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Home / Economy / What is ‘shrinkflation’ and how is it playing out in India?

This is a form of inflation that isn’t easily visible to you, the consumer. Yet it has been creeping into your consumption basket lately, one small cut at a time. To tackle high raw material costs, several fast-moving consumer goods (FMCG) companies in India are downsizing product packets, while keeping the price unchanged. Dubbed ‘shrinkflation’, this effectively means consumers are paying the same for less of the product.

Russia's war with Ukraine has sent commodity prices soaring globally, making it dearer for companies to procure raw materials they need to make daily consumer goods such as eatables and home and personal care products. Overall wholesale inflation in India marched to a 30-year high last month, while Hindustan Unilever Ltd, a top FMCG company, put its net material inflation (NMI) in the March quarter at 4.5 times that in the June quarter of 2020.

Meanwhile, retail inflation has also been hovering above the central bank’s comfort limit of 6% for five months now, and hit an eight-year high in April. This is prompting a shift in consumption patterns. Price-sensitive Indians are moving towards low-value packs, both in rural and urban areas, across product categories from beverages to packaged foods, shows data compiled by Bizom, a retail data platform. This leaves FMCG companies with the unenviable choice between raising prices and shrinking the size of the products.

However, the strategy won’t remain tacit anymore as a recent government notification has mandated that companies display the unit sale prices of pre-packaged items.

Shrinking products

With inflation raging, grammage cuts by companies have become pervasive as a method to trim costs. For end consumers this means their bar of soap may run out sooner than expected or a 10 packet of chips isn’t as filling.

During February-April, data analytics firm Kantar noted that the average pack size of FMCG products in India shrank by nearly 15% year on year. Shrinkages are even more common at popular price points of 5, 10, 15 and 20, for which companies prefer grammage cuts over directly raising prices to say, 7 or 12.

Over the past year, a leading coffee brand and a detergent brand have downsized their 10 packs by about 8% and 6%, respectively, Kantar told Mint. Parle Products, which makes Parle-G, India’s highest selling biscuit brand, took an indirect price hike of 7-8% on Parle-G packs priced below 10 by reducing their grammage over the last six-months.

Price hikes

But inflation is also forcing companies to take direct price increases. In a recent update, Kantar said every kilogram of packaged consumer goods sold in India in February-April was 10% costlier than a year earlier. In large categories such as soaps, detergents, shampoo, biscuits and edible oils, price hikes were to the tune of 15-20% within key stock keeping units, analysts at BNP Paribas India said in a report dated 17 March.

In turn, the surge in prices of daily goods is hurting consumer demand, researcher Nielsen said in an FMCG market report earlier this month. While price increases help companies protect margins, they also prompt consumers to look for better deals or move to cheaper brands. BNP Paribas pointed out that the trend of prices rising faster than consumers’ wages was hurting volumes and leading to instances of downtrading, where consumers shift to cheaper brands or buy smaller packs. Companies, thus, also risk losing market share to rivals.

Consumer preference

What do consumers prefer—a price hike or grammage cuts? While the jury is still out, research suggests consumers are more aware and sensitive to price changes over quantity. Unlike shrinkflation which is “hidden", a price hike is immediately evident to them. A 2004 study by researchers John Gourville and Jonathan Koehler concluded that “firms may be better off maintaining margins by reducing the quantity contained in their products".

Human cognitive bias plays a role here. Researchers attribute this behavioural outcome to automatic cognitive response—the fact that prices are more noticeable than size. However, studies have also warned against products where downsizing packs would not work. These include items with perceptible benchmark sizes such as a carton of eggs and a pack of butter. “Deviations from these standards may register much more quickly with consumers," say Gourville and Koehler.

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