During 2023, a strategy that CPG brands have been using for a long time made headlines, and some customers were concerned about it. You guessed it: shrinkflation. After years of going relatively unnoticed, the practice of hidden price changes is in the spotlight.
As grocery prices rose an average of 11% in 2023, customers, journalists, and governments started to pay closer attention to price changes. The public was surprised at how common shrinkflation is and how it often appears outsized compared to increased costs. The general tone is a feeling that brands have been lying to them. TikTok influencers and Reddit threads with “before and after” examples have millions of views. Grocery retailers and food manufacturers are blaming each other. Governments are starting to step in. The future of this price reduction strategy is in question.
The Brand Perspective
Among supply chain issues, the pandemic, global conflicts, and climate change, balancing the needs of consumers and shareholders has never been more challenging. Brand managers adopt the tactic of shrinkflation because historically, customers get angrier about blatant price increases. Trying to avoid drawing attention to a price bump is a common approach in the industry. However, we know that shrinkflation works well only when customers don’t notice.
Some argue that because the weight of the product is on the label, customers have been informed. Yet, the practice mainly relies on consumers not paying attention or being unable to calculate the difference. After all, not a lot of customers keep track of the unit pricing for every item they purchase at grocery stores. If customers feel duped, it feels disingenuous to pretend they’re wrong. This leaves brand managers with seemingly few options, as they continue to be pressured to increase prices while avoiding consumer outrage.
So, what are brands to do? First, let’s zoom out and look at the negative fallout of being part of a bigger story around food prices for over a year. Although brand managers may be the ones holding the bag, leaders may have to roll up their sleeves to solve the bigger issue.
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The Bigger Picture: Trust in Big Brands is in Jeopardy
If it’s true that what you don’t know won’t hurt you, it’s also true that what you do know can hurt a lot. Now that consumers are paying close attention to food prices, they are livid. 69% of customers say they would struggle to manage an unforeseen expense of $1,000, while companies are reporting record profits. The rising cost of housing and food is the most concerning to consumers because they are necessities, and they’re feeling the effects of the added stress and bills.
How is this changing consumer behavior? According to Morning Consult Pro, 48% say if they notice a product has been shrinkflated, they shift to another brand. Others choose a generic product or shift to bulk. This shift is benefiting private label programs, club stores, and even dollar stores. Consumers are increasing price-matching behaviors as well as learning how to use unit pricing information. Coupon usage is up 30%, as is loyalty program usage. The cost of living is the number one concern of voters across the globe, spurring governments to action.
It’s true that many products will have to increase in price to remain profitable, but with brands reporting strong profits and CEOs hauling in multi-million-dollar salaries, a single unprofitable SKU may not mean much to a customer. Taking a customer-centric view will require brands to be more open-minded rather than defensive, more proactive rather than reactive, and more compassionate towards the people buying their products. While many of these changes require leadership to embrace change, brand managers can influence change by championing the voice of the customer.
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If Brands Don’t Change Willingly, Regulation Will Come
Governments around the world are responding to soaring food prices. South Korea, Germany, and France are already in the process of passing laws to regulate shrinkflation. Canada recently launched a commission into food costs, with shrinkflation as a key factor under investigation. Retailers may also take matters into their own hands, as French grocer Carrefour did by posting warning signs about hidden price changes. Both grocery retailers and food manufacturers should expect to embrace change, and doing so voluntarily will be a better look.
Potential Ways to Address the Issue
What can brands do to manage price changes and rebuild trust with consumers? Here are some ideas to help address the decline of trust in CPG brands (especially national and multi-national brands) and ways to make price adjustments more effectively when they are justified.
#1. Proactively protect by de-inflating prices
In many cases, the cost increases seen on the shelf outpace inflation. Journalists are digging into these stories, and governments are investigating. If your organization is at risk of a price-related scandal, it is strongly advisable to take proactive measures to reduce the impact. In this case, a transparent, fact-based price adjustment in favor of consumers is the strongest move you can make. Regardless of whether a scandal is brewing, a downward price change to reflect a more accurate adjustment for inflation is a strong move to repair brand loyalty.
#2. Innovative leadership
Industry leaders need to adjust their mindset. Comments from high-paid CEOs about food prices are probably not going to be well-received, especially if their workers are struggling to make ends meet. Reining in executive compensation while focusing on improving workers’ wages and benefits is not a pipe dream; companies like ConnectED are ensuring more equitable compensation. Not only does an emphasis on employee compensation reflect well on a company, but it also future-proofs labor models in tight markets.
Today, we see companies bickering with each other, fighting their employees, and fighting regulation. This behavior reinforces negative views and suggests some may be stuck in the past. Leaders who step out of this paradigm and offer customer-centric solutions will be the ones who re-establish trust with consumers.
#3. Offer transparent options when a change is justified
When a price change is justified due to an increase in costs, brands could consider a transition strategy that allows customers a choice between a smaller pack at the same price and a larger pack at a new price. Let consumers choose which they prefer, and then make a transition to the more popular choice after a given period. Alternatively, leverage social media or databases to pose the question to consumers in a survey. Sharing detailed information about the reason for the cost increase is key. Being more transparent may not make everyone happy, but it will at least move the needle back towards trust.
#4. Add value
If you need to shift to a new price, consider how you can use the change as an opportunity to add a new benefit to consumers. For example, can you add value through a new nutritional improvement or better flavor? Often, these innovations are already in the pipeline. Lining up the innovation rollout with a price change may make it more palatable for consumers.
#5. Data exchange
Offering customers a price freeze through a subscription that leverages their data is another option to consider. Customers are generally happy to trade their data if there is a tangible benefit. This gives your most loyal consumers the chance to keep their preferred products in their cupboards at an affordable price. At the same time, it may offer you the added benefit of learning more about your consumers.
#6. Engage in a conversation with your consumers
What’s most striking about the evolving story of food prices is how out of step some brands are with their consumers. This is somewhat shocking, given that it’s never been easier to engage customers. Processes to include the voice of the customer must be integrated regularly with guidelines for how the data will inform decisions. Examples include annual brand health surveys, focus groups, shop-along research, and social listening.
Is shrinkflation dead?
Once inflation stabilizes (now in question given the rising conflict in the Middle East), consumers will be living in a world where wages have fallen even further behind the cost of living and where new behaviors and price sensitivities are well established. Regardless of whether government regulation forces a change, consumers will remain highly price-sensitive for the foreseeable future. Brands may find it hard to win back those who have switched to lower-cost options. Unless brands find a new path forward in their relationship with consumers, shrinkflation may continue to create a risk of brand switching and a loss of trust.