An unfavorable economic context
The world economy is undergoing the effects of the Covid-19 pandemic and the war in Ukraine which both provoked a shock in demand and supply globally. The annual growth rate of CPI in April 2022 amounted to 9.2% in OECD countries. Nepal’s economy was recovering from the effect of the earthquake and the six-months Indian blockade that both occurred in 2015. This current crisis has further weakened Nepal’s vulnerable economy. Nepal encountered high inflation (Inflation based-CPI jumped to 7.28 % in April 2022 and to 7.87 % last May on y-o-y basis). While Nepal relies mainly on imports and due to the inflation, the import’s price hikes resulted in a depreciation of the NRP as well as a significant compression of foreign reserves. On a micro-economic level, the supply chain encountered constraints due to the rise in production costs.
How ‘less is more’ become a business strategy…
To face this dreadful economic situation, companies must implement a business strategy to face the curbs in profits. To cope with inflation, companies decided to “downsize” – also referred to as shrinkflation. It consists in reducing products package’s size, which people hardly notice while maintaining the same price. This strategy has been implemented since the 1970s and knew a surge after 2008. This way companies can better cope with production costs surge while avoiding loss of competitiveness. The chore of the strategy lies in that consumer are more price conscious rather than ‘weight conscious’, especially when the labels have been changed in a more discrete one, making the downsizing less obvious. This strategy is used globally by companies in the US, and the UK – where inflation is particularly high (between 6 to 8%). India, also experiencing a similar level of inflation, has seen its companies like Clinic Plus, Parle, or Hindustan Unilever Limited (HUL) implementing this business strategy focusing on poor rural areas.
Why shrinkflation seems to be the safest option for retailers?
When a company’s production costs increase, it mainly has three options: produce smaller packages, change the ingredients, or raise the price of the final product. In our economic context, changing ingredients can be quite risky. Indeed, changing ingredients means using cheaper ingredients which deteriorates the product’s quality. Another option is to raise prices. Given the current economic health, increasing price is not an option. So, getting packages smaller seems to be the safest for business at the moment.
On the other side, on the customer’s level, shrinkflation also affects consumers’ shopping habits. Already because of inflation, consumers focus their consumption on the most important items: groceries, electricity, and fuel. Also, as reported in an article of the NPR, some decide pragmatically to buy the whole piece of cheese instead of buying the pre-sliced one. Further, retailers have identified new trends in consumer habits as reported by the Times of India. Downsizing the package makes consumers ‘look for packs that offer value’. This is why, HUL, has decided to create and produce bridge packs (between two price points) ‘to provide the right price-value equation to its consumers, ensuring that products remain affordable and accessible’.
This practice has pushed consumers rights association to speak up …
Even if this business strategy is not illegal, it remains tricky. For that specific reason, concealing the price hinders consumer rights. This practice affects the ability of the consumer to make informed choices. Indeed, given the small difference in size between the previous and new products, the consumer is not able to notify the change, and thus chose which product is the most suitable for them. This is one of the reasons why some Consumer Protection associations advise looking at the price per kilo instead of the price of the product. In an interview to CESIF, Mr. Hari Prasad Mainali, secretary of the Forum For Protection of Consumer Rights Nepal, restated the Article 44-1 of the Constitution stating that “every consumer shall have the right to obtain quality goods and services”, which rights have been reassured by 2074’s Consumer Act. According to Ratula Chakraborty, professor of business management at the University of EastAnglia, suppliers, and retailers should be obliged to notify the customer that the product has been downsized through a label for a period of at least one month.
… for valid reasons.
Moreover, companies may use marketing to justify such business strategies: praising the lower environmental cost of the package, standing for the health of the consumers as it limits ‘passive’ overeating, or supporting the innovatoin of the brand for a more efficient product. However, this practice questioned the choices and strategies used by these companies after food giants realized huge profits during the pandemic. Indeed, last may an OXFAM report revealed that 62 new food billionaires have been created over the last two years while global food prices have spiraled by over 30% . Thus, it widely questions the necessity to adopt such practices as shrinkflation. Meanwhile, chairman of Rasna Group, Piruz Khambatta and Sahil Gilani, Gits Food Products Sales & Marketing Director, declared to the Times of India that they won’t be running any promotional offers given they are already absorbing cost inflation. S.Charlebois, professor of Food Distribution and Policy, Dalhouse University, reported his doubts in an article for The Conversation regarding the tendency of this business strategy to contribute to inflation. Indeed, we refer to it as an “invisible inflation” because it challenges statistics to get adjusted sufficiently and efficiently, making this inflation more vicious.