Economics

value deflation

What is value deflation?

Value deflation, or contraction deflation, occurs when retailers and service providers cut costs and sell smaller packages, distribute smaller portions, or generally offer less for the same price to keep the same sticker price. Companies may use it as a way to quietly raise prices when costs are rising and consumers are particularly price-sensitive.

Economy-wide value deflation is actually a form of price inflation that results in a reduction in real consumption at the same price level. Value deflation can lead to undervaluation if inflation rates and the cost of living are not taken into account when calculating the price index.

key takeaways

  • Value deflation is when businesses reduce the value they offer to customers rather than increase their selling prices.
  • It can take the form of shrink-inflate, reducing the package or serving size for the same price, or lowering the quality, selling a slightly cheaper product on par with an older product.
  • Value deflation can lead to inflation, especially inflation that cannot be explained by statistical agencies.

Understanding Value Deflation

Value deflation is a way to raise prices so consumers are less likely to notice, it can take the form of reducing the amount of food in a typical package, reducing portion sizes in restaurants, increasing wait times and reducing customer service and support, or switching to Lower cost ingredients or materials.

This can be a successful strategy because many shoppers are more sensitive to price changes than to quality changes. From a marketing standpoint, in order to maintain a consistent price point, shrinking the package is better than increasing the price.

But value deflation can backfire, as Kraft discovered in 2016 when it downsized its Toblerone pub and made headlines in the UK. British food retailers have used value deflation so extensively to compensate for a weaker pound and higher costs of imported ingredients that contractionary deflation has become a phenomenon. From 2012 to 2017, more than 2,500 products experienced value deflation, according to the National Bureau of Statistics.

Value deflation may not show up in inflation measures such as the consumer price index or retail price index. Many economic statistics agencies use a quality adjustment process to isolate price changes from changes in product weight or quality, so should still show up as price increases in official inflation statistics.

However, by design, many value-deflation techniques can be difficult to measure. Manufacturers may switch to low-cost inputs without drastically changing their products. For example, a manufacturer of hot cocoa may switch to a less expensive sweetener, or a manufacturer of grated cheese products may increase the wood pulp filler content of their products. This may reduce the quality of some customers, but despite the lower quality, they may not be enough to change their behavior. Other consumers may not notice the change at all. This may or may not be captured by official data and statistical agencies.

In particular, it may be difficult or impossible for consumers and statisticians to interpret and adjust for cuts in services or reductions in the quality of ingredients and materials. For example, a hotel might instruct its cleaning staff to reduce the cleaning time per room, resulting in a drop in cleanliness, or a consumer electronics manufacturer might turn to a lower-cost customer support provider, increasing call waiting times or irritating its users. Service quality is low.

Whether or not value deflation constitutes a “perfect business crime”, consumers around the world should be on the lookout for these packaging tricks. The question is how much FMCG companies can withstand value deflation — and risk damaging their brands — before being forced to raise stickers or face a squeeze on operating margins.

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