The Impact of Shrinkflation on Warehousing
Explore the connection between shrinkflation, packaging, and SKU proliferation
Since the COVID-19 pandemic began, inflation has challenged and stressed global economies, warehousing, logistics, and supply chains. Increases in costs and shortages of materials and labor have driven inflation to levels that have not been seen in decades. The choice to raise prices or reduce their profit margins has plagued businesses. As global supply chain woes continue, businesses are resorting to a variety of methods to make sure that they remain profitable.
Today, companies are trying out different strategies to avoid obvious price increases. As inflation increases, manufacturers worry about diminishing brand loyalty if they need to increase prices on goods, especially if it must happen too frequently. One tactic is not to change pricing or packaging and to absorb cost increases internally. Another tactic is to raise prices, a move that can test a brands’ consumer loyalty, potentially driving them to competitor products. Both options can negatively impact a company’s profit margins. The third tactic that businesses can initiate is to change packaging, offering the same product in a smaller size for the same price.
What is Shrinkflation?
Shrinkflation refers to reduction of a product’s packaging and contents to combat increased inflation. Instead of raising the price of a product, manufacturers alter the size of a product’s package, subsequently reducing the volume of the product in the package.
Shrinkflation is a symptom of inflationary issues and normally happens due to higher costs of:
- Raw materials
The practice of shrinkflation is common in the food and beverage industry, however since COVID-19 it has become common for other consumer packaged goods typically sold in retail stores. Business Insider provides examples. In each instance, the size of the product was reduced while the price remained the same:
- Walmart’s Great Value Paper Towels dropped from 168 sheets per roll to only 120
- Hefty’s mega pack of garbage bags went from 90 bags to 80 bags
- Royal Canin’s cans of cat food now weighs 5.1 ounces, down from 5.9 ounces
- Crest reduced 3D White Radiant Mint toothpaste from. 4.1 oz to 3.8 oz
- Proctor and Gamble reduced its Pantene Pro-V Curl Perfection conditioner from 12 fluid ounces down to 10.4.
- Pedigree changed the size of some dry dog foods from 50 lbs. to 44 lbs.
Common Items Experiencing Shrinkflation
- Personal Care Products
- Confectionary Products
Shrinkflation and Warehousing: The Importance of Packaging
Global supply chains depend on a myriad of coordinated processes to make sure that consumer demands are met as effectively as possible. Each are important to the supply chain and a disruption in one process can be a catalyst for disruptions in others. Warehousing is the process of storing physical inventory for sale or distribution. Warehouse facilities are used by all different types of businesses that need to temporarily store inventory in bulk before either shipping them to other locations or individually to end consumers.
Packaging is an important aspect involved with warehousing and is more vital than ever in times of rising inflation. The packaging of goods relates directly to warehousing solutions. Goods packaging helps supply chains work more efficiently by enabling efficient storage, transportation, and distribution. How products are packaged impacts consumer action in terms of pick up, shipping and delivery as well as product placement in display space in retail stores.
Shrinkflation is not a new phenomenon. During periods of high inflation in the 1960’s and 1970’s, manufacturers changed the size of food items such as chocolate candy bars but kept prices the same. This allowed items to be sold at a constant rate at concession stands or in vending machines. Today, pandemic-related supply chain issues such as increased ingredient and transportation costs have caused shrinkflation to become more popular. Packaging for items such as cat food, paper towels, ice cream and potato chips have gotten smaller, and this has had a direct impact on warehousing operations.
The size of a package determines how many of the products can be placed on pallets for storage. This is important because the more packages that are on a pallet, the less expensive it is per unit for inventory storage. When a manufacturer reduces the size of a product, a storage center or distribution center can store more packages of the item. For example, last year Quaker Oats Co. removed one bar out of its multi-unit boxes of chewy granola bars. This resulted in consumers paying the same price for 5 bars that they previously paid for 6. It also resulted in warehouse facilities being able to store 120 boxes of chewy granola bars on a pallet instead of 100 boxes.
This is beneficial to companies because they are charged the same amount over the same period of time based on the dimensional weight of the product. Even though more items are being held, they are not taking up any additional space, so the cost of warehouse storage remains constant
An increase in the cost of cocoa will have a direct impact on companies that produce candy bars. Rather than increase the price of chocolate, the company may choose to reduce the size of its product (and therefore, the amount of cocoa per bar) and keep the price point at the same level. Mars Inc. took this path in 2017, shrinking Maltesers, M&Ms, and Minstrels in the United Kingdom by 15%
Shrinkflation At Work
In July 2022, Charmin began selling 366 sheets of two-ply Ultra Soft toilet paper. It previously sold 396 sheets of two-ply Ultra Soft toilet paper for the same price.
