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In July, the UK Office for National Statistics (ONS) stated that the size of more than 2,000 food and drink products decreased between January 2012 and June 2017. Dubbed ‘shrinkflation’, the research suggests brands have been reducing the size of their products while maintaining retail prices. This seems to be the latest lever businesses and procurement functions are pulling to try and manage costs, particularly in light of the uncertainty they face from raw material costs.
Volatile raw material prices were cited as a major factor in shrinkflation. ONS analysts noted that the price of both sugar and cocoa – two of the most important ingredients in confectionery – has fluctuated considerably in recent years.
The uncertainty surrounding the UK’s withdrawal from the European Union is contributing to price volatility and is likely to do so for some years to come. Other factors include weather conditions, with below average rainfall and sub-average water reserves in some key agricultural areas in India, presenting "a warning sign to the market", according to Agrimoney. After all, these conditions can trigger a fall in yield and, when yield is down, prices typically go up.
If procurement can reduce the quantities of raw materials it has to purchase, it can reduce the buying organisation’s exposure to price volatility. In turn, this helps ease the pressure procurement has to exert further down the supply chain in terms of costs.
’Shrinkflation’, therefore, creates a scenario where neither procurement nor its suppliers should feel the pinch.
Ultimately, the cost and trade of raw materials remain uncertain and the practice of shrinking the volume of packaging and end products may catch on in other industries, as businesses aim to maintain both margins and supplier relationships.
Image: Vladi333 / Shutterstock.com
This article is a piece of independent writing by a member of Procurement Leaders’ content team.