Inflation in Australia is reshaping how consumers buy everyday essentials like groceries, toiletries, and cleaning products. FMCG businesses face rising costs for raw materials, transport, and labour, while shoppers become more price-sensitive. This creates a challenging environment for brands trying to balance profitability with consumer loyalty.
Key takeaways:
Consumer behaviour shifts: People are turning to private labels, bulk buying, and discounts to save money. Brand loyalty is weakening.
Shrinkflation: Smaller product sizes at the same price are common but risk damaging trust.
Urban vs rural differences: Urban shoppers have more options and access to online deals, while rural areas rely on bulk buying and local stores.
Business strategies: FMCG brands are using targeted pricing, private label partnerships, and supply chain improvements to adapt.
The focus is on staying competitive by understanding consumer needs, managing operational costs, and responding to inflation-driven changes in demand.
How is ‘shrinkflation’ helping FMCG companies tide over rising input costs?
How Inflation Changes FMCG Demand
When inflation impacts Australian households, the effects on FMCG demand are immediate and far-reaching. Shoppers adjust their habits, rethink brand preferences, and make different product choices. These changes often prompt product tweaks and reveal variations in demand across different regions.
Price Sensitivity and Shifting Consumer Behaviours
As inflation bites, Australian shoppers become more price-conscious, adopting strategies like bulk buying, hunting for discounts, and exploring private label options. These behaviours significantly alter FMCG demand patterns.
Bulk buying becomes a go-to strategy for non-perishable items. Products like toilet paper, canned goods, and cleaning supplies are stockpiled during sales, creating sharp spikes in demand. While this approach helps households save money, it complicates forecasting for FMCG brands, especially during promotional periods when sales can swing wildly.
The focus on discount hunting also intensifies. Shoppers increasingly rely on sale catalogues, price comparison apps, and major sales events to plan their purchases. This behaviour isn't limited to budget retailers - premium supermarkets see a surge in customers gravitating toward discounted items and weekly specials.
Another noticeable trend is the rapid adoption of private labels. Store brands, once overlooked by some, gain traction as consumers realise the quality often matches - or comes close to - national brands at a lower cost. Once people make the switch, many stick with private labels even after inflationary pressures subside, reshaping market dynamics.
Shopping patterns also shift. Instead of large weekly grocery runs, many Australians opt for more frequent, smaller trips to take advantage of rotating specials and reduce waste from perishable bulk buys. This fragmented shopping behaviour adds challenges for FMCG companies trying to manage inventory and promotions effectively.
These consumer habits pave the way for product-level adjustments, such as shrinkflation, which brings its own set of challenges.
Shrinkflation and Product Adjustments
Shrinkflation, where product sizes shrink but prices stay the same, has become a common response to inflation. However, it often creates unintended consequences for FMCG brands.
Australian shoppers are becoming increasingly aware of shrinkflation. They notice when a chocolate bar drops from 50g to 45g or when a packet of biscuits contains fewer pieces. This awareness can lead to frustration and a sense of betrayal, especially when brands fail to communicate these changes transparently.
Shrinkflation tends to damage brand trust more than outright price increases. Many consumers feel "cheated" when they discover smaller quantities, which can lead to negative reviews, social media backlash, and a reluctance to repurchase. The emotional impact of this perceived deception often outweighs the financial savings for brands.
The perceived value of products also takes a hit. Items that once seemed like a good deal suddenly feel expensive on a per-unit basis, pushing shoppers toward competitors offering better value. Smaller or newer brands that maintain consistent sizing often benefit from this shift.
Some FMCG companies try to offset shrinkflation with product reformulations or packaging updates. However, these changes can backfire if they alter the product's taste, texture, or appearance. When multiple changes occur at once, consumers are more likely to switch brands altogether, further eroding loyalty.
Urban vs Rural Market Variations
Inflation doesn’t affect all Australians in the same way. Urban and rural shoppers experience different challenges, leading to distinct demand patterns that require tailored approaches from FMCG brands.
In cities like Sydney and Melbourne, urban consumers have access to a wide range of retail options, from premium supermarkets to discount chains and specialty stores. This variety allows them to compare prices easily and switch brands or stores to stretch their budgets. Urban shoppers might cut back on basics like cleaning products but still splurge on premium coffee or organic foods that align with their lifestyle.
