When the shrinkflation bites
It is no secret that prices of daily use commodities in Pakistan are on an uptrend and the rise is encouraging a huge chunk of the society to slash its spending on monthly groceries, medicines and other essential items.
Rampant inflation in Pakistan has impacted all classes of the economy and even the upper strata of the population is bearing the brunt of price hikes.
Struck by the increase in the cost of production, driven by the hike in the price of raw material, and keeping in view the contracting purchasing power of the masses, businessmen of the country have resorted to practice a phenomenon known as shrinkflation.
Shrinkflation takes place when firms reduce the size of their product rather than hiking prices so that the cost pressure is not transferred to the public. Instead, the quantity of the product, available to the public, falls which still enables the population to buy the item at the same price.
According to Investopedia, shrinkflation is also termed package downsizing in business and academic research. A less common usage of this term may refer to a macroeconomic situation where the economy is contracting while also experiencing a rising price levels.
Shrinkflated items
Speaking to The Express Tribune, product manager at a local fast-moving consumer good (FMCG) company in Pakistan said that the country was witnessing stagflation therefore inflation and unemployment were on a rise.
“At such a moment, if a company increases the prices of its items, it will lose a huge chunk of consumers,” he said. “To retain the customers, the firms are forced to turn towards shrinkflation.”
He added that at present, shrinkflation was being witnessed in a lot of daily household items such as soaps, shampoos, food products, cold drinks, mineral water, surf, frozen food and other commodities.
The gist is that edible items are the easiest to shrinkflate and firms belonging to the processed food and packaged food sectors are the fastest to decrease the size of their product while retaining the prices.
He noted that a few firms were clever and they introduced new variant of the same item to hide the fact that they have increased the price. Let’s say that a 500ml mineral water bottle from a certain company costs Rs50, so according to calculations, Rs1 buys 10ml water. However, during the ongoing time, the company could also release a new bottle having volume of 350 ml and sell it for Rs40. Now, Rs1 is buying just 8.75 ml of water.
“This is also a form of shrinkflation that companies cleverly hide through shrewd marketing and smart strategy,” he said. “It is ironic that digital companies such as ride hailing firms also practiced this particular pricing phenomenon. Some of the firms in the sector introduced budget car rides and made bike rides available on their applications to combat rising prices and this is also a type of shrinkflation.”
He remarked that the concept stems from the quote that a dollar today is worth more than a dollar tomorrow which essentially means that a one dollar can buy higher amount of goods and services today than in the future.
“Take the example of matchboxes, one box contained 60 matches in the past but the number was reduced to 40 later on and now it stands at around 30. So even the most basic items are also becoming victims to this practice,” he said.
Citing an international study, he underlined that it found out that the public preferred to buy shrinkflated goods against expensive variants of the same product. “It is no secret that this is a psychological tactic but if companies are able to retain their profits, it bodes well for them.”
Speaking about medicines, he stressed that globally, this industry had also been shrinkflating its output as sizes of a few medicines had decreased while prices remained the same.
“It is lamentable that such an important and essential industry is being forced to shrinkflate but global price hike has dented all the sectors and each one is looking to remain profitable while servicing customers,” he said. “On the flip side, consumers are getting lower amount of medicines which can turn into a health disaster. There is urgent need to address inflation and shrinkflation in vital sectors of the economy such as pharmaceuticals.”
He stressed that many other items such as engine oil of cars, cosmetics, perfumes, office products and stationary were witnessing shrinkflation as well.
Moving on to talk about shrinkflation in office items, he said that a ream of printer papers usually have 500 pages but lately, companies are also releasing packages of 350 and 250 papers at partially higher per paper rates which is a clear ‘less quantity for same price’ practice. On the other hand, a box of staples is going smaller and smaller while being priced the same.
Services industry
“It sounds absurd but shrinkflation is rife in the services industry as well,” he said. “It is not practiced in the same way as in goods industry but the phenomenon of less quantity for same price is widespread in the sector.”
Giving another example, he added that the aviation industry indulges in the practice quite often. After the world began recovering from the Covid-19 pandemic, a few airlines launched a new passenger class below the economy class which offered lower amount of services such as no food and baggage and the ticket price was partially slashed.
