Economy

Shrinkflation 101: The Economics of Small Grocery Stores

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Grocery store shoppers notice something is wrong. Bags of chips filled with air. Shrunken soup cans. Reduced detergent packets.

Companies are cutting back on products without lowering prices, and consumer posts from Reddit has Tic Tac ” in the New York Times comments section, they are dripping with outrage over this trend, widely known as “Shrinkflation.”

The practice is not new. Sellers have been quietly discounting their products to avoid raising prices. for centuriesand experts think it’s a no-brainer business strategy since at least 1988, when Chock Full o’Nuts reduced its one-pound canister of coffee to 13 ounces and its competitors followed suit.

But the indignation is acute today. President Biden has exploited anxiety in ways recent video. (“What makes me the most angry is that ice cream cartons have actually decreased in size, but not in price,” he lamented.) The companies themselves denounce the practice by using marketing tips. A Canadian channel unveiled a growth pizza. (“In terms of pizza,” the company’s press release jokes, “a bigger piece of the pie.”)

But how does contraction and inflation work, economically? Is this happening more often in the United States, and if so, does this mean that official data fails to capture the true extent of inflation? Below is an explanation of the trend and what it means for your portfolio.

It may seem hard to believe, but contraction in inflation seems to be happening less often today than it did a few years ago.

The government is adjusting official inflation data to account for shrinking product sizes, and data collectors who monitor size adjustments have detected fewer instances of shrinking household items and groceries in 2023 than a few years earlier.

Downsizing was common in 2016, when headline inflation was low. It became rarer after the pandemic began in 2020, and more recently it began returning to pre-pandemic levels, Bureau of Labor Statistics analysts said. (Economists have noted that the set of products measured has changed somewhat over the years, making comparisons over time a rougher approximation than an exact science.)

Although downsizing doesn’t happen as often, shrinkage is having a big impact on a few key categories today, including candy, detergent and toilet paper.

From 2019 to 2023, shrinkage added about 3.6 percentage points to inflation for products like paper towels and toilet paper, compared to 1.2 percentage points between 2015 and 2019. Shrinkage has also contributed more strongly to the rise in prices of candy and cleaning products in recent years. .

For snacks, the reduction in formats added 2.6 percentage points to inflation, which roughly corresponds to their contribution from 2015 to 2019. The government has not yet published an analysis on the contribution of the contraction in overall inflation from 2019 to 2023.

The contraction itself is accounted for in official inflation data, but another sneaky force costing consumers goes unnoticed in the statistics. Companies sometimes use cheaper materials to save on costs, in a practice some call “skimping.” This is very difficult for the government to measure.

If your roll of paper towel costs the same but you get fewer sheets – shrinkage and inflation – this clearly shows up as an increase in unit cost on top of official inflation. If your paper towels are the same size but are suddenly made of a worse quality material – lightweight – the government doesn’t record that as inflation.

In fact, food and household products are generally not directly adjusted for quality changes other than height and weight, government statisticians said. So if your brand of microwave meals starts using vegetable oil instead of olive oil, or your once-resealable package loses its zipper, it won’t show.

Companies choose to downsize their products rather than charge more for a simple reason: Consumers often pay more attention to prices than sizes.

When the quantity decreases, “people may notice it, but often they don’t,” said John Gourville, a professor at Harvard Business School. “You don’t get sticker shock.”

In one famous example, Dannon sold yogurt in larger containers than its competitor Yoplait – eight ounces versus six. Consumers were convinced that Dannon’s yogurt was more expensive, without realizing that it was simply bigger. Eventually, Mr. Gourville said, the company gave in and shrank its packaging.

“Sales of Dannon’s yogurt, which declined immediately after the downsizing, have since rebounded,” the Times reported in 2003. “And Dannon now pockets a bigger profit on each cup of yogurt sold.”

Not all size changes are equal. Some may be surreptitious, such as increasing the size of an indentation at the bottom of a jar or shaving the corners of a bar of soap. Consumers especially have difficulty recognizing changes in size when they occur in three dimensions, said Nailya Ordabayeva, an associate professor at Dartmouth’s Tuck School of Business who has studied consumer responses.

“The brain is programmed to perform simpler heuristics,” she explained.

Additionally, she noted, consumers might be willing to accept smaller quantities or even prefer them in some cases. Junk food products have sometimes been reduced to reduce calorie counts, for example.

While companies simply care about their profits – not their consumers – some pricing experts worry that a persistent contraction in inflation could scare away buyers.

When raw material costs were climbing and inflation was making headlines, consumers likely realized that companies needed to pass on some of those increases. They may even have preferred smaller products at higher prices, several experts said.

But today, headline inflation has slowed: after peaking at 9.1% in July 2022, it fell to 3.1% in January. And consumers may be less willing to accept contracting inflation now that businesses face less severe cost pressures, not least because food company profits have been… and in many cases remain -high.

They may simply feel ripped off.

“I see consumers becoming more and more aware of shrinkage,” said Jun Yao, a marketing professor at Macquarie University in Australia who has studied the trend.

And as more chains and online retailers list unit costs, shoppers may be more sensitive to size changes, Mr. Yao said, an awareness that could thwart future shrinkage.

This practice, he said, “can backfire – and damage the brand’s image.”