In contrast, rural and regional consumers face more limited choices. With fewer stores and longer distances to travel, they often rely on bulk buying and stockpiling. This creates more stable demand for established brands in these areas, although rural shoppers tend to be highly price-sensitive across all categories. Generic brands often dominate in these markets, as there’s less willingness to pay extra for convenience or lifestyle-focused products.
The online shopping gap between urban and rural areas also plays a role. Urban consumers benefit from e-commerce platforms and delivery services, accessing competitive prices and a broader range of products. Rural shoppers, on the other hand, often face higher delivery fees and fewer online options, making them more dependent on local stores and pricing.
These geographic differences highlight the need for FMCG businesses to craft region-specific strategies rather than applying a one-size-fits-all approach to inflation-driven changes in demand.
How FMCG Businesses Can Respond to Inflation
When inflation takes hold, FMCG businesses need to act quickly and strategically. In Australia, the FMCG market has experienced price increases averaging 8–12% during 2024–2025. This has forced companies to rethink their strategies to maintain profitability while managing rising costs and shifting consumer behaviours. The solution lies in adopting targeted approaches that tackle cost pressures and evolving buying habits.
Pricing and Value Positioning
As consumer habits shift, pricing strategies become a critical tool for FMCG brands. A tailored approach - based on product categories and consumer segments - is essential to minimise customer loss while safeguarding profitability.
For essential items like bread, milk, or cleaning products, moderate price increases are often manageable since these are necessities with fewer alternatives. On the other hand, discretionary items such as premium snacks or specialty beverages require a more cautious approach, as they’re the first to be cut from shopping lists when budgets tighten.
Adjusting pack sizes is another effective tactic. Offering smaller options, like a 350 ml bottle instead of a 500 ml one, allows brands to maintain per-unit profitability while appealing to budget-conscious shoppers. A well-rounded product portfolio, including premium and budget-friendly options, can capture a broader audience. For instance, a cereal brand might continue its premium organic range while introducing a more affordable variant for price-sensitive customers.
Clear communication about price changes is equally important. Instead of simply announcing increases, brands can explain the reasons behind them - whether it’s better ingredients, sustainable packaging, or improved quality. This transparency helps build trust and makes consumers more accepting of higher prices.
Private Label and Value Brand Growth
The rise of private labels during inflation presents both a challenge and an opportunity for FMCG businesses. Instead of resisting this trend, companies can find ways to benefit from it.
Collaborating with retailers to produce private label products is one option. FMCG companies can use their manufacturing expertise to become suppliers for these labels, creating a steady revenue stream even as their branded products face pricing pressures. Such partnerships often provide more predictable income during uncertain times.
Creating value sub-brands is another approach. These brands cater to price-sensitive customers while keeping premium offerings intact. Some companies even adopt a hybrid strategy, offering products that sit between basic store brands and premium options. Small changes - like better packaging, clearer labelling, or slight formula tweaks - can make these products stand out, allowing brands to charge slightly higher prices without losing appeal to budget-conscious shoppers.
Using Promotions and Loyalty Programs
Promotions and loyalty programs are powerful tools to retain customers and drive sales during inflation. However, they need to be data-driven and carefully planned to protect margins.
Personalised promotions based on customer purchase history can be particularly effective. For example, a shopper who regularly buys premium coffee might appreciate a targeted discount on that product, while someone focused on household essentials might respond better to deals on cleaning supplies. Timing these promotions to coincide with pay cycles can further maximise their impact.
Bundle promotions are another smart move. Offering discounts on complementary items - like pasta paired with sauce or shampoo with conditioner - not only encourages larger purchases but also helps maintain profitability.
Improving Supply Chain Flexibility
A flexible supply chain is one of the best defences against inflation.
Diversifying suppliers is a key strategy to avoid steep price hikes. Many companies are moving away from just-in-time inventory models to buffer stock systems, which provide a cushion against supply disruptions and price volatility. While this requires careful planning to avoid overstocking, it ensures smoother operations during unpredictable times.
Advanced technology can also make a big difference. AI-powered demand forecasting and real-time inventory systems help align stock levels with actual demand. Tools like RFID and IoT sensors provide visibility into stock, shipments, and supplier performance, enabling better decision-making.
Automated warehousing and optimised transport systems reduce errors and fuel costs while efficiently handling larger order volumes. Similarly, Transport Management Systems can streamline delivery routes, cutting fuel expenses through smarter logistics planning.
Partnering with third-party logistics providers is another way to boost flexibility. These partnerships offer access to advanced networks and additional capacity, allowing businesses to scale operations as needed while leveraging specialised expertise.