In such a scenario, while the size of the aircraft remained constant, the process of shrinkflation was witnessed through reduction in services.
Similarly, the hospitality has also enhanced the amount of classification of rooms over the past few years which is indirect shrinkflation.
“Nearly 50 to 70 years ago, hotels all over the world had flat rates for any room but with time, they introduced a few classes,” he said. “Today, there are many classes such as single, double, regular, king and deluxe suites.”
Even renowned companies like Apple began launching multiple variants of the same phone and while it gives the buyer more choices, the difference in price compared to the features of high price and low price variant is debatable so this can also be classified as shrinkflation.
Moreover, many universities in the world reduced the size of their semester from around six months to four or three and a half months and now they are offering a trimester system. This is also a kind of less quantity at same price costing.
Detailing about the restaurant sector, he stated that eateries tended to reduce the portion sizes due to inflation and this was how they used this strategy.
The ultimate losers of this practice are the consumers because they get less quantity for the same price and so far there are no solutions to this problem, he concluded.
In Pakistan
Rahim Ali, an independent analyst from Lahore, said that the consumers of Pakistan were experiencing massive shrinkflation because Covid-19 slowdown, mounting inflation reading and rampant unemployment had reduced the purchasing power of the people. On the flip side, the cost of production of the companies hiked considerably due to global commodity price rise, scarcity of raw material and increase in minimum wage.
“In such a scenario, if companies focus solely on raising the price of goods, a common man might not be able to afford a lot of them therefore the only option left for them is to shrinkflate the items,” said Ali. “This way, firms can continue to make profit while retaining its customers.”
From a customer’s point of view, they can continue to buy the product albeit at a lower quantity.
He stated that almost every item that could be shrinkflated, is being reduced in size and made available at the same cost. However, he noted that this strategy cannot be practiced on all items can.
Non-shrinkflatable items
According to Ali, while processed food items are easiest to shrinkflate, products like meat, fruit, milk and vegetables cannot be shrinkflated.
“These are items that can only witness price hikes,” he said.
Talking about fruits and vegetables, he said that they are sold in specific units like bananas and oranges are sold on per dozen basis and other commodities of the group are sold on per kg basis.
Therefore, this makes it impossible to shrinkflate these items. Take meat for example, it has to be sold on per kg basis so the only option left for companies here is to raise their prices and that is exactly what the economy and the public is experiencing.
Similarly, oil is purchased on per barrel basis hence the entire world is reeling from its price hike. There is no way to reduce its volume for the importing countries.
“In brief, the share of items that could be shrinkflated is quite less compared to all the available commodities. This strategy cannot be applied on majority of the goods and services,” he said. “Consider the case of automobiles. This formula cannot be implemented on them and this is part of the reason why prices of vehicles in Pakistan are climbing rapidly.”
Moreover, commodities like clothing and footwear are independent of this strategy. Purchase of apparel depends on a person’s size therefore it is impossible to shrinkflate.
“There are countless examples of items where this strategy fails. Customised products in particular are safe from this menace,” Ali said.
Deceptive strategy
Talking about the downsides of shrinkflation, Ali highlighted that some firms preferred to use lower quality inputs to save costs further which in turn reduced the competitiveness of their products.
Using cheap raw material to cut costs adversely impact the image of the industry for the consumers.
“There are countless examples where customers discontinued using products because their quality nosedived,” he said. “This is a deceptive strategy used by companies to cut costs and inflate profits but firms need to understand that consumers would buy shrinkflated products only until they have to compromise to a little extent. Anything beyond that would motivate the buyers to discourage the product or search for alternates altogether.”
On the plus side, the company is able to retain its market share and offer the product at a reduced quantity to its brand loyal customers, he said.
The strategy helps a firm to trim its cost in view of rising inflation and sustain its profits.
“It is witnessed all over the world and Pakistan is no exception but whether it is ethical or not is a separate debate,” he said. “Few firms in Pakistan however use unethical practices to further save cost in addition to shrinkflation, which should be discouraged.”
He pointed out that there was no indicator to measure shrinkflation anywhere in the world hence data for it is largely unavailable.
