Is Shrinkflation Really a Thing?

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Is Shrinkflation Really a Thing?
Find yourself asking “Where’s the beef?” when you order a burger these days? You could be a victim of “Shrinkflation.” Rising demand post-pandemic and disrupted supply chains are impacting many of the goods and foods we consume. Will we be getting less of a product for the same price as companies try to protect their bottom lines? Hear what a UCF economist and Marketing professors have to say about what to expect and whether you need to watch out for Shrinkflators around every corner.

 

Featured Guests

Episode Highlights

  • 00:14 – Introduction
  • 01:26 – Are we experiencing inflation?
  • 03:40 – What prompts companies to become shrinkflators?
  • 05:30 – What are some examples of shrinkflation?
  • 08:40 – Are we more sensitive to price than changes in service or packaging?
  • 13:00 – Are there any consumer benefits to shrinkage?
  • 28:00 – Will shrinkflation be here in a year?
  • 32:04 – Dean Jarley’s final thoughts

 

Episode Transcription

Assorted Speakers:“Where’s the beef?” “Why is my six-count nugget now a five count nugget? Where’s my other nugget?” “You mean shrinkage?” “Significant shrinkage.” “So you feel you were short changed?” “Yes.”

Zemack-Rugar: So apparently if you reduced one dimension, but you make it longer, then people perceive the same size because we can’t assess volume.

Jarley (Host): : As Erin Turner would say, this is how they get ya.

Jarley: : This show is all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? Onto our show…

Jarley: A couple of weeks ago, I read an article claiming that for a variety of reasons, some companies were cutting back on the size of their offerings rather than increasing their price. I was intrigued. So I sent an email out to the faculty and within an hour, I had 10 people who had volunteered to become part of a podcast on this subject. It made me think that shrinkflation was at the very least, well, an academic thing. Conflicting schedules reduced the size of our panel from 10 to five, but I have one economist and four associate professors of marketing with me today to talk about what’s going on. Muge Kullu, Yael Zemack-Rugar, Axel Stock and Anand Krishnamoorthy all hail from our Marketing Department. Listen in.
Before we get to shrinkflation, Uluc, are we experiencing inflation right now?

Ayson: Yes, we are. So if you look at TPI inflation, it’s called headline inflation. It has increased in the past three months. We went from below 2 percent to 2.6, 4.1. Now it’s just four points, 4.6. And then now it’s just at 4.9, uh, which is considered high based on the past three decades. And it’s high compared to the Fed implicit inflation target as well, which is 2 percent. So it is increasing.

Jarley: It’s a really odd situation here. We’ve had an economy that’s been largely shut down for a year. That’s coming back. Give me some sense of how much of this is sort of a supply chain issue and how much of it is due to other factors.

Kullu: Companies had trouble from the supply end, also from the demand end, you know, like people just ran to the store and cleaned off the shelves for toilet paper. So like demand went crazy and suppliers shut down first; China shut down. So, and that was a wave of shutdowns in different parts of the world in different parts. At times through the year and then logistics shut down, now there was a lot of trouble passing through the customs and the border shut down. There was a lot of challenges from both ends of the supply chain from both the supply side and the demand side, right?

Jarley: Uluc agrees.

Ayson: So that’s how it started on disruptions of supply chains. We call this in economics, we have this Phillips Curve. That’s how we describe inflation. Now as these two components, main components – cost push and demand pull. So on the supply chain, disruptions affect the cost per side of things. And now we have all this stimulus money and then infrastructure spending and also the normalization. So we’re kind of finding our feet that it means demand is picking up. So it was kind of pulling inflation. So we have both factors happening at the same time. There’s a third component, which is inflation expectations. That seems to be still anchored at low level.

Jarley: The market thinks this is temporary.

Ayson: That is correct.

Jarley: If I’m facing rising costs or shortages in my input, I really have three choices. I can raise my price, but I have two other alternatives. One would be to substitute in a less expensive input and that could be a quality reduction or, in some cases, I can shrink the size of what I’m selling you, which is what we’re going to call street place. But tell me a little bit about why companies would choose one or the other. And then talk to me a little bit about quantum pricing, Uluc.

