Shrinkflation is a phenomenon that has reappeared since the boom in inflation. A reduction in the quantity of products for the same price. But shrinkflation can also be more “sneaky.” Some manufacturers change the recipes of their products and replace ingredients with cheaper ones. In the end, all this is only the manifestation of a more global trend: the rationalization of a plethoric offer under the pressure of simplistic marketing recipes. More variety does not necessarily increase customer satisfaction.
A few words on shrinkflation
In economics, shrinkflation refers to two distinct phenomena:
- The maintenance of the selling price of a product while decreasing its quantity. This logically leads to an increase in the price per quantity (price per kilo, price per liter).
- A change in the recipe to reduce production costs. This approach is particularly popular in the food industry. Ingredients can be replaced by others of lower quality and, therefore, cheaper, without the consumer perceiving any difference in taste.
Shrinkflation is a marketing tactic used in periods of high inflation to preserve company margins.
The last thing a company should do is force customers to think about their purchase.
Advantages of shrinkflation
Shrinkflation has a huge advantage for brands. It allows them to keep the customer.
Remember, nothing is more difficult than making a customer loyal, and nothing is easier than breaking that loyalty. The last thing a company needs is to force customers to think about their purchases.
By keeping the price constant, the brand gives the illusion that nothing has changed for the customer. This allows customer loyalty to continue.
Why is the loyalty cycle difficult to create?
It is generally estimated that it takes 7 purchases for the recurring purchase cycle to be activated. In other words, it is only after 7 purchases of the same product that the decision to buy will be stored in the brain in the form of automatism. The purchase decision becomes unconscious because the consumer no longer weighs the pros and cons.
Rationalization, a strong trend in retail
2022 was the year of an invisible revolution in the retail sector. The search for savings on structural costs.
During the Covid period, retailers were the masters of the game. Promotions had disappeared, and margins had been able to swell (somewhat like in the automobile sector). Irrational behaviors could even be observed, putting supermarkets in a position of strength concerning consumers. But all that is over. From now on, the margins must be increased, as they have been eroded by:
- the increase in wages
- energy prices
- consumer trade-offs for cheaper products
On the other side of the spectrum, hard discounters are benefiting from the crisis. The Belgian retailer Colruyt has seen its margin melt from 3.3% to 1.7%. Lidl’s turnover will reach 100 billion Euros in 2022, and its operating margin will be 6.8%.
Traditional retailers are, therefore, under pressure to save on what they can, i.e., on structural costs. There are no 50 solutions in this area, and it is the assortment that they are attacking. The distributors are simplifying their offer and reducing the number of references.
Variety is expensive to manage
Marketing, especially in the food industry, has developed over the last two decades based on a simplistic proposition: variety would be a source of customer satisfaction. It would be necessary to offer products as personalized as possible to customers’ tastes to satisfy their expectations 100%. In doing so, the offer has also undergone unprecedented inflation. A supermarket offers 20,000 products, and a hypermarket 40,000.
But variety is expensive. For a distributor, placing 10,000 orders for 10 units will always cost more than 100 orders for 1,000 units each. The hard discounters’ recipe has been to reduce the offer as much as possible, with the results that we know today.
Manufacturers rediscover the virtues of simplification
For producers, it’s the same thing. Simplifying recipes, using the same ingredients in all recipes, allows for economies of scale.
If the products undergo a simplification cure, the containers are also the object of all attention. In particular, the ratio between the container’s price and the content’s price indicates perceived value. Products for which the container is too expensive in relation to the content are eliminated. Some small containers (especially glass) are removed from the assortment.
The good thing about the current period is that it puts the marketing strategy of retailers and brands in order. The whole food industry has forgotten a simple adage: “too much choice kills choice.” Today it is time to go back to basics and get rid of a lot of products that are useless and expensive to produce. This rationalization could lead to efficiency gains, but it is still being determined that these will be shared with consumers.
Posted in Marketing, Strategy.