He detailed this it is a strategy and an initiative can only be measured through success or failure and same was the case of shrinkflation.
“So far, the measure seems to be successful which can be gauged from its widespread implementation in the world. Firms are able to slash their costs significantly and par losses.”
Cost of shrinkflation
Kareem Sohail, who works in a senior position in a biscuit factory in Karachi, admitted that his company and many others turned towards shrinkflation whenever cost of production soared past the sustainable value.
It helps the company maintain its image in the market because customers would bear in mind that the firm did not increase prices of its products despite hike in inflation.
Sometimes, the decrease in volume of product is gradual hence few customers fail to realise that the product has shrunk.
He emphasised that shrinkflation did not come cheap and the company had to invest in advance for it.
“We have to shorten the packaging, rethink the labeling, rearrange the utensils and frames, ration the raw material and perform many other arduous tasks,” he said. “When a third party is in charge of packaging, it becomes a hassle because firms need to be told atleast three months in advance that we need slightly smaller packaging than usual.”
It is no secret that sometimes the product size is reduced while it remains in the same packaging and this is because the company is either exhausting its stored inventory or saving the cost by not investing in new packaging.
Not just that, companies also need to shorten items to a size which fits in regular cartons hence a lot of planning, meetings, approvals and deliberation is involved and even after all this, the skrinkflation strategy might fail. He noted that product teams had to be sharp and agile for successful shrinkflation.
At times, firms also hire external consultants which cost a fortune but they promise that the cost can be covered in a given timeframe, he said.
Furthermore, factories might need to get new machinery installed to perform this activity because not every machine is made keeping in mind that five to seven years down the line, the owner might need to reduce the quantity of goods.
“After that, there is freight cost. We have contracts with logistics firms to deliver certain units per day or per month,” he said. “When we change the quantity, we need to renegotiate the contracts with logistic firms and if they are being difficult, we have to search for new firms afresh.”
Another problem is that of bad batches. The first ones do not come out as planned so they are usually scrapped. Companies keep a margin for bad batches but sometimes they breach that margin as well.
Finally, when the products hit the shelves, there is always a fear of whether the competitors would shrinkflate alongside us or not, he said.
Failure of the competitor to reduce the portion sizes can severely dent profits of one firm and shift consumer base. This is one of the biggest fear incurred everytime a company looks forward to shrinkflate.
All in all shrinkflation is expensive for every company and it take months and sometimes a whole year to recover the investment done for it.
Consumers on the other hand might not respond positively to it and that would result in further loss for the firm, Sohail said.
It is a risky strategy and a lot of planning and manpower needs to be implemented for it.
“For industries such as soaps, it is even harder because it demands amending the shape of the product therefore visualisation, math and trial runs are involved,” he said. “Many a times, factories have to change premises because there are dangerous fumes and a good and well-placed ventilation system needs to be in place.”
He pointed out that sometimes while amending the sizes of products such as soaps, entire ventilation system has to be revamped.
This is part of the reason why shrinkflation in these items is performed quite seldom. On the other hand, it is the easiest for restaurant sector because there is little to no investment involved. The food preparation material can be reduced and that can easily shrinkflate the portion size, he said.
Consumer side
While the practice of shrinkflation has vexed some consumers, others have cherished that the company implemented some other strategy other than price hike.
“Shrinkflation is not a fresh strategy. It has been going on for as long as I can remember,” said Habib Rehman. “It is usually witnessed whenever price hikes are rampant. So it is another way for the companies to address inflation.”
He noted that this way, the purchasing power of the consumer remained the same while the quantity purchased shrunk.
Therefore, the customer is partially free from the stress of incomes remaining the same.
On the flip side, Arham Abbas felt that shrinkflation was no different than inflation and termed it deceptive practice.
“Corporate sector is playing with the mindsets of people. Once it reaches its limit to hike the price of a certain product, it begins to lower the volume while retaining the price tag,” he said.
Abbas called upon the government for taking action against this practice and held the view that the leadership should intervene to address unfair capitalism by the firms.
Aside from shrinkflation, the quality of products is falling as well which is injustice to the end consumers, he exclaimed.