More than 2,500 products have decreased in size in the past five years, often with no corresponding price reduction, according to the Office for National Statistics. Shrinkflation has been criticised as underhand, but is it justifiable?
To improve their profit margins or protect against rising manufacturing costs, businesses can directly increase prices, cut promotions or shrink their products. Given the current cost pressures, especially on imports – combined with the margin erosion that has resulted from a long supermarket price war – shrinkflation has been the only way for many firms to keep their goods on retailers’ shelves. This is a tried and tested approach, but public awareness of it has been increasing.
Some established supermarkets are also looking to beat the discount chains at their own game by keeping a lid on supply costs and hence their own prices. Shrinkflation enables them to do this. Rather than simply cutting sizes across the board, the smarter operators are shrinking their goods as one part of a well-structured medium-term plan. They may simultaneously introduce larger packs that offer better value, for instance.
A real understanding of your customers is crucial, as a significantly smaller pack with a slightly reduced price could become far more attractive to certain consumers. We all have varying price thresholds, which also differ by product category, above which we consider an item to be too expensive. Why not test this out yourself when you’re next at the shops?
James Brown is a partner at Simon-Kucher
Shrinkflation is a risky move: you’re trying to fool customers into paying the same for less and, if they twig what’s happening, they may well vote with their feet. You should instead take a more strategic look at the product’s overall cost. By analysing the fixed and variable elements, you may be able to identify ways to reduce this and improve efficiency without affecting quality or value.
You could also consolidate your supply chain. This would eliminate some of the overheads that come with using a large number of suppliers and it should help you to cut prices without affecting profitability.
Much can be achieved by innovation too. If you develop a product that offers improved quality or value, consumers may well be willing to pay more for less of it. Alternatively, the adoption of lighter or more compact packaging could reduce distribution costs.
Lastly, if your business is buying or selling goods overseas, you should consider hedging against future exchange-rate volatility. By doing so, you can mitigate the effects of sharp currency fluctuations and so help to protect margins. Where possible, you should consider a “natural” hedge by adapting trading agreements to ensure that goods are being bought and sold in the same currency.