Shrinkflation and its discontents

“Homo homini lupus” - man is wolf to man

Every passing year, the size of a cookie keeps reducing. If earlier there were four cookies in a pack, one fine day there would be three, and so on.  It is also not rare to find the quality of an edible deteriorating over the years, whether it is the quality of chocolate or the sheer texture, there is gradual deterioration.  Another great example is bread, if the price doesn’t change, the size goes down.  Lately, one can even find a few slices of bread packaged together.  More recently, one can even find margarine being sold in tubes like its toothpaste. The price of these products doesn’t change much, but the quantity and quantity deteriorate. This phenomenon is called shrinkflation.

Shrinkflation is the more lethal and discrete cousin of inflation.  While it is possible to measure inflation through a number of methodologies, it is nearly impossible to measure shrinkflation over a long enough timeline as there are no standardized products that can be measured.  As inflation represents an erosion of purchasing power, shrinkflation determines a potentially permanent deterioration in the quality of products, and eventually lifestyle.

Shrinkflation is most common in edible products, the demand of which is highly elastic.  A slight increase in price can trigger the substitution effect and increase demand for a competing product. As cost-push inflation increases the overall cost of production and distribution, margins start to erode.  In order to maintain those margins, a seller can either reduce the size of the product, or skimp on quality — instead of high-quality chocolate, they can use mid-tier chocolate, and so on.  As successive bouts of inflation take hold over a long-enough timeline, the overall quality of the product continues to deteriorate, till the time the product remains no match to its predecessor.  

No consumer or wholesale index can accurately capture shrinkflation, so it often goes unnoticed in policy circles, even though a consumer can sense it, but can’t quantify it.  Shrinkflation is a consequence of a permanent erosion in purchasing power as sellers develop new products to cater to a reduced level of real income, or purchasing power.  A secular decline or flattening of real income for a large section of population has adverse outcomes for sustainable economic growth, and income inequality.

Depending on which side of the fence one is on regarding inflation, whether it is cost-push, or demand-pull, barely anyone is on the side of shrinkflation which just gradually shifts overall consumer preferences.  Another adverse effect of shrinkflation is lack of innovation, and product diversification.  A classic Schumpeterian growth model suggests that as overall innovation in an economy increases, and as the number of overall products increase, the frontiers of economic growth are gradually expanded resulting in growth across the board.  However, shrinkflation threatens such innovation or product driven growth.  

If an economy is plagued with regular bouts of shrinkflation, it is not primed for product expansion driven growth as sellers do not see a thriving market for development of new products and more innovation.  Another casualty of shrinkflation is margins – it is due to maintaining a certain level of profitability margin that product quality and quantity is reduced.  However, there is only up to a certain extent that quality and quantity can be compromised upon, eventually a product is silently dropped from the market, as the seller deems it impractical to sell it in a market.  Eventually, imported versions, or even smuggled versions of the same product start appearing on shelves because the demand continues to exist but not supported by supply economics.

Shrinkflation is a consequence of consistent erosion of purchasing power, which would be a function of both inflation, as well as general stagnation in wages.  Although its impact is not apparent in the short term, its impact is critical in the long-term as entities evaluate investment and product expansion decisions based on potential purchasing power.  A weakened purchasing power or economic environment would not create a favorable case for fresh investment, or product expansion.

Shrinkflation is rampant in Pakistan, whether it be cookies, bread, beverages, or something as mundane as detergent.  A consequence of the same being that most products manufactured locally pale in comparison to their imported counterparts, largely due to utilization of substandard ingredients to save costs, and maintain margins.  This also disincentivizes any fresh investment, or even divestment which can be seen in the case of many listed companies in consumption & pharmaceutical space either going private, or divesting from a market altogether.  Those that continue to operate are largely trading houses, rather than formidable manufacturing units.  

Policy makers need to consider shrinkflation as a symptom, and find a cure for that, and that cure lies in tapering down inflation, which in our case is mostly a supply driven phenomenon.  Excess inflation over an extended period of time signals to investors potential for negative real returns, decisions regarding which become evident in the phenomenon of shrinkflation.

Ammar H. Khan
The writer is the chief risk officer for Karandaaz Pakistan, an organisation that seeks to promote financial inclusion in Pakistan. He has previously worked at several financial institutions in Pakistan, both in commercial banking and capital markets

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