From Line Changes to Customer Contempt - The Hidden Cost of Shrinkflation

The marginal savings from a packaging adjustment might not justify the expense for a smaller operation, Stepowany says. Conversely, “if you sell a few billion [units], it’s a lot easier to justify that change in package or any cost to revise equipment, things of that nature."Consumer packaged goods companies weigh the costs and benefits of package downsizing.Getty Images

Included in financial considerations are whether there is available room for a second line, the cost of tearing down the old line if there isn’t room, strain on the power grid, and whether there is any money left on the current line to amortize through.

Once the financial side of the project is penciled out, “then it’s the timing,” Stepowany says, citing hard-to-control challenges like equipment delivery issues, weather, and politics. Inventories should also be considered, to avoid eliminating customers by not having product on the shelf for any period.

With so many factors to juggle, “I think it’s the companies that saw the COVID scenario coming and the issues that it brought about, that addressed it then, that we’re seeing those lines go into production now,” Stepowany says. “That’s how long it takes.”

A much quicker and easier solution would be to just raise the product’s price and maintain existing processes. But consumers watch prices much more keenly than they do net weights or package shapes, and competition enters the equation.

“If it gets to the point where it’s out of reach, consumers are going to go to the cheaper items, the private label, the generics,” Stepowany says. “You don’t want to cut off your nose to spite your face. You know, is it something you can struggle through and get through and hopefully the costs go down?”

The Cost of Shrinkflation from an OEM Perspective

Josh Becker, bakery and confections segment manager at packaging equipment company Harpak-Ulma, says every piece of the supply chain is affected by shrinkflation projects in some way, but he sees companies struggle most with production line changes. Becker can offer a particularly diverse perspective as he spent 20-plus years on the CPG side of the table before joining Harpak-Ulma, first as an engineer at Frito-Lay and Kraft Foods,  then as a senior project engineer at Bimbo Bakeries USA and finally as senior manager packaging systems - North America for The Hershey Company. 

“If you start taking products out of the finished package, and you still want to run the same amount of pounds or products per minute through your processing line, your packaging equipment may not be capable of increasing the speed based on that reduced count in that package,” Becker says.

Shrinkflation projects might require line adjustments to maintain efficiency.Getty ImagesThese changes might require extra machinery on factory floors to compensate, and “not everyone has space to do it,” Becker says.

The financial stress of whether to adjust production lines is coupled with labor costs. Becker explains that if a company maintains the number of workers on a line but decides to slow down production rather than add machinery, labor starts to cost more per product.

Challenges don’t end once the product leaves the factory. Becker says package size adjustments can affect agreements with retailers, particularly with shelf space planning.

“Even at the store level, they have those shelves all planned out, of which suppliers have which space on the shelf, how much space is available, how many products they can put on that shelf,” Becker says. “And they’re not going to change them every week, if someone keeps changing the size of products.”

With these challenges in mind, he says every aspect of production should be examined before making adjustments to ensure potential profit is not lost to technical trouble. That being said, Becker says there are times when shrinkflation is understandable.

“At times, that’s the only way to kind of stay profitable within certain business units,” Becker says, noting low margins inherent in the bakery segment, along with common challenges like increasing cost of ingredients.

With those justifications in mind, Becker says an inevitable breaking point with consumers needs to be factored in with shrinkflation projects.

“At some point in time, it’s going to be obvious to the consumer that ‘well, this was three times its size 10 years ago, now, I’m paying the same price, and it’s like a third of the size,’” Becker says. “At some point in time, there’s got to be the perception that consumers are going to figure it out.”

Finding Alternative Solutions

Companies can find themselves in positions where a shrinkflation project is a necessary step to stay profitable. But there might be other options with a bit of creativity.

B&G’s Stepowany suggests considering future challenges during product development, and developing a product that isn’t overly expensive to manufacture. “Do you really need the Rolls Royce, or are you happy with the Cadillac, or are you okay with the Buick?” he asks.

Stepowany says other tactics he has seen include locking into contracts that could offer a lower price, and finding ways to order larger bulk quantities of materials, like grouping purchases or even facilities together if possible.

Harpak-Ulma’s Becker suggests finding ways to increase production line efficiency before shrinkflation becomes a necessity.

Automation might help companies avoid shrinkflation by lowering labor costs.Getty ImagesOne method for this might be automation, “which takes labor out, which allows you to maintain lower costs per product to keep product sizes today,” Becker says. He notes that this method has been forced in a way, as labor has been a challenge to source.

Becker acknowledges that some factors, like ingredient or packaging material costs, are outside of a CPG’s control. “But if they can control the waste and the labor utilization within a factory, then they have a better opportunity to fight the shrinkflation effect.”

Consumer advocate Dworsky says increased consumer awareness and organization would help, even if it is a long shot.

“The vast, vast majority of purchasers don’t pay attention, either to stories about products, or to the actual net weight of what they’re buying,” Dworsky says.

Consumers have the “power of the purse string,” as Dworsky explains, but “it’s really kind of rare that consumers spoke up as loudly as they did on the Conagra issue with SmartBalance. I don’t expect that to work in most circumstances.”

Dworsky also cites a new ordinance in Brazil published in September 2021, which requires companies to note quantitative changes on the product’s packaging. 

Dworsky says that an ordinance could be an overreach of power in the United States. Instead, he suggests regulators take a “reasoned approach” by speaking to manufacturers about the issue and possibly conducting surveys to show consumer reactions to downsizing projects.