Brand Reputation and Shrinkflation: Strategies for Suppliers in Regulatory Landscape

About Shrinkflation

In an inflationary environment, the price of Doritos has remained steady while other products are experiencing price increases. Similarly, the price of Gatorade has not changed. While this may appear beneficial to consumers, it's premature to draw conclusions. The size of Doritos and Gatorade bottles have reduced, with Doritos shrinking from 9.75 oz to 9.25 oz and Gatorade from 32 oz to 28 oz, all at the same price. This phenomenon is known as shrinkflation.

Shrinkflation, a portmanteau of 'shrink' and 'inflation,' describes the practice of maintaining a product's price while reducing its quantity. It is usually a strategy used by companies to offset increased production costs while minimizing the loss of price-sensitive consumers. Similar terms include greedflation and skimpflation, which differ based on how costs, product quantity, and quality are managed (Figure 1).

Figure 1. The differences between shrinkflation, greedflation, and skimpflation

Shrinkflation may appear as a legitimate cost management strategy from the company's viewpoint and may not initially appear contentious. However, from Apr-20 (99.1, index point based on Jul-20 = 100) to Oct-23 (119), the inflation rate in the United States (US) increased by 20.1% (Figure 2), while corporate profits increased by 75.4% (100 to 175.4, index point based on Apr-20 = 100) during the same period (Figure 3). This indicates that companies have been improperly maximizing profits under the guise of responding to rising costs.

Figure 2. Consumer Price Index for All Urban Consumers: Average of All Items in US Cities from Apr-20 to Oct-23 (Jul-20 = 100)

Figure 3. National Income: Corporate Profits before Tax from Apr-20 to Oct-23 (Apr-20 = 100)

In response to this issue, governments in various countries are taking action. In Hungary, a regulation implemented in Feb-24 mandates that retailers and manufacturers must provide informative notices if there are changes in the weight or volume of a product. In South Korea, the Fair Trade Commission announced on Feb-24 in its '2024 Major Business Promotion Plan' that it will monitor changes in product quantities to prevent shrinkflation. In the US, there were public criticisms of shrinkflation in Mar-24, indicating the potential for related regulatory measures.

If regulations related to shrinkflation are established globally, suppliers will need to respond swiftly by adjusting their production and marketing strategies. As shrinkflation becomes a global issue, consumers are becoming increasingly aware of it.

Shrinkflation and Brand Reputation

This Study conducted by Claudiu-Cătălin et al. (2022) examines the influence of shrinkflation on brand perception, using dairy products in Romania as a case study. The study concentrated on four specific items: milk, butter, yogurt, and aged cheese. Information was gathered from 386 undergraduate students aged 18 to 26, who responded to inquiries regarding shrinkflation and brand image.

The study examines three scenarios involving product size reduction and price adjustments. Through confirmatory factor analysis and coefficient analysis, it is revealed that shrinkflation consistently diminishes brand reputation across all scenarios: 1) a 10% reduction in packaging with constant prices, 2) a 20% reduction in packaging with a 10% price decrease, and 3) a 10% increase in packaging with a 20% price increase (refer to Figure 4). This implies that heightened consumer awareness of shrinkflation Could have a possibility of this strategy getting less effective for increasing corporate profitability.

Figure 4. Brand Reputation Framework and Structural Model

While the study is limited to dairy products, its findings may not be universally applicable to all shrinkflation-affected items. Nonetheless, given the growing scrutiny of Shrinkflation and the emergence of related regulations, this research offers valuable insights for suppliers.

Conclusion

From a supplier's perspective, implementing a shrinkflation strategy is relatively better for products with high price elasticity of demand. However, as shrinkflation becomes increasingly controversial and related regulations continue to grow, suppliers should develop other strategies that also benefit consumers.

In South Korea, the company Ottogi has maintained the same price for their ramen for ten years with the same quantity, branding themselves as a consumer-friendly company. By examining the price elasticity of the products they supply, suppliers can consider strategies like simultaneously reducing both price and size and marketing this. The more substitutes available, the higher the price elasticity, and the more the product leans towards luxurious goods rather than necessities, the higher the price elasticity. Higher price elasticity means that a price drop can lead to a greater increase in demand. This approach could enhance brand value and build a positive reputation among consumers.