What is ‘shrinkflation’ and how bad are dollar stores with doing it?

If you’re noticing more air than chips in your bag of Lay’s, you’re not imagining things. The phenomenon of “shrinkflation” arose during the pandemic as retailers grappled with surging costs and experimented with pricing power. To avoid raising costs, stores are cutting the size and quality of their products. Now, even as inflation rates have ebbed, the hack of keeping a price unchanged but just filling, say, your bag of chips with less food, hasn’t. And dollar stores are actually the worst offenders.

Despite boasting cheap prices, dollar stores such as Dollar General and Dollar Tree actually end up costing customers more in the long run. Essentials such as toilet paper, soap, and groceries cost more per unit price at dollar stores than they do as other large retailers. For example, a six-pack of 3.17 ounce bars of Dove sensitive soap costs $8 at Dollar General, but an eight-pack of the same soap in 3.75 ounce bars costs $10.99 at Target. Despite the higher price tag at Target, the cost per ounce of soap ends up being about five cents less there compared to its dollar store competitor.

This is a new gamble for dollar stores. Dollar General made the decision in 2021 to defy its moniker by raising its prices to $1.25. By last summer, some of its products cost up to $5

“​​For more than eight decades and through a variety of macroeconomic environments, Dollar General has served millions of Americans seeking to stretch their budgets on household essentials in a convenient, easy-to-shop store,” a Dollar General spokesperson told Fortune.  “We continually partner with our national and private brand suppliers to evaluate how best to offer items that meet our customers’ product and affordability needs.”

But these small cost differences add up: Dollar General and Dollar Tree both had profit margins around 31.5% in 2023, 7% higher than Walmart’s 24% margin and 10% above Kroger’s 21.4% margin. These patterns have held for over a decade. 

The effects of shrinkflation at dollar stores are massive because of the stores’ omnipresence. Dollar General has the most locations of any U.S. retailer, with 19,000 locations. Combined Dollar Tree, the two retailers have over 35,000 U.S. locations. That’s about five times as many stores as the U.S. Walmart and Target locations combined, Fortune calculated.

The strategy of shrinkflation is becoming more commonplace. Toilet paper and paper towels are 34.9% more expensive than they were in January 2019, with over 10% due to manufacturers shrinking the size of the product, according to a December report from Democratic Senator Bob Casey. Snack foods before 26.4% more expensive in the same period, with 9.8% of the price increase due to shrinkflation.

Dollar General has extra reason to protect profit margins after suffering from inventory shrink in 2023. It reported an operating profit decrease of 41.1% to $433.5 Million in its third quarter. Despite challenges, the company still had a net sales increase of 2.4% to $9.7 billion in the same period

This is where the strategy of shrinkflation comes in. Low-income customers, which dollar stores rely on for most of their business, are sensitive to the price hikes that are associated with inflation, Brian Numainville, principal of retail consulting The Feedback Group, told Fortune. Instead of raising prices and alienating customers, these retailers opt to cut the size of their products while keeping the prices the same, creating the illusion of a good deal while keeping their profit margins wide.

“That doesn’t mean, however, that shoppers won’t notice that they are getting less for their money even without obvious price hikes,” Numainville said.

Shoppers hate shrinkflation, but can do little about it

Customers are indeed noticing the differences in their frequently-shopped-for products. Three in four U.S. customers are concerned with shrinkflation, according to an April 2023 YouGov survey of over 1,100 U.S. adults. Almost half of adults over 55 said they’d stop buying certain products altogether because of shrinkflation, and one third said they’d temporarily hold off on buying certain items.

Customers may want to change their purchasing behaviors to avoid shrinkflation, but those already shopping at dollar stores may not have a choice.

Thousands of dollar stores cropping up across the U.S. may seem like a win for shoppers looking for convenience, but dollar store expansions have also forced out independent grocers and created food deserts in the areas they occupy.

Typically located in low-income and rural communities and communities of color, dollar stores rely on impoverished customers making less than $35,000 a year and counting on government assistance. In 2017, these customers made up 21% of Dollar General’s shoppers and 43% of its sales in 2017 according to Jim Thorpe, Dollar General’s chief merchandising officer at the time.

With dollar stores heavily reliant on cash-strapped shoppers with few options, they have little motivation to do away with shrinkflation.

“There are almost 100 dollar-type stores in a ten-mile radius,” Fort Worth Councilwoman Kelly Allen Gray, who helped pass an ordinance limiting dollar store openings in her district, told CNN. “They are heavily located in low-to-moderate-income neighborhoods, which makes their presence feel predatory.”

Dollar Tree did not immediately respond to Fortune’s request for comment.

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