Explained: What is Shrinkflation & Why FMCG Companies are Opting for It?
Rising inflation is shrinking consumer baskets and this is making major FMCG companies adopt a business tactic consumers are “not supposed to see”
India's retail inflation, which rose to a 95-month high at 7.79% in April, was 7.1% in June 2022. Since food inflation is continuously high, people's purchasing decisions have changed and made them more price-sensitive. In fact, ratings agency Nomura's analysts say inflation has not peaked yet and headline inflation is likely to breach the 8% mark in coming months.
The central government monitors retail and wholesale prices of 22 essential food commodities, which saw a rise in retail prices during December-January 2021, according to a Lok Sabha response.
"Prices of essential food commodities are volatile as they tend to get affected by several factors, such as mismatch in demand and supply, seasonality, supply chain constraints, artificial shortage created by hoarding and black marketing, rise in international prices, etc," Ashwini Kumar Choubey, Minister of State for Consumer Affairs, Food and Public Distribution, told the Lok Sabha.
While inflation has shrunk consumers' consumption baskets, it has also motivated many fast-moving consumer Goods (FMCG) companies to adopt a business tactic known as Shrinkflation to deal with inflation woes and to keep their businesses afloat.
What is Shrinkflation?
In 2018, an 80 gram Parle-G biscuit packet, which cost Rs 5, was reduced to 76 gram. While the cost remained the same the quantity of biscuits in the packet decreased. This means that consumers were paying the same price for the biscuit but for a lesser quantity. This covert tactic adopted by businesses is known as Shrinkflation. The reason to cut the pack size was to tackle rising raw material costs of ingredients such as wheat flour, milk, sugar and even packaging materials.
Shrinkflation was quoted as "inflation's ugly cousin" or the " inflation you're not supposed to see" in a June 2022 article published by ResearchGate. It is the practice of downsizing a product while maintaining the MRP or final price. It can also be seen as an alternative to increasing prices of products. Shrinkflation is not illegal as long as the net weight, final price, etc, are clearly labelled on the product.
What Causes Shrinkflation?
High production costs and market competition play a major role in adopting shrinkflation in businesses. For instance, in 2021, General Mills, an American multinational manufacturer and marketer of branded consumer foods had announced that their organisation would be taking pricing actions due to the rising costs of ingredients, packaging, labour, etc.
"This change also allows more efficient truck loading leading to fewer trucks on the road and fewer gallons of fuel used, which is important in both reducing global emissions as well as offsetting increased costs associated with inflation," the company's spokesperson had said.
Since the FMCG market is highly competitive, producers aim to reach a middle ground that keeps them from losing customers while maintaining their revenue growth. For better understanding, here are some examples of shrinkflation:
- Reducing size of a chocolate bar from 55 grams to 50 grams but price remaining the same.
- Cutting number of days of an internet data pack from two months to 56 days but keeping the price unaltered.
- Shrinking the size of a cold drink bottle from 800 ml to 750 ml but the MRP is unchanged.
Shrinkflation in India
In India, top food companies such as Hindustan Unilever, Nestle, Britannia, Coca Cola, Pepsi Co, Dabur and Procter & Gamble (P&G) have adopted this business strategy. One example of this is Nestle, which has reduced the net weight of a Maggie packet from 80 grams to 55 grams while soap brands like Vim now weigh 135 grams from the earlier 155 grams.
"As inflation increases, prices rise and this could cause overall consumption in the market to dip drastically," Vivek Kaul, author and economic commentator told FactChecker.
The retail inflation hit an eight-year high of 7.8% in April 2022. The depreciation in the Indian rupee added to the inflation woes. The rupee hit an all-time low of Rs 77.68 against the US dollar in May 2022. This resulted in consumer durable goods getting costlier in the country. Other factors such as the Russia-Ukraine war, COVID-induced lockdowns in China also played key roles, said Kaul.
So, to ease the stress for most industries, the Reserve Bank of India hiked repo rate by 90 basis points in five weeks during May-June, 2022 to 4.9% from the earlier 4% . Following this rate hike, most Indian banks raised the lending rates, which in turn increased the home loan and car loan cost for buyers. The RBI said the decisions were aimed at achieving the medium-term target for consumer price index (CPI) inflation of 4% while supporting growth.
