Shopper Digest: Shoppers' perspective on shrinkflation

2023 was undeniably a challenging year for both consumers and manufacturers alike. Consumer spending and sentiment declined in response to the surge in prices, while manufacturers were forced to devise creative ways to deal with rising production costs. These costs typically included higher prices for raw materials, fuel for transport and logistics, as well as increased labour costs in the post-pandemic world. During such times, it is not uncommon for manufacturers to pass the responsibility of bearing these higher costs to consumers, typically achieved by raising prices. Alternatively, manufacturers may downsize their products while maintaining prices, as it is perceived as "less painful" for consumers to bear. This case study will examine one instance where a brand downsized its most popular SKU and its corresponding effects.

Brand A conducted a downsizing exercise for their top-selling SKU, SKU X, reducing its volume by 5% to cope with rising production costs. Consequently, Brand A experienced a slight drop in volume sales on a MAT (Moving Annual Total) basis from the previous year, while the value change remained neutral, hovering slightly above the 1% mark. However, Brand A wanted to understand the success of the downsizing exercise and how shoppers reacted to this change, especially since the prices of the SKUs remained unchanged, making it a classic case of "shrinkflation."

We first examined the trended performance of the overall brand, as well as the performance of three SKUs: the old SKU (X), the new SKU (Y), and SKU V, traditionally Brand A’s second-highest performing SKU after SKU X. From the trended chart, we observed that the volume sales for total Brand A started to decline in July 2022, coinciding with the start of the downsizing exercise. The X pack size experienced a sharp decline in volume, while Y gradually and slowly gained volume sales. However, despite being in the market for a year, Y was still unable to match the performance of its predecessor. Instead, pack size V became the #1 SKU, maintaining the brand’s performance stability throughout the year.

Having established that the new pack size, Y, did not meet the intended performance levels, we then analysed the Source of Volume/Value Change (SOVC) from the perspective of the old pack size, X, to identify shoppers' movements. The chart revealed that about two-thirds of the change was attributed to shoppers switching out, followed by shoppers dropping the SKU from their repertoire, as well as shoppers lapsing out of the market entirely. However, when examining the SKUs to which shoppers switched, only 43% of X shoppers moved to Y, while the remaining shoppers switched to SKUs of other brands. The switching chart also indicated that the largest leakage was towards Brand C’s Y pack size, one of Brand A’s main competitors, raising concerns.

One of the analyses conducted to assist Brand A in recovering the performance of their Y pack size was a price cliff analysis, where we compared the maximum price per pack customers paid for similar SKUs in the market against the absolute value sale of the SKU in the past year.

From the price cliff analysis, we observed that Brand A’s Y pack size was priced the highest compared to its two biggest competitors, Brands B and C. Moreover, its placement on the cliff disadvantaged it, as it exceeded the maximum price many customers were willing to pay for this pack size. Therefore, we recommended that Brand A slightly reduce the prices for the Y pack size by 5%, positioning themselves in the middle, between their two main competitors. Our analysis indicated that this adjustment would result in a 27% increase in value sales, approximately RM 5 million.

Through the help of the Source of Volume/Value Change (SOVC) and the Price Cliff analysis, Brand A identified that their downsizing exercise led to shoppers abandoning their brand in favour of other brands, with only a 43% retention rate of shoppers switching from the old to the new pack size. Additionally, the price cliff analysis revealed that a vast majority of shoppers were not willing to spend beyond a certain amount for the new pack size, and those who did preferred competitor brands. As with most cases, a shopper’s willingness to pay a certain amount depends on various factors such as brand perception and promotions. Therefore, it is imperative for Brand A to justify the high price by offering more benefits through premiumization or conducting a brand refresh of their SKU line-up, with pack size V now leading the brand. Alternatively, Brand A could also consider running promotions like price-offs to regain volume sales.

In Worldpanel, we conduct Source of Volume/Value Change (SOVC) to ascertain the forces driving your brand’s volume movements. Whether it be stealing shoppers from your competitors, your brand being dropped from shoppers’ baskets, or shoppers increasing their purchases for your brand, we can help you develop specific strategies based on shoppers’ behavioural relationship with your brand, ensuring effective optimization of your budget.

Source: P8’2023 Peninsular Malaysia Household Purchase - Kantar Malaysia, Worldpanel Division