EXPLAINED | What Is Shrinkflation? How It Is Impacting Indian FMCG Industry

Firms adopting shrinkflation hope consumers will not be able to notice the reduction in quantity of products at first glance. Restaurants in the US have also implemented similar steps to save costs

Several major FMCG companies have opted for shrinkflation. Firms such as Hindustan Unilever, Nestle, Dabur, P&G, Coca-Cola, and Pepsico have adopted this method.

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New Delhi: As inflation is going through the roof, consumers in India are trying to manage their budgets while buying daily essential items. However, it's not only the consumers who are feeling the pinch, the manufacturers too are trying different methods to survive the soaring inflation.

Among these methods is shrinkflation, which has turned out to be a boon for the manufacturing sector worldwide. The fast-moving consumer goods (FMCG) companies, specifically, are resorting to such new, innovative ways to mitigate the rise in input cost.

Several firms, mostly in the FMCG industry, have adopted a mix of both price rise and grammage cuts to tackle inflationary pressure.

What is shrinkflation?

Shrinkflation, in economics, is the practice of cutting down the size or quantity of a product, while the rate of the item remains the same or slightly increases. The term, in some cases, may indicate lowering the quality of a product or its ingredients without hiking the product price.

This term was first coined by British economist Pippa Malmgren in 2009. Shrinkflation is mostly common in the FMCG industry, especially in the food and beverages sector.

How does it work for companies?

In the case of rising inflation, manufacturers usually opt for shrinkflation. Instead of hiking the price of any product, companies reduce the size of the item keeping the price of the product untouched. According to the companies, shrinkflation helps them to bear the brunt of higher input costs. The firms adopt this method as it will not immediately affect the buyer and they hope the consumers will not be able to notice the reduction in quantity at first glance.

Why is shrinkflation adopted?

Mostly, the practice of shrinkflation is adopted when there is a surging inflation in the market. Rising costs of production, higher raw material cost, price rise in commodities such as oil, coal, and steel, and high labour cost may cause shrinkflation. Besides, stiff competition in the marketplace can also cause shrinkflation.

Shrinkflation in the Indian market

Several major FMCG companies have opted for shrinkflation. Firms such as Hindustan Unilever, Nestle, Dabur, P&G, Coca-Cola, and Pepsico have adopted this method.

According to news reports, Haldiram has cut down the size of its aloo bhujia packet to 42 gm from 55 gm. Nestle has reduced the quantity of Maggi from 80 gm to 55 gm. Soap brands like Vim have cut down the size of its soap to 135 gm from 155 gm.

News agency Bloomberg has reported that amid rising costs of edible oils, grains, and fuel, Britannia and Dabur have both chosen the path of shrinkflation.

Several chief executives of the top FMCG companies in India have said that the operating environment has become extremely challenging due to sharp rise in inflation. This is causing a drastic decline in consumption across the board.

Inflation across the globe is mostly because of the ongoing Russia-Ukraine war that caused supply disruption and rising cost in energy basket. As the world, which was opening gradually after the Covid-19 pandemic, faced a sudden wrath of the war, causing serious economic issues around the planet. Russia’s invasion of Ukraine has also led to several strict sanctions by the Western countries, leading to supply disruptions and rising prices in the commodity basket.

Meanwhile, India’s inflation for April zoomed to 7.8 per cent, an eight-year high, thus breaking the upper limit of the Reserve Bank of India’s (RBI’s) threshold of 6 per cent.

From food to commodities, prices across segments have surged which resulted in pushing up wholesale price-based (WPI) inflation in April to a new high of 15.08 per cent. In March, WPI-based inflation was 14.55 per cent, while it was 10.74 per cent in April last year.

Since April last year, this is for the 13th consecutive month that the WPI inflation has remained in double digit.

To tame the surging inflation, the central bank, in an unscheduled policy review meeting of its Monetary Policy Committee (MPC), on May 4, 2022, hiked the policy repo rate with immediate effect under the liquidity adjustment facility (LAF) by 40 basis points to 4.40 per cent.

Impact on global market

Shrinkflation is not an Indian phenomenon alone. Restaurants and food joints in the US have implemented similar measures to save costs. According to the Bloomberg report quoted above, Domino's Pizza and Subway have reduced sizes of their products to mitigate rising expenses. Burger King will also see the same reduction for their nugget meals.

The US is battling higher inflation, which is at a 40-year high. Many manufacturers either have hiked prices of their products or adopted shrinkflation to tackle the rising input costs.

Not only the restaurants and eateries, groceries and other FMCG companies in the US are also going for shrinkflation.

Several news reports mentioned that from Gatorade to toilet papers, everything can see quantity reduction in the US market.