It’s not just inflation, the COVID-19 pandemic is also feeding ‘shrinkflation’

As the economy recovers from the COVID-19 pandemic, consumers are increasingly experiencing “shrinkflation” — whether they realize it or not.

It’s the decades-old strategy, deployed most often by food manufacturers and producers of consumer staples, of shrinking product sizes while keeping prices unchanged. And as the global ramp-up in economic activity drives up food prices and transportation costs, reports of “shrinkflation” are on the rise.

U.S. ice cream maker Tillamook, for example, recently warned consumers in a blog post it was changing its carton size from 56oz to 48oz, while keeping the price constant, due to rising cost of ingredients. In February, Nutella-maker Ferrero similarly cited growing costs when it said it would reduce the size of jars of its world-famous nutty cholate spread in the U.K. and Belgium while keeping price unaltered. And U.S. consumers have noticed shrinking boxes of General Mills cereals just as the company warned of “pricing actions” due to rising inflationary pressures.

Manufacturers are trying to protect their margins as they face rising input and transportation costs tied to the economic recovery, says Sri Thanabalasingam, senior economist at TD.

Food prices worldwide were nearly 34 per cent higher in June compared to the same month in 2020, according to the Food and Agriculture Organization of the United Nations (FAO). The cost of moving products has been soaring due to a combination of higher fuel prices and supply-chain backlogs. The cost of shipping a 40-foot container across the world has more than quadrupled since July of last year, according to one U.K. shipping consulting firm.

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Companies are offloading some of those higher costs onto clients and consumers via higher prices. Inflation in the U.S. reached a 13-year high in June, with prices up 5.4 per cent in the month compared with a year earlier. In Canada, the Consumer Price Index rose 3.6 per cent in May, the steepest annual increase since May 2011.

But higher sticker prices is only the most visible way in which businesses are passing some of the extra costs on to consumers. Trimming product sizes while keeping prices unchanged is “a bit of a stealthy way,” to do the same thing, Thanabalasingam says.

The reason why manufacturers of consumer packaged goods in particular may opt for shrinkflation is simple says Sridhar Moorthy, Manny Rotman Chair in Marketing at the University of Toronto’s Rotman School of Management: shoppers are much more likely to notice an increase in prices than a change in quantity.

One study based on ice cream purchases in Chicago, for example, found that consumers were four times more sensitive to changes in prices than they were to changes in package size.

“This result implies that marketing managers can use downsizing as a hidden price increase in order to pass through increases in production costs, that is, cost of raw materials, and maintain, or increase, their profits,” the researchers concluded.

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Sneaky price increases are happening beyond the confines of grocery aisles. Auto manufacturers and dealers, for example, are widely reported to have dialed back discounts and promotions on new vehicles this summer as the sector struggles with supply snags caused by a shortage of semiconductor chips, a key component of modern cards and trucks.

“Cutting back on promotions is probably the easiest thing that a firm can do,” Moorthy says.

In a competitive market, though, firms usually “pay a price” for holding back on promotions if competitors don’t do the same, he adds.

Shrinkflation, on the other hand, tends to be less noticeable. Over time, consumers may notice that, say, they’re going through a cereal book that used to last two weeks in a shorter amount of time, Moorthy says. And eventually, they might adjust their shopping behaviour accordingly.

“But compared to a price reaction, this will be much slower,” Moorthy says.

To help consumers better compare prices, many grocery stores have taken to indicate unit pricing next to package pricing. For example, the unit price a two-litre carton of milk prices at $7 is $3.5, while a 500-ml milk carton selling for $2 is priced at $4 per litre.

Generally, however, Canada doesn’t have “a standardized approach to unit-pricing … for most consumer products,” says Ken Whitehurst, executive director of the Consumers Council of Canada, which has been advocating for such a national approach. Quebec is the only province that regulates unit pricing.

Still, whether or not they notice it, shrinkflation has a palpable consumers’ bottom line, Thanabalasingam says.

“More of a household’s finances … get devoted towards spending on things like groceries, on and on food purchases, which then leaves less available income, especially if wages aren’t rising as quickly,” he says.

The good news for shoppers, though, is the current bout of inflation and shrinkflation is likely transitory, according to Thanabalasingam.

As the economy re-adjusts to normal levels of business activity, “we do expect that sort of impact to dissipate,” he says.