Inflation has been soaring through the roof and companies are facing the brunt of it at the EBITDA and net profit levels.FMCG companies are no exception to this. In fact, they face the impact of inflation in not only the raw material prices, but also packaging costs. But if you had noticed, apart from a few products, the prices of many FMCG products remain the same. How do these companies tackle inflation if they do not increase product prices? That's where shrinkflation comes in.
Instead of increasing the product prices, companies rather decrease the quantity provided to the consumer. A bit confusing? Let's understand with an example. ABC Ltd is a huge biscuit manufacturer and charges Rs 30 per packet which has 15 biscuits. Now inflation has been affecting ABC Ltd but unfortunately they can't increase their prices because they don't want to lose their customers to competitors. So what do they do? Instead of increasing the price, they reduce the quantity of biscuits per packet. Instead of 15 biscuits, each packet now contains 13 biscuits. You may ask, "Just two biscuits less? Come on, how can they save money in two biscuits?". We have to remember that these companies manufacture thousands of packets a day and millions in a month. Take away two biscuits from every packet and they save so much money in raw materials, plus the packet gets a bit smaller which saves money on packing cost too.
So lets say previously, a packet with 15 biscuits weighed 100 grams. So if the company charges Rs 30 per packet, it would collect 30 paise per gram. Now since the packet will only have 13 biscuits, it will weigh 86.67 grams and as the company still charges only Rs 30 per packet, it would collect 35 paise per packet! While this may not rescue a company from sinking debt, this will help them increase their revenue and keep margins afloat in inflationary situations without losing customers to competitors.
Are there any real life examples of shrinkflation? Obviously! Do you know the famous Toblerone chocolate? In 2016, Mondelez, the company that produces the chocolate, reduced the number of peaks in it and also reduced the overall weight to combat rising production costs. Right now, Indian FMCG companies like Hindustan Unilever, Britannia and Dabur India are moving towards lighter packets with less quantity.
Also read:
The inflation monster is destroying your wealth every year!
Rising inflation? Bonds can be an answer!
This article was originally published on May 16, 2022.
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