Ayson: So it really depends on if you have competitors or not. So if you have close substitutes, so a lot of competitors, then you can’t afford to increase prices. So you have to make cuts other places, or you have to, as you say, decrease either the quality or the quantity. These companies that are doing this are mostly in the food and beverage industry, or they have a lot of competitors where there’s a lot of awareness or people pay attention to prices more so than they do to quantity.

Jarley: Cause it’s clumpy, right?

Ayson: And if I’m buying a box of cereal, that’s uh, 15 ounces and I, the company reduces the 14.5. It’s the same box. I’m not going to notice that, right? So I’m just going to pay attention to the price so they can do this, but we do live in this social media age. So if the word gets out, people as consumer awareness, I don’t know how, how much you can do this. How long you can keep this up?

Quantum pricing. First of all, is these companies that sell multiple products. I mean, I sell multiple products and I, um, place my products in these price ranges. So I, I have bunch of things that I sell at 5 99. I have other things that I sell at 3 99. So instead of moving it from 3 99, 9, 9 to 5 99, I just adjust the quantity. I saw it reduced the quality, as you’re saying,

Jarley: Uluc gave us a lot to unpack here. So I’m going to ask my marketing colleagues to help me break this down. Well, we’ll let you know it’s food as the most obvious place for shrinkflation, but can you give me a few other examples? Muge…

Kullu: First class and business class and economy class seats in an aircraft. Still, we are talking about the size and the critical resource we are talking about is the aircraft space. You know, there have been airlines who offered all business and they’re full of the aircraft, like 50 seats instead of 250, right? So you can put 250 economy versus 50 business class. It is five times. It occupies five times the space. So which one is a better strategy is the company’s decision, given the profits per unit resource consumed. So that’s a very critical aspect of the product that companies should really focus on. Like for any profit may be high for a business class, but then you look at the amount of space it takes up from your aircraft, maybe economy like selling five economy, class seats, maybe more profitable. You know, the company should be careful about those kinds of decisions when they’re making these product blind product mix menus.

Jarley: And in an earlier conversation you and I had, and for our student listeners, right, increasing class sizes can be a form of form of shrink question, right?

Kullu: Exactly, exactly. To teacher student ratios, amount of time, you spend with an, um, representative in a bank, you know, in a service then why I’m at the time you can, you know, the resource, whatever the key resources, what are the expensive resource you’re talking about, then how much money is needed for each product becomes your decision makers?

Jarley: Anand, I thought I saw a recent article where Walmart’s thinking of eliminating all of its front-end personnel and just go to self checkout. Is that a form of shrinklation?

Krishnamoorthy: What is the biggest expense on the floor? It is people. Walmart, as it is, has a very few people on the floor. If much of it can be automated, then a lot of these cost savings can then result presumably in the lower prices that Walmart likes to tout. Anyway, because Walmart is about low prices. That is not as big a deal for some of these other players where pricing is not their key differentiator, but at Walmart it’s always about pricing. What can they do to bring prices down in a world where costs are difficult to strength, shrink, uh, labor, for example, that is the first way you can, uh, if a product shrinkage is not going to work, then you would look at shrinking on other expenses like labor. What a manufacturer is doing with shrinkflation is pretty much what Walmart or other retailers are doing with wages, because when it comes to a retailer, um, nearly all the product you put on the shelf is made by someone else. So then when it comes to your own product, so to speak, it is your employee labor force. And that is what you would like to shrink.

Jarley: So in general, are people more sensitive to price than they are changes in service or changes in packaging?

Krishnamoorthy: Yes. They are, and there are a lot of reasons why. The most obvious is that consumers tend to pay attention to top-line prices. They remember the price of the item. They do not remember the size or weight of the item. I can ask you a simple question. What was the size of a canned vegetable, a vegetable in cans, uh, 15, 20 years ago? What was the weight? Do you remember, anybody? It was 16 ounces. Why it’s a pound, right? The challenge is, is it even, you know what it is today, go to Publix and look. It’s 14 and a half ounces. Every can of vegetables is 14 and a half ounces. Why haven’t we heard about it? We are experts in the room. If we don’t know that the package has shrunk from 16 ounces to 14 and a half over the last 15 years, how in the world are consumers who are mostly clueless about these things are going to figure this out? Consumers remember, or at least pay attention, to prices.

