What is shrinkflation?

The definition of “shrinkflation” was first coined by British economist Pippa Malmgren in 2009 to explain the process of diminishing a product’s size while maintaining its price.

The practice usually happens in a macroeconomic environment where companies are forced to lower expenditure when faced with inflation. 

How does shrinflation work?

What does shrinkflation mean? In simple terms, shrinkflation can be considered a hidden form of inflation. Shrinkflation is used by companies to deal with inflation and can be immediately evident to customers. 

Under shrinkflation, the price of a product stays the same, but the quantity decreases, enabling companies to get through the higher costs they have to bear due to inflation. For example, the price of a carton of milk could stay the same, but the quantity of milk in it decreases. 

In some cases, the quality of a product may fall to deal with higher costs involved. Shrinkflation is widely used by companies in the food and beverages industry. 

Reasons behind shrinkflation explained

There are various reasons behind shrinkflation. Firms are discouraged to raise prices due to competitive pressure and fear of revenue losses. Companies choose to lower the quality or quantity of a product rather than increase prices.

Higher costs of production can also lead to shrinkflation. To weather inflationary pressures, companies have to offset higher prices for raw materials, ingredients, energy and labour. This may lead to reduced profit margins. 

Raising a product’s price is not an easy option when facing competitors, as it may lead to a significant loss of revenue. Decreasing the quality of the product or lowering the quantity may help maintain sales volumes and offset higher production prices.

Examples of shrinkflation

Examples of shrinkflation include American beverage giant Coca-Cola (KO) reducing the size of its large bottle to 1.75 litres from 2 litres in 2014 and Chicago-based chocolate maker Mondelez reducing the size of its Toblerone chocolate bar to 150 grams from 170 grams. That change was incorporated by altering the shape of the bar by increasing the gaps between the triangular cuts, ensuring lower quantity.