As India's retail inflation touched 6.95 percent in March, hitting a 17-month high, there is a growing incentive as well as the need for some companies to raise the prices of their products. While increased prices could drive away some not-so-loyal customers, there is another tried-and-tested weapon in the arsenal of these organisations: shrinkflation.
Here we deconstruct what exactly this phenomenon is.
This is the practice of cutting down the size of a product while keeping its price intact. It is a common strategy deployed by several big and small companies, especially in the food and beverage sector to battle inflation where they don’t raise the product’s price, at least not explicitly.
In other words, it is package downsizing in business and academic parlance.
Some companies simply decide to offer a smaller package for the same price of a product instead of raising the product's price.
For example, if the price of cocoa increases, it will cause direct impact on the chocolate prices. Instead of raising the chocolate prices, an FMCG company may decide to cut down the size of its product while keeping the price intact.
For instance, last year Walkers (owned by Frito-Lay) cut down the size of its 24-unit pack by two to sell it at the same price. Similarly, Hershey cut down its pack of dark chocolate Kisses by two ounces. Likewise, Frito-Lay reduced regular bags of Dorito's by 50 ounces.
In the macro-economic terms, these changes are small and are restricted to a small number of products, but they are sizeable enough to make calculating inflation a difficult exercise in view of the change.
It is a form of hidden inflation. Companies are aware that customers can spot product price increases and hence decide to cut down the size of the product instead. As a matter of fact, small shrinkage usually goes unnoticed. This is a way to squeeze out more money by charging the same amount for a package that contains relatively less quantity.
Companies, at times, embrace shrinkflation to maintain their market share. In a competitive industry, raising prices could make customers to switch allegiance to another brand.
Is it detrimental?
Well, there is no denying the fact that shrinkflation is considered better than raising price explicitly. But even shrinkflation can be detrimental to company's interest because if consumers happen to notice the small changes in the product's size, then this could gradually cause a loss of trust and confidence.
This means companies can opt for such subtle price 'raise' only a few times before customers notice. At the same time, they should be careful not to reduce the price drastically.
There is another shortcoming of shrinkflation — it makes it hard to correctly assess changes in price.
However, some companies will continue to do it as they have been doing for decades now, in a little subtle way, gradually — too slowly for their customers to take note of.