Krishnamoorthy: They don’t pay as much attention to product sizing. Ice cream, for example. There was a study on ice cream consumption in Chicago that they found that consumers are four times as sensitive to changes in price as a package size drops. Clearly consumers notice that a lot more. I’m sure a Yael in the room can probably talk about the behavioral aspect, but the primary argument is that there’s a lot of consumer processing required to keep track of sizes, et cetera. That is…. pricing is slightly easier to remember. Pricing is something consumers always look at. So it’s slightly easier to process; hence, that is the thing that consumers pay attention to. And that is what they are most sensitive to

Jarley: Yael, you wanted to weigh in on this. Are we seeing the dark side of marketing here?

Zemack-Rugar: Dark side. So I agree with Anand and the prices are high sensitivity item. And I also completely agree that we do not look at labels to understand how many ounces they are. What is a serving, how many calories. These are not things we bother ourselves with. However, we do perceive sizes and we do notice changes in sizes. It’s so perceptually. So if you’re going to engage in shrinkflation, for example, maybe lower the quantity in the bag, but don’t change the size of the bag. So there’s fewer ounces of chips in there, but it looks like the same bag, just more air, then people won’t notice because they don’t read what’s on the package. However, if you shrink the package, they will notice and consistent with all the perceptual errors that we can generally live on.
We’re going to see some perceptual here, too, but this is actually really, really interesting. So when packages grow, consumers totally mi-estimated when McDonald’s makes their drink 50 percent bigger. People estimated it grew by about 30 percent. That’s why they also misestimate the calorie in a bigger meal or a bigger serving of fries or a 6-inch versus… they misestimate it and they underestimate it. But interestingly, when things shrink, consumers are pretty accurate. So if your package is going to shrink by half, consumers are going to estimate that it shrank by about in half. And they will associate that with a price to the extent that they know and remember the price, then they will expect the price to drop with the package. So that is something you have to deal with when you’re changing the packaging itself. When the shrinkflation is visually apparent, then that’s something that marketers have to deal with.

Jarley: So, Axel, are there competitive pressures here as well? So I’m thinking for example, firms that have more competitors might have to play different sorts of games than ones with fewer competitors.

Stock: As I said earlier, you know, consumers might not react to the shrinkage because they don’t notice the shrinkage, but when they start consuming, then certainly one will notice, you know, I need another package to satisfy my consumption. So the way I see the market is, you know, there are different consumers, there’s different, demands. Or let’s say we have some low demand consumers and then we have some high demand consumers. So if the firm is basically shrinking the package, then our high demand consumers may have to purchase an additional package to satisfy their demand. Whereas the low demand consumers, they may be OK, but then the price per package will increase. But actually the matching of their demand with the amount of product that is provided may actually be advantages. So for those consumers, it may actually be that shrinkflation may provide an advantage.
Whereas the high demand consumers, they actually, you know, they suffer. They may have to buy another package. They have to pay a higher price per unit. But this may not be addressing your question exactly. I think competitive pressures are certainly to be considered. So we can imagine that if one of the competitors goes out and shrinks their packages, then what will happen in the competitive scenario is that those consumers who like the big packages go to the competitor. So the shrinkage hasn’t had much, which was the low demand consumers. The person that the competitor who stays with the current package size will have a demand advantage with a high demand consumers. And now, basically the question is short to the competitor and move ahead and just match the package size. So there’s a trade off here, because we are losing, you know, the high demand consumers. We are gaining the low demand consumer.
So it, it could be what we call a prisoner’s dilemma. Where all of the firms lose or actually the opposite. It could also reside, where all the firms gain where price competition has reduced. And now, you know, everybody’s better off as smaller packages, but just in general, I think there are two effects. One is the price effect, which is negative for consumers, who pay a higher unit price, but then there’s a quantity effect, which is basically advantages for those low demand consumers. They can better match the units that they purchase with what they need to consume. That could be it.

