Rising inflation and pandemic-related supply-chain challenges are driving up prices at the grocery store. While some manufacturers, like Procter & Gamble, have come forward to announce price hikes across their portfolio of products, others are taking a less transparent route by selling less product in the same package and perhaps hoping the consumer doesn’t notice. Here, HBS faculty members John Gourville and Alex MacKay discuss the ups and downs of the practice of shrinkflation, as it’s known, as well as consumer price sensitivities and what might lead a brand to try to disguise a price hike.—JMF

John, can you give us some historical context to explain this phenomenon?

John Gourville: The first instance of shrinkflation that I found was in 1988, when Chock full o’ Nuts reduced its one-pound can of coffee to 13 ounces. Within a short while, everyone else in the ground-coffee market had done something similar, and it’s been going on ever since. You tend to see this happen at times of increasing costs of raw materials, wages, and energy prices—anything that puts pressure on manufacturers’ margins. Right now, we’re seeing the biggest inflation in four decades. Throw supply-chain problems on top of that, and you get real pressure to jack up prices. It can be easier to pass along a price increase via shrinkflation because people tend to have a pretty clear idea of what something should cost, whether it’s a half-gallon of ice cream or a box of cereal, but it’s more difficult for a person to pick up on the fact that there is less product in a package.

From the perspective of the consumer, the lack of transparency seems at least a little nefarious. Is it risky?

Gourville: I think it depends on whether the product is an indulgence or a necessity. If a tub of ice cream gets too expensive, someone might just choose another dessert. It makes less sense for necessities—like reducing the number of diapers in a package of Pampers—and in categories when there are standard sizes or established quantities, like eggs. When Chock full o’ Nuts reduced its can from 16 ounces to 13, people did notice. But once they broke that magical 16-ounce standard, then they were free to move it almost anywhere they wanted.

Alex MacKay: It’s also possible that you could get a marketing boost with a slightly smaller product for certain segments. Corona now makes Coronita bottles, as an example, and I’ve noticed that Coca Cola’s 7.5-ounce mini cans are more prominently displayed in some stores than their 12-ounce cans. They could be selling these smaller containers at higher per-ounce premiums, but this might also reflect changing health preferences and tastes. Some customers may prefer smaller portions. Meanwhile, the prices for certain organic foods and things like wild-caught fish seem to be going up in a very transparent way, and people seem less concerned about this. It might be easier for companies to reduce the package size for products that are viewed as less healthy, and it might even be preferred in some cases.

Alex, you studied pricing over a 15-year period just before the pandemic. What did you learn about consumer sensitivity?

MacKay: We put together a large-scale study of consumer products covering more than 100 product categories and found a few interesting things. Over the 15-year period that ended in 2019, right before the pandemic, prices for these products increased by only 2 percent (in real terms). So a box of cereal that used to be $4.95 might now cost $5. These prices are adjusted for inflation and also adjusted for the size of the package, so per-unit (e.g., per-ounce) prices really didn’t increase much for a long time. What we’re finding instead is that firms were producing products at a lower cost. Overall, markups on these products were increasing, while price levels stayed fairly flat.

Interestingly, falling costs were not passed on to consumers. Typically, competition would tend to drive those prices down, but I suspect that firms put in some effort to maintain prices despite the falling costs. Moreover, our study found that consumers actually became less price sensitive over this period, allowing firms to keep the benefits of cost reductions for themselves.

I think there’s also a lot to be said for changes in consumer behavior over this period, and, John, I’d love to get your thoughts on that, too. In the past 20 years, to what extent have people shifted their shopping behavior across retailers? Certainly, online shopping has taken off over this period. How might that affect consumer behavior when they show up in the store? With stores like Walmart and Target carrying almost everything, including groceries, I wonder if the threat of the consumer going to another store as a way to discipline prices has become less of a reality. Maybe that’s one reason consumers seem to be less price sensitive today than they were 10 or 15 years ago.

Gourville: You definitely still have those who are loyal to their favorite store and do most of their shopping there. They might trade off what they buy in the store, depending on price. There are also brand-loyal people who will buy the same container of, say, Edy’s ice cream, no matter what it costs, every time. And there will always be the price-sensitive consumers who take the time to figure out where they can get the best prices at each store; they might make three separate trips to reduce their overall food expense.

There are other interesting examples that speak to this idea of people’s sensitivity to price relative to quantity. Back in the early 2000s, Dannon sold yogurt in eight-ounce containers; Yoplait sold its yogurt in six-ounce containers. For years, Dannon tried to get people to realize they were getting more yogurt when they bought Dannon, but people were just looking at the price. Dannon finally threw in the towel and came out with a six-ounce container. So when people were comparing the two it was an apples-to-apples comparison, and Dannon looked more reasonably priced than it did before.

Sounds like they’re generally counting on the consumer to not do the math?

MacKay: Some consumers might be doing these calculations, but certainly not all. If you’re one-stop shopping, you might not be doing a lot of price comparisons. But there are a lot of consumers on the lower end of the income spectrum for whom it could be a real challenge to get 25 percent less product at the same price. Such changes could be meaningful in terms of their overall basket of goods. That’s important to think about when firms are doing market testing and thinking about how price decisions will affect different types of consumers, including those who actually show up in the store.

Gourville: I also understand why manufacturers do it. Their costs are increasing. They have to satisfy their stakeholders. They need to pass on those price increases to the end consumer, and there’s a dilemma about how best to do it. I think if you ask consumers if they would prefer to pay the same price and get a little less product, or pay more for the same quantity, at least some people will say they’re happy to get a little less product, especially with indulgence items.

MacKay: The products we’re talking about are also sold in fairly competitive outlets, so you have a lot of inter-brand competition. To John’s earlier point on Dannon and Yoplait, you’re subject to competitive market conditions, and that really influences the available levers.

Gourville: It’s the fact that they try to hide it that’s different. When Chock full o’ Nuts coffee reduced their 16-ounce can of coffee, they even reduced the size of the font on the package that told you how many ounces were in the container, in the hope that no one would be able to read it.

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