Managing Inventory Amid SKU Proliferation
Proper warehouse operation controls costs and reduces inefficiencies. Warehouses rely on warehouse management systems to help them deal with issues including SKU proliferation. Over the course of a product’s lifecycle, it is common for manufacturers to offer it in a variety of different packaging and quantity amounts, each with its own stock keeping unit number (SKU).
When a company changes packaging, implementing shrinkflation measures, it creates a new product entity which must be identified and tracked. This packaging change may result in the creation of an entire new size of a product. Because inventory of the previous sized product still exists, the newly packaged product must be issued a new SKU. Over the course of the COVID-19 pandemic, many manufacturers closely examined their SKUs to determine which had the highest sales and profitability. The manufacturers then eliminated slower moving SKUs to reduce the tendency towards SKU proliferation.
The problem of SKU proliferation impacts supply chains in negative ways including reducing forecast accuracy and store inventory accuracy. When fewer products are manufactured, production runs can last longer and be more efficient as equipment and packaging does not have to be changed over. With more SKUs comes more packaging changes and higher labor costs. In this case, simple really is better.
Inaccurate store inventory counts lead to stock outs and unhappy consumers. Brand loyalty is often stronger than store loyalty, so consumers shop elsewhere. When stores carry too many SKUs, it can lead to overstocking of goods, making it harder for consumers and professional shoppers to find what is needed to fulfill orders. This can also result in diminished consumer loyalty and poor customer experience.
The pandemic provided the ideal reasoning for culling less profitable products from retail store shelves. Retailers worked with consumer goods manufacturers to decrease the variety and number of products that would be available on store shelves. The fewer SKUs manufactured, the lower the supply chain costs.
One of the advantages of warehousing is that manufacturers can rely on storage facilities to manage their additional SKUs. Without proper inventory management, SKU proliferation can cause storage costs to rise because of slow-moving or dead stock items and make predicting potential sales volumes difficult.
SKU proliferation forces 3PLs to follow thorough supply control measures to receive and store inventory. More items require more of a warehouse’s space for storage and makes getting orders picked, packed, and shipped more complex and time-consuming. Without proper warehouse management systems and integrated technologies, similarity in product SKUs increase the chances of order inaccuracies and makes managing inventory more difficult.
3PLs are managing accelerated SKU growth amidst shrinkflation by streamlining their processes with automation. Advancing technology is helping increase efficiency with devices such as smart forklifts and wearable technologies. As a warehousing solution, these tools make sure that the correct pallets of products are identified, picked, packed, and shipped. They streamline warehousing operations, which subsequently alleviates workforce issues such as fatigue and improves the warehouse safety and productivity of warehouse workers.
Dimensional weight reflects package density, which is the amount of space a package occupies in relation to its actual weight.
To calculate dimensional (DIM) weight, multiply the length, width, and height of a package, using the longest point on each side. Then, divide the cubic size of the package in inches by the DIM divisor to calculate the dimensional weight in pounds.
Today, dynamic pressures continue to shake up the warehousing and storage industry. During any given period of time, warehouse storage facilities are dealing with major issues involving ensuring inventory quality, occupational health and safety, and executing product recalls. Managing inventory properly whether a business is involved in warehousing for Amazon or big box retail stores, involves dealing with warehouses space concerns, SKU proliferation and many other factors. With the rampant rise of inflation, manufacturers are trying new tactics to recoup rising costs while maintaining consumer loyalty to brands valued by target markets. Shrinkflation is one such tactic.
Many companies believe that shrinkflation is necessary during times of rising costs because it allows them to maintain the quality of their products without compromising their profitability. Warehousing is the process that allows companies to utilize shrinkflation and reduce costs. With access to smart technology, warehousing logistics can be streamlined to improve functions of warehousing such as warehouse storage.
What Makes Datex Different?
1. Revolutionary low code/no code flexible workflow-driven warehouse management software
2. Most configurable, user-friendly WMS on the market today
3. End-to-end solution provider: software, hardware, EDI, and managed services
4. White Glove Concierge Service
5. Executive-level attention and oversight