Jarley: Okay. I need to make sure we’re speaking the same language here. When you talk about a low demand consumer, you mean someone who wants to consume a smaller amount of the product. So the example I’m going to use here, the 100-calorie pack, it comes to mind as an example of this, and I’m willing to bet the people who are purchasing the 100-calorie package are paying more for it on a per unit basis. They just got it in the bigger box. Am I right about this? And is that a low demand, Yael?

Zemack-Rugar: Clearly agree with Axel that some people prefer small quantities. And in fact, that creates an advantage for smaller packaging for certain products and your 100-calorie pack is an excellent example because it’s usually applied to indulgence products. So there are no 100-calorie packs for carrots, but there are usually for Oreos. And why, because we know we can’t control our own consumption of these indulgent goods, cookies, ice cream. So, the manufacturer helps us control it by giving us a small package. And then we pay a premium for that control, the premium that you pay to buy 10 individual size 100-calorie packs of Oreos over one package of Oreos. I mean, weigh them out at home, put them in little plastic bags. But we know once we open that package, it’s very hard for us to stop. And those little packages serve as a stopping point. And I think that’s one of the ways from a behavioral perspective that marketers can think about how to position smaller packages as a good thing, as a service to the consumer, as an improvement and innovation in their product. If they fall into these categories, then they can actually leverage shrinkage to both reduce the package size and increase the price. And so an added benefit.

Jarley: Yet Costco doesn’t stock giant bags of 100-calorie packages.

Zemack-Rugar: No, they do. They chose…they have boxes of like 25 bags of small bags of chips. It’s not size, maybe less a calorie consideration than a convenience consideration, but still, which is another dimension that gives an advantage to a smaller package. But still it would be cheaper to buy an enormous bag of Veggie Chips, then 20 individualized bags, but people buy individualized bags and then pay a premium for them.

Jarley: Anand, go ahead.

Krishnamoorthy: There are differences in terms of how retailers actually display unit prices. Costco is one of those stores that actually prominently displays the price per unit. Most stores do not. In fact, I think in 30 or 35 states, there is not even a law mandating that unit prices be displayed. And in the 10 states that have laws, it is all over the place. I can give an example with tea bags, for example, the same retailer. Let’s say you have one Brand A and Brand B. Under Brand A, you could say the price is 27 cents per bag. And Brand B, you would say the price is a $1.22 per ounce. So even within the same retailer, within the same product category, you could have many different ways in which unit prices are displayed. And if at all, the places you shop Costco is probably the one that hits the unit pricing on the head in terms of prominently displaying it. Of all the times. I’ve shopped at Costco, not once have we heard any consumer in the paper towel aisle debate choices of brands or products based on the unit price. That is a store that puts the unit price in font size 40. Then if consumers don’t pay attention to that at Costco, why would they pay attention to that at Publix where the unit pricing is in font size 2.

Jarley: There are other areas where permanent pricing is the norm. Let me give you an example: A gallon of gas is a gallon of gas and you see very little variance there. But I want to comment on this because we had an exchange around this price per square foot in housing is a pretty common metric.

Kullu: Price per square foot is actually a concave function. You know, the bigger the house, price per square foot goes down. But then you buy a bigger house. The price goes up, but the marginal increase is lower. As you go bigger and as a real estate construction company, it is really very challenging to make decisions because you have to do it well before you know anything about how much customers are willing to pay. You know, that is kind of a very scary, very risky industry. So one thing that we’re looking at is how big these houses should be and should they have any flexibility? And what we find is flexibility is key to product line flexibility. That’s what we call it. You know, just the firms should be able to make changes as they go and plan. Yes, they buy the land, but they keep their options open. If they want very large luxurious homes or just moderate model houses, no? Or if they want maybe big land and they will divide it into several subdivisions. Are all of them gonna be very luxurious? Are all of them going to be townhomes? Those are very different decisions. And the firm is flexible and keeps their flexibility in terms of decision-making and not finalize anything ahead of time, three years ahead of time, that’s much easier to survive when the resources are costly. Once again, when the land costs are significant, you know, if land is cheap, that’s really, you can get away with it much easily.

