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Shrinkflation, playing out in India?

  • Category
    Economy
  • Published
    16th Jul, 2022

Context

Owing to global crises like COVID-19 and the war in Ukraine, many businesses are shrinking the size of their products to maintain or increase their profits in a process known as shrinkflation.

About

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.
  • Shrinkflation is mostly common in the FMCG industry, especially in the food and beverages sector.

    This term was first coined by British economist Pippa Malmgren in 2009.

Shrinkflation simplified

  • 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.
  • o 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.

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.
    • Haldiram has cut down the size of its aloo bhujiapacket 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.
    • Amid rising costs of edible oils, grains, and fuel, Britannia and Dabur have both chosen the path of shrinkflation.

Responsible reasons

  • The sharp rise in inflation causing a drastic decline in consumption across the board.
  • The ongoing Russia-Ukraine war that caused supply disruption and rising cost in energy basket.

RBI’s corrective measure

  • 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.
    • LAF is a tool used in monetary policy, primarily by the RBI that allows banks to borrow money through repurchase agreements (repos) or to make loans to the RBI through reverse repo agreements.

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.
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