The ticking time bomb of shrinkflation

Cookie Monster only needed three simple words to deliver a scathing edict on the hot topic currently plaguing grocery store aisles and finally infiltrating the halls of Congress: “Me hate shrinkflation!”

Seemingly everyone else—from President Biden to Senator Elizabeth Warren to probably just about all your friends and family—has shared the same message recently, with maybe just a touch more eloquence.

Shrinkflation, the practice of altering products or packaging so consumers get less while prices stay the same (or even increase), is nothing new. Edgar Dworsky, a consumer advocate with nearly 50 years in the field and the de facto leading shrinkflation expert, told CFO Brew that “the lore is that it goes back to the 1950s, in the days of the nickel candy bar.”

When the price of chocolate went up, “they all went into a panic, supposedly, because their machines [only] took a nickel.” The evil genius solution still being used today: Make the product just a liiittle smaller, and charge the same amount.

In recent years, however, high food prices and inflation have tightened wallets, making consumers more aware (and suspicious) of shrinkflation, Dworsky noted.

When consumers become aware of shrinkflation, Hitendra Chaturvedi, a professor of supply chain management at Arizona State University’s W.P. Carey School of Business, noted that there’s a general sense of being “hustled,” and “nobody likes the feeling of being hustled,” he told CFO Brew.

Despite a groundswell of political energy, like a Senate bill that would allow the Federal Trade Commission to pursue companies that engage in shrinkflation practices, Dworsky thinks it’s unlikely shrinkflation will ever be outright banned in the US. The next best thing, in his mind, is consumer awareness. And if Cookie Monster’s latest diatribe is any indication, consumer awareness has likely reached something of a fever pitch.

That’s good news for the US consumer.

For CFOs, however, it’s a warning that the jig will soon be up. The next step in the shrinkflation saga: navigating consumer backlash.

Caught red-handed In the past, companies haven’t typically had the most inspiring responses when confronted about alleged shrinkflation, according to Dworsky. Usually, it involves a lot of finger-pointing.

“The typical response is: ‘We’re facing higher costs for raw materials. We’re facing higher labor costs. We’re facing higher gas prices,’” he said. In one case, when he reached out to a company, they were notably candid, explaining that they simply wanted to keep “the product at a familiar price quota,” he said. “That suggests to me that manufacturers are very cognizant that consumers will notice more readily an increase in price, rather than a decrease in product, quantity, or size of the package.”

And in some instances of shrinkflation that Chaturvedi has studied, “the raw material cost and the labor costs are much more than compensated for their price increases, and there is no reason whatsoever to decrease the quality or the quantity in the packages that we’re so used to.”

In his opinion, many of the companies now being accused of shrinkflation simply never expected the issue to gain the cultural prominence that it has.

“I don’t think the CFOs and these companies were expecting it to be a part of the State of the Union address and the Cookie Monster becoming an evangelist,” he said. “They were hoping that this storm would pass.”

Pound-foolish For some CFOs, consumer backlash won’t matter until it really starts hurting—and that’s the problem, in Dworsky and Chaturvedi’s eyes.

“I can’t imagine that companies, despite the president coming out against it [and] the Cookie Monster coming out against it, are going to all of a sudden say, ‘Oh, well, you know, we need to stop this right away,’” Dworsky said. “It may give them pause. It may make them think twice a little bit before doing it.”

But experts like Dworsky and Chaturvedi caution against simply letting the numbers talk. We’re at a shrinkflation inflection point, and savvy CFOs need to get ahead of consumer backlash, not respond to it according to Chaturvedi.

Chaturvedi’s overarching message to CFOs: “Let’s think more strategically.” Consumers seem increasingly unafraid to switch from beloved brands in light of shrinkflation, he noted, and the dampened brand loyalty of younger generations only heightens the problem.

“It cannot be a purely financial decision, a quarter-by-quarter decision, a penny-wise and pound-foolish decision,” Chaturvedi cautioned. “If the consumer backlash picks up—right now these are ripples—but the more things pick up, some of these companies are going to suffer very dramatically.”

“What will change is the groundswell from the consumers, where they stop buying some of these products,” he continued, adding that some CFOs might finally notice the issue “when you see a 20% reduction in revenue because consumers are saying, ‘We’re not buying your product.’”