At the time of writing, we’re currently in the midst of earnings season. These are the months of the year during which most quarterly corporate earnings are released to the public, which has led analysts to look closer at the effects of inflation. And what they’ve found is astonishing.
What is 'shrinkflation'?
What effect does shrinkflation have on consumption?
Imagine buying a bottle of Coca-Cola or a bag of potatoes: you’d notice a price change, especially if you count these as a regular purchase. But would you notice if the manufacturer shaved 10% off your bottle of cola or docked a couple of potatoes while charging you the same price? Probably not. Most people are price-conscious but not net weight-conscious; this is shrinkflation in practice. Applying shrinkflation does not impact the Consumer Price Index (CPI), which measures the average price of a basket of commodities relative to a base year. But in reality, prices do indeed get inflated relative to a shrinking product. In this way, shrinkflation is a kind of hidden inflation. Ultimately, this means consumers are spending more, getting less for their money, and having less purchasing power as a result.
The differences between inflation and shrinkflation
What causes shrinkflation?
Rising production costs
Volatility in the supply chain has made prices rise exponentially, but so has weather, disease, war, and climate change. This has had a knock-on effect on the cost of ingredients, raw materials, energy, and labor costs, to name but a few. This has resulted in bad news for consumers. These rising production costs are the primary cause of shrinkflation, as companies look to pass inflation on to their customers while maintaining sales volume.
Choice, choice, and more choice for customers mean that battle lines have been drawn across every industry, particularly the Consumer Packaged Goods (CPG) industry in relation to food and beverages. Consumers looking for substitutes that better suit their needs when it comes to quality or price, for example, are now able to access a broad range.The beauty industry is another great example of this with the emergence of ‘clean’ and affordable skincare. Producers have been forced to seek out options that inspire customer loyalty while allowing them to maintain their profit margins.