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29 March 2022

Shrinkflation: why a Dairy Milk gets smaller, not more expensive

As inflation rises, manufacturers are at risk of “demand destruction” if they increase prices.

By Emma Haslett

Hell hath no fury like a consumer whose chocolate bar is a little bit smaller than they remember. Hence the dismay at the announcement by Mondelez, parent company of UK chocolate-maker Cadbury, that its 200g Dairy Milk bar will shrink by 10 per cent. “In the Roman army original sense of the word, the Dairy Milk 200g bar has been decimated,” lamented the BBC economics editor Faisal Islam.

“Shrinkflation” — the phenomenon of products getting smaller while their price remains the same — is a sure sign of an inflation economy: as the price of ingredients rise, companies cut the size of their products (or the number of products in a multipack) and hope their customers won’t notice. One of the most notable occurrences of this was when Toblerone suddenly became a gap-toothed shadow of its plump, nougaty self in 2016, prompting such a frenzied outcry from consumers that, two years later, the bars were restored to their former glory. (Toblerone is also owned by Mondelez.)

Even before the cost of living crisis, shrinkflation was rife. A 2019 study by the Office for National Statistics showed that 2,529 products had shrunk in size between January 2012 and June 2017. It found that, in 2016, 70 per cent of shrinkflation occurred in the food and drink categories, while in the “sugar, jam, syrups, chocolate and confectionery” (ie Dairy Milk) category, “there were more unique products with size reductions than increases”.  

Given the strength of the reaction when consumers do notice shrinkflation, why do companies bother? Why not just stick to basic principles of economics and raise the price of the product in line with the rising cost of ingredients? The answer lies in an economic theory known as “demand destruction” — the idea that beyond a certain price, consumer demand doesn’t just drop, it disappears.

The theory goes like this. A consumer, who spends £2 a week on a 200g ACME chocolate bar, sees that it has increased to £2.20. He winces but puts it into his shopping basket anyway. Six months later, though, inflation has increased further and ACME is forced to hike the price further, to £2.50. At that point, our consumer has had enough. His heating is more expensive, his clothing is more expensive, and he’s worried about his household finances. He switches to a cheaper, supermarket own-brand bar — or ditches his chocolate habit altogether — and finds that his life is absolutely fine. When prices begin to drop again (or he gets a bump in pay), he feels no need to return to his original behaviour. His habit is broken: demand destruction has occurred. If ACME had only found another way to preserve its margins without hiking prices, our consumer would have maintained his habit and kept spending.

The concept of demand destruction is usually applied to energy commodities such as petrol. High prices can cause consumers to make a fundamental change in behaviour, such as selling their car and switching to public transport (or buying an electric car). “Above $4 per gallon, you do see the American public change their driving habits,” Regina Mayor, the global head of energy at KPMG, told Yahoo Finance. “And we do actively see demand destruction.” The current average gasoline price in the US is $4.24 per gallon, according to the American Automobile Association. 

Demand destruction can bring sudden change to a market. In the mid-1700s whale oil, which burns with a virtually smokeless flame, was the most popular choice for lighting homes in the United States. At the peak of the whaling industry between 1770-1775, ports in the north-east of America produced 45,000 barrels of oil a year. Sperm whales were hunted to the brink of extinction, and as the source of the oil began to disappear whale-hunters became increasingly desperate, hunting smaller whales in more dangerous seas. That sent prices spiralling upwards.

Having been forced to buy less whale oil, consumers were prepared to try alternatives, and a recently discovered source of oil — kerosene from mineral oil — quickly became the default choice for oil lamps. The price of whale oil fell but demand had been destroyed, never to return. In 1861 a cartoon in Vanity Fair depicted whales in dinner jackets at a “Grand ball given by the Whales in honor of the discovery of Oil Wells in Pennsylvania”. “We wail no more for our Blubber,” said a sign in the background.

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In an environment so inflationary that people are, in some cases, being forced to choose between heating their homes and feeding their children, it wouldn’t take much of a price rise for them to fall out of the habit of buying small luxuries such as chocolate bars altogether. Companies are keenly aware of this, which is why they’d rather take a relatively small hit to their brand by shrinking their product than raise prices, and risk it disappearing from the weekly shop altogether.

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