some customers may not buy if the prices are increased or consider lower-ticket items. Hence, the companies reduce the quantity a little bit. Since the price is still the same, you may not notice it.

Ram: No wonder! In recent times I have been consuming extra half packet of noodles than my usual quantity and I thought I was overeating. Let me go and check the quantity in each package.

Veena: Yes. Check whether the quantity has changed or not in noodles, biscuits and snack items. In most cases, you are likely paying more per gram versus earlier.

Ram: Hmmm... Ok. Nevertheless, this is interesting. Inflation in a different form and you don’t notice it.

Veena: Unless the difference is significant, many a time it goes unnoticed. Have you heard of the legendary story of how the head of American Airlines cut costs for the company?

Ram: No

Veena: In the 1980s, Robert Crandall, the CEO of the company, saved over $40,000 annually for the company by reducing just one olive in the food served to passengers. His logic was that customers will not notice it and he was right. At the same time, the airline ended up saving money!

Ram: Wow! This sounds like good entrepreneurial lesson for tough times.

Veena: Haha yes. Companies will want to protect their profit margins. In order to do that during inflationary times, they will either have to increase price or cut costs where they can . One way to increase prices is via shrinkflation.

Ram: Ok. So as customers we need to check how much quantity we are buying for a certain price.

Veena: Yes, at least once in while it would be good to keep track of these things.

Ram: What about the opposite of shrinkflation? For example, Honey, I Shrunk the Kids had a sequel, Honey, I Blew up the Kid.

Smart trick
In the 1980s, American Airlines saved over $40,000 annually by reducing just one olive in the food served to passengers

Veena: That would be expecting too much. May be when demand is low or competition is high, companies would offer some discounts and some extra goodies to induce you to buy. But if demand is strong, and input commodity costs are declining, they will look to retain the benefits to the extent possible and increase their profit margins.

Ram: Hearing this, I think governments would wish they had a shrinkflation trick up their sleeve.

Veena: Why is that?

Ram: Well, fuel price would not be an election issue anymore!

Published on April 16, 2022
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