Jarley: I think we’ve established that you shrinkflation is real at least in the short term. Uluc, so let’s turn to the macroeconomic consequences of that. If you’re the Fed or the Treasury Department or the average consumer.

Ayson: On the macro front, one of the concerns is that that it might disrupt labor markets, because we found a company that cannot increase prices. Then I can maybe decrease my labor and the only way I can do that is to cut my workers at these low levels of inflation. I can’t lower wages. I can’t give you a cut. It’s very hard for me to do that. Instead of that, I lay you off or I make you work less hours, or, you know, I decreased our benefits, allowances and things like that. So that’s one concern. The second concern is about policy formulation. So to the extent that we can’t pick these things up, the increasing quantity, then inflation is not very informative. Or the Fed is the ultimate controller of inflation, right? So, and if they cannot see just this focus on headline inflation only, then they can’t see this shrinkflation. So they can’t, react to it. So that’s one of the complications of it.

Jarley: Do things ever reinflate? Anand, go ahead.

Krishnamoorthy: Yeah, so usually there is no incentive for a firm to unilaterally drop prices when inflation dies, because one you’re competing with other firms that as Axel pointed out earlier, there is no incentive. What is the biggest expense for firm? As we talked about, wages. If you cannot drop wages, why would you then drop prices and get the start in terms of margins? So it’s well known that prices are always stickier on the downside. That is, to put it in stock market terms in the opposite of stock market terms, price increases take the elevator; price decreases take the stairs. Why would you unilaterally drop prices? Because your costs have gone down, nobody else is doing it. And consumers are getting used to paying higher prices. Why then would you want to drop prices if you’re not seeing a whole lot of drop in demand because the top-line prices remain the same and your unit price has increased and your margins are better. Why would you want to change that?

Jarley: Muge, you wanted to add.

Kullu: I was going to talk about the airline industry and what happened during the 2009 crisis, the size of the seats and how, you know, I was talking about those fully business class seats in the aircraft. It was biggest hype before the crisis, you know, like 2006, 2007, all these, you know, silver jets, EOS, all these airlines fully focused on the business class. And, you know, they were talking about inflation in seat sizes and the resource consumptions. And with the crisis, when the crisis hit, they all went out of business. They could not survive. They could not sell. And all those airlines with full service, we call it the, all the cabins, they were able to rearrange their seat seats and remain in the business through those years, all those difficult years. And right now, we started seeing all those bins before the COVID, before the airline industry went into this most recent crisis.
We started seeing all business flights back in the air. So yes, they’re you know, during a crisis, they disappeared, all business class. And then after the crisis was over, when the industry business cycle went back into their regular levels, then reinflation of, you know, let’s say the product size reinflated back to the old business flights.

Jarley: Yael…

Zemack-Rugar: So it’s about, it’s about customer value when you’re all in a competing space and you have to generate some value proposition that’s added to the consumer, right? You can do it in a variety of ways. You can innovate, have new products, the benefits features, or you can make your package bigger. And sometimes that is a path of least resistance. We would not see the supersizing wars that received, but let’s remember that as you inflate, you have to inflate by that much more, even just to return to the perception that you’re the same as before, right?
Because increases are underestimated. You return your package to what it was, it doesn’t seem like that’s that much an increase. And because the reference point of what the old package used to look like, well, that’s long gone. So we do compare across competitors. It’s important to stay within the range of competition, but it’s also a way to one up the competition to increase your package. And we compare to the size. We are most recently familiar when it’s grown from that size. We’re likely to think it’s grown much less than it actually has, and there’s ways to manipulate that. So for example, if a package grows on one dimension, we tend to be much more accurate than if it grows on two or three dimensions. If you’re going to make your package bigger and you want consumers to estimate it better, then grow it only on one dimension, not on three, but the opposite occurs for shrinkflation.
So if you’re going to reduce your package, then consumers will become less accurate in estimating the reduction. If you reduce it on all three dimensions, rather than just one of course, then your risking that it’s a super noticeable that it became smaller. So one of the strategies that the literature really shows us is elongation. Apparently, if you reduce one dimension, but you make it longer then people perceive almost the same size, because we can’t assess like volume. You can use elongation to shrink. You can use elongation to reinflate. You know, we have perceptual tricks that we can use to help manage consumer perceptions, to help them actually understand what they’re actually consuming in part so they don’t consume more than they need.

