Have you noticed that the size of the retail products you generally consume is shrinking while prices remain relatively stable? You have, indeed, witnessed shrinkflation. Sometimes it's big and obvious, and other times it's subtle and barely noticeable.
Companies struggle with higher production costs during periods of high inflation and are forced to raise product prices. Doing this has a significant impact on product demand, especially when there is fierce competition.
Companies tend to reduce the size of their products while maintaining the same pricing to achieve a soft landing. They achieve a price increase in this manner without actually changing the price tag.
Have you noticed that while the price of a loaf of bread has remained relatively stable, the weight has decreased from 500 grammes to 450 grammes and then 400 grammes?
It's also happened to milk sachets, chocolate bars, a standard cup of tea at your favorite hotel, coffee sachets, airtime packages, tissue papers, and a variety of other products.
People may choose to buy lower-priced products from competitors if a company abruptly raises the price of their product. People may not notice or take meaningful action if a company slightly reduces the size, packaging, weight, or quality of a product while maintaining the same pricing.
This method of increasing product price involves reducing size, weight, ingredients, quality, or packaging.
As a household with a monthly or weekly budget, you are forced to consume fewer products of lower quality, nutrition, and effectiveness, which may result in a lower quality of life and a lower value for money spent.
For example, if a family of three consumes a 500-gramme sachet of milk every morning for Sh60, and milk companies reduce the milk to 450 grammes per sachet for the same price, the family is forced to consume less milk every day, implying less value for money, less daily nutrition, and a lower quality of life. I can call it what it is: defrauding the customers.
Companies will sometimes remove ingredients from a product while maintaining the same price, which I see as a betrayal of trust. When there is a lot of competition, companies will reduce the size of their products to undercut the competition, which often leads to a race to the bottom.
In this case, the customer is always on the receiving end of the stick.
Shrinkflation occurs all over the place and is easy to spot if you know what to look for. Rebranding campaigns and package redesign are two common methods used by businesses to conceal shrinkflation.
It is sometimes a major component of a product that is removed, such as when Apple removed power adaptors from the iPhone package. It is frequently caused by rising production costs, fierce competition, and a shift in demand trends.
If a company sells consumer discretionary goods and lacks strong pricing power, it may be forced to engage in shrinkflation in order to survive in a difficult economic environment. During periods of high inflation, stocks in this sector tend to take a significant hit.
Consumer staples, or companies that sell products that we need, can raise prices during periods of high inflation while avoiding shrinkflation.
In Kenya's current economic environment, it is clear that companies are engaging in both shrinkflation and price hikes. This indicates that things are not going well and that we may require a stimulus to spur production and value chains.
Addressing production costs such as electricity, energy, and raw materials creates the necessary environment for cheaper manufacturing, lowering shrinkflation rates.
Financial market investors are aware of shrinkflation and how it affects stocks, particularly in times of high inflation. Investors frequently buy commodity stocks to increase their chances of portfolio growth during periods of high inflation.
They could also accumulate consumer defensive stocks. Giffen and luxury goods allocations may also perform well.
Shrinkflation can sometimes backfire on the company committing it. If customers complain about a product shrinkflation, particularly on social media, the market may lose trust in the product, reduce consumption, and shift to another product. Companies should exercise caution when engaging in shrinkflation.
The writer is a research & market analyst at Scope Markets Kenya
