Shrinkflation has driven down volumes. What next?

Is it time to shrink shrinkflation? Or does it still play an important role in helping consumers manage the cost of their purchases?

It’s been an increasingly important question this year, which has given rise to to record levels of inflation and squeezed household budgets - and ushered in an age of shrinkflation.

This is an understandable tactic. Shrinkflation enables manufacturers to increase prices to cover rising costs, but in a way that reduces the impact on shoppers’ budgets with smaller pack sizes. It means unit prices remain the same, even if costs per litre or kilo of many household essentials have risen.

If consumers are careful in managing consumption, they can mitigate these rises in costs. This seems to have played out: we’ve seen volumes decline across fmcg by 3.5% in the last 12 months.

As inflation eases and manufacturers look to other strategies to drive growth, brands will be looking at how to increase volume sales or drive product mix, encouraging consumers to trade up to more premium products.

But here’s the rub. Manufacturers have inadvertently trained consumers to become thrifty by eking out a little more from smaller packs and bottle sizes. So, while many continue to struggle to make ends meet, persuading shoppers to buy and consume more will be challenging to say the least.

Advertising and innovation may offer alternative ways to drive growth and could provide a decent return on investment, but they all come at a cost. Knowing which levers to pull requires actionable data insights derived from an understanding of market trends and the media landscape.

From our own data analytics across hundreds of categories, we’ve noticed manufacturers have already responded to the consequential impact of shrinkflation, and the subsequent reduction in market volume, by increasing promotional investment.

Percentage giveaway – the measure of promotional spend as a percentage of value sales – has risen 0.7pp year on year in the last 13 weeks. This trend is more striking in non-food sectors, where shrinkflation has been most widespread. Here, percentage giveaway rose 2pp in the four weeks to the end of September.

At the same time, trade deal efficiency is down 3.8pp in the past 13 weeks. Manufacturers who raise promotional spend, particularly through discount levels, without a corresponding rise in incremental volume face an inevitable outcome. That’s margin erosion and reduced sales value. Achieving optimal promotional levels requires precision modelling.

Shrinkflation may have seemed like a good way to pass on inflationary costs and protecting margins. But brands now find themselves with the conundrum of how to drive volume among shoppers who are accustomed to using less, without eroding margin and ultimately reducing sales value.