Jarley: Axel?

Stock: So I want to continue that discussion along those lines a little bit, just as Yael mentioned, when costs are dropping, then firms tend to want to offer more quantity as at least as an option. And here, basically we see like the opposite effect of what I pointed out earlier, which is now with bigger sizes being available, consumers who initially have a, let’s say, a low demand for the product, all of a sudden they’re tempted to consume more than they initially wanted. And in the era of fast food, it can lead to very negative effects for the consumers like overall consumption and the negative health effects like obesity and so on and so forth.

Jarley: Final question: It’s a year from now, is there still pressure to shrink your packages or do you think shrinkflation will be something that will be a historical artifact. Axel?

Stock: Because it is still going to be potential from strategy in general, it’s about firms about offering menus of choices for consumers. And so as you can increase your menu, you can basically tailor to a more different consumers, more precisely and potentially make more profit. So I think there’s still going to be supply chain problems, maybe in other industries, other than those that we have discussed today. And if firms can respond, if it’s a category where, you know, package sizes can easily be shrunk, then that will happen at least for some time.

Jarley: Yael, what do you think?

Zemack-Rugar: From a marketing perspective, if conditions are such that companies need to become wiser about their product lines and packaging and offerings, I would hope that we can see some more sophisticated marketing strategy. Product lines, right? Small, medium, large, which by the way, is another way to manage perception of size. Then we can see better segmentation, right? So when you talk about service level, that’s the size, too. So when companies have these smarter strategies of thinking about how they allocate their resources, their size, their, as Muge aptly called it, their limited and precious a resource that they have, that’s when we get more interesting things than just is the package of bigger or smaller.

Jarley: Anand…

Krishnamoorthy: Well, frankly, if inflation was with us 30, 40, 50 years ago. You look at canned vegetables, chocolate bars have shrunk in size. The curvature of bars of soap has increased over time, high curvature, lower material, lower costs. Shrinkflation has been with us for a long time. Airlines started doing economy, limited leg room, more economy seats way before COVID hit. So the point is it’s been with us way earlier than COVID was ever a phenomenon, and it is going to be with us far longer. Perhaps they may come up with a fancier term than shrinkflation, but the phenomenon is probably here to stay.

Jarley: Muge…

Kullu: It all comes down to how you manage your supply chain.

Jarley: Uluc…

Ayson: The supply line problems will dissolve and supply will meet up with demand. In that case, we’ll have healthy levels of inflation. Companies will not have to resort to shrinkflation.

Jarley: It’s my podcast. So I get to go last. Some of my colleagues didn’t give me a straight answer on the future of shrink inflation academics frequently struggle with simple yes or no answers consumers. On the other hand, all of us prefer a menu of choices, but as Axel notes, choice can be expensive. If firms think their customers are more sensitive to price, they’re going to find ways to cut corners and preserve margins. The real question in my mind is whether the consumer will be more or less price sensitive a year from now, and they are today. I’m betting less. People’s features are coming into focus. Consumers will become more acclimated to modest price increases, especially as supply chains work themselves out. And with a more robust job market, people are going to be willing to pay a little more to get what they want. As Anand notes, shrinkflation will never go extinct, but I don’t think shrinkflators will become the defining feature of this century’s Roaring Twenties.

What’s your take. Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show. Special thanks to my interim producer, Erika Hodges, who can’t get rid of this gig fast enough, and the whole team at the Office of Outreach & Engagement here at the UCF College of Business. And thank you for listening. Until next time, charge on!