Imagine you own a food-manufacturing business and are facing rising production costs. These costs aren't rising dramatically given labour costs are flat and inflation is close to non-existent, but they are inexorably edging up.
That's threatening the small profit you make on each chocolate bar or can of baked beans or bottle of fruit juice you sell.
If you want to maintain your profit margin you have three options.
You can use cheaper ingredients. Historically, this has been the go-to solution. But in an age of social media, this will soon be noticed and remarked upon. If the quality of your product is seen to have declined, lots of your customers might switch to a competing brand.
You can raise the price. Passing on increased production prices is the most transparent approach, but most of your customers haven't had a real pay rise in years. If you make your product more expensive, lots of your customer might switch to a cheaper brand.
You can keep the price and ingredients the same but give customers a little bit less, that is 'shrinkflate' your product. For example, if you're manufacturing Toblerone bars, you could widen the gap a fraction between the triangular prisms, meaning the bars contains less chocolate.
If you're unlucky there will be a consumer backlash; this is what happened to Toblerone when they shrinkflated their bars in 2016. But chances are that most of your customers won't realise or care that you've shaved a few grams off the amount of product you're providing.
Photo: Alastair Grant, AP
Of course, if lots of food manufacturers start shrinkflating grocery buyers will sooner or later twig to what's going on. There now seems to be a growing awareness of shrinkflation among Australian consumers.
However, as Dr Jun Yao, a lecturer at Macquarie Business School, explains below, being aware of shrinkflation doesn't mean consumers can do much about it.
How widespread is it?
"Not a lot of research has been done into shrinkflation and most of that research relates to the US and UK," Yao says. "One UK study found that 2,529 products had reduced in size while maintaining the same price between 2012-2017.
That suggests shrinkflation is now widespread in the UK. While there's no hard data to prove it, anecdotal evidence suggests shrinkflation is also common in Australia."
What are the mechanics of shrinkflation?
Shrinkflation is sometimes called 'Grocery Shrink Ray' or 'Package Downsizing'. But Yao warns the external package – as opposed to the internal contents – often doesn't reduce in size at all.
"Most of us have experienced buying what appears to be a large box of breakfast cereal and opening it to find a surprisingly small packet of cereal inside," Yao says. "Food manufacturers understand how visual cues impact purchasing decisions.
These manufacturers long ago discovered that if they kept the external packaging the same size, most of their customers either wouldn't realise or wouldn't care there was less actual product inside."
Yao notes food companies often make use of the magician's trick of misdirecting attention.
"While the size of the package frequently stays the same after shrinkflation, often the design changes," he says. "It changes in a way that suggests the buyer is now getting better value for money. Often this refers to the product's ingredients, with the package now proclaiming, 'Now with added folate' or 'Proudly made with 100 per cent Australian ingredients'."
Is it legal?
"There are regulations relating to consumers being provided with information about the quantity of the serving, as well as the unit price and overall price of the product," Yao says. "When shrinkflation occurs the unit price of a product will become less appealing. But as I've observed previously, not many Australian consumers pay attention to unit prices."
In short, companies aren't required to run public-awareness campaigns if they raise prices or change the ingredients they use or shrinkflate. "Shrinkflation is undoubtedly legal but it's debatable how ethical it is to shrink serving sizes and hope your customers won't notice," Yao says.
When did shrinkflation start? When might it stop?
"Unscrupulous sellers have sought to gouge buyers in various ways since the dawn of time," Yao observes. "Academics started paying attention to shrinkflation in the early 1990s; that's probably when it started to become a popular strategy."
Yao argues shrinkflation is unlikely to go out of fashion until consumers accept there is no such thing as a free lunch.
"To use the economic jargon, consumers' 'revealed preference' is for shrinkflation over price rises. That is, consumers have demonstrated they are less impacted by getting a little less rather than paying a little more.
No doubt, companies sometimes shrinkflate to increase profit margins. But I imagine they mostly do it because it's the only way they can maintain what are often already tight profit margins in the face of rising costs."
Yao says it's possible that if both wages and inflation start growing more strongly, Australian consumers would become more accepting of prices rises. "That should mean there will be less motivation for food manufacturers to shrinkflate" he says.
"It may also be the case that consumers can be convinced, as many have been with milk produced by Australian dairy farmers, that price rises are justified. I'm currently researching this very topic."
For the time being, Yao advises consumers determined to take a stand against shrinkflation to "keep your wits about you when doing the grocery shopping and send a message to the shrinkflators by not buying their downsized products ".
This has been co-published with The Lighthouse, Macquarie University's multimedia news platform.