What governments and retailers are doing to reduce Shrinkflation and what can brands and manufacturers do in-lieu of Shrinkflation
What is Shrinkflation
This concept has been around for a while in CPG but got very common during the high inflationary times of post-Covid era.
Shrinkflation is basically keeping the price of a product the same but reducing the size or number of units. For example, if a pack of cookies cost $1 for 10 cookies ($0.1 ea) . Instead of raising prices, companies reduced the size or quantity. So the new cookie pack now was still at $1 for 8 cookies (price 0.125 ea). So essentially a 25% increase in per unit price.
Brands have also taken this a step further and raised prices of the smaller pack as their next price tactic. So increasing the price of the pack of 8 cookies to $1.10 (0.1375 ea). A 37.5% increase in price.
This has been a very common price tactic used in the past 3 years due to rising inflation.
Importance of sticker shock
Although price is an important factor when consumers check when shopping there is a lot of research that says, as soon as the consumers make a choice they do not remember the price of the product they bought.
Sticker shock is more of a factor in buying decision. Continuing with the example above if $1.25 was the limit of sticker shock for a standard pack of cookies. Getting a 25% increase would not have been possible, however using the Shrinkflation tactic, they achieved almost a 37.5% increase without hitting the sticker shock.
This behaviour was a huge factor when brands decided to use the Shrinkflation tactic to combat their cost inflation.
“Shrinkflation” shaming
In recent months retailers in Europe and governments in Europe and India have taken steps to curb Shrinkflation.
Carrefour started putting up displays late 2023 to start educating customers about the price changes done on products and brands.
In early January 2024, some stores of Carrefour in France have dropped certain PepsiCo’s products off the shelves as well.
This is a massive impact as it takes a lot of negotiations and planning on getting products on the shelves. (One of the 4P’s of marketing is “Place”. Product, Price, Place and Promotion)
Starting January 1, 2024 retailers in India have started showing per unit price. Indian government passed a law regulating this and failing to comply would result in fines.
As Shrinkflation continues Indian retailers might also choose to go the Carrefour route first displaying the per unit increases and later impacting the shelf space.
The Hungarian government has also passed a law effective March 2024 to curb Shrinkflation.
A quote from Economic Ministry of Hungry below
US government was the latest one to join the "Shrinkflation" discussion.
What can brands do now
As retailers have started “Shirkflation” shaming brands and in some extreme cases have even dropped the brands off the shelves, what can brands and manufacturers do to combat this:
Tactics
Segmentation: Introduce more SKU’s with different sizes so they can cater to different segments with different price points.
Using the hypothetical example from before brands can introduce 3 cookie sizes.
A sample scenario calculation to show how mix can drive revenue and have the same impact as “Shrinkflation”
Essentially they have achieved a similar result but did not affect per unit price.
Reducing expenses: Reduce or cut down on the marketing expenses and sales expenses
Margin reduction: Reduce the margin to retailers - albeit a very difficult one to do which could also lead to losing floor spots, this essentially leads to cost reduction and impacts profitability and this doesn’t affect consumer at all.
Strategy
Vertical Supply chain integration: Integrate the vertical supply chain so costs can be reduced
Direct-to-consumer: Going direct to consumer will reduce the additional costs of selling through a retailer and increasing margin for the brands
Losing shelf space or customer churn is a much more expensive problem to deal with. As we know retaining a customer is much more important than acquiring a new one.
Happy Pricing!