Supply chain inefficiencies currently cost the Australian fresh produce sector over $1 billion annually, with up to 22% of produce lost. By addressing these inefficiencies, businesses can significantly improve their bottom line while building resilience for future challenges.
Using Market Intelligence for Better Decisions
In times of inflation, making decisions based on solid data isn’t just helpful - it’s essential. For FMCG businesses, relying on instinct or outdated information can lead to costly missteps, especially when consumer behaviour shifts rapidly. To navigate these turbulent periods, many companies are turning to market intelligence as a guiding light.
Real-Time Consumer Data and Demand Forecasting
Consumer habits can change in the blink of an eye, and relying on last quarter’s data just doesn’t cut it anymore. Real-time insights are crucial for understanding how shoppers are adapting, especially during inflationary periods when budgets are tighter.
FMCG companies are now blending point-of-sale data with tools that track consumer sentiment to identify emerging trends. It’s not just about what people are buying - it’s about when, how much, and what they’re skipping altogether. For example, a spike in online searches for "budget meal ideas" or "discount grocery stores" can signal that households in certain areas are feeling the pinch.
Predictive modelling steps in when historical data falls short. These tools consider a range of factors - like inflation rates, unemployment levels, seasonal trends, and competitor moves - to forecast demand more accurately. This helps businesses avoid the twin risks of running out of stock or over-ordering inventory. Armed with these insights, companies can respond quickly and measure the impact of their strategies with precision.
Methods for Measuring Business Impact
To evaluate the success of strategies during inflation, FMCG companies need the right metrics and testing tools. Unfortunately, many businesses struggle to identify which measurements matter most or lack the tools to track them.
Unit economics analysis is a cornerstone of smart decision-making. It helps businesses monitor the profitability of individual products. During inflation, costs can shift rapidly, so frequent analysis is essential to flag products that may no longer be viable at current cost levels.
Incrementality testing separates true growth from mere timing shifts. For example, it can reveal whether a promotional campaign genuinely boosted sales or simply moved purchases earlier. This ensures marketing dollars are spent on strategies that create real value.
Customer lifetime value (CLV) tracking becomes even more critical when inflation drives up acquisition costs and alters buying behaviour. Businesses need to understand how price changes impact customer loyalty and which segments are most sensitive to price increases.
Market share analysis should go beyond the surface. While overall market share might look stable, deeper shifts can happen within specific price brackets or product categories. Regular competitive analysis uncovers gaps where competitors are struggling or where new opportunities are opening up. When internal tools fall short, external consulting services can fill the gap with advanced strategic frameworks.
Using Consulting Services for Direction
Sometimes, internal analytics just aren’t enough. That’s where external expertise comes in, offering fresh perspectives and actionable strategies. Specialised consulting services can provide the frameworks and tools that internal teams may lack, especially during inflationary challenges.
Take consultancies like Uncommon Insights, for example. They offer services tailored to the FMCG sector, including growth audits, competitive market analysis, and strategies to maintain customer loyalty despite price hikes. These services often focus on:
Unit economics frameworks to identify which products, channels, or customer segments remain profitable under rising costs.
Incrementality testing frameworks to ensure marketing investments are driving genuine growth, not just shifting sales around.
Financial modelling for inflation, helping businesses plan for different scenarios, from pricing adjustments to product mix changes. AI-powered tools are often used to process huge datasets and uncover patterns that might otherwise go unnoticed.
The best consulting engagements don’t stop at reports - they deliver weekly updates and work closely with internal teams to turn insights into actionable strategies. Tailored roadmaps ensure changes are implemented in a structured way, avoiding unnecessary disruptions.
For FMCG companies with revenues between $1 million and $10 million, these services can be game-changing. They provide access to high-level analytics and strategic advice that would be too costly to build in-house. Plus, an external viewpoint can help businesses see opportunities they might miss when too focused on daily operations.
Case Studies and New Trends in Australian FMCG
Australian FMCG businesses are navigating inflation with creative strategies, reshaping the industry in the process. Recent examples highlight how targeted approaches are making a difference.
Private Label Growth and Consumer Choices
To counter inflation, major supermarket chains across Australia have been expanding their private label ranges. These aren’t just about affordability anymore - improved quality in private labels is winning over consumers. Retailers have found that when house brands deliver on quality, they foster trust, not just savings. This strategy has proven effective for both big chains and independent stores, helping them manage pricing challenges while maintaining customer loyalty. It’s a clear example of how focusing on quality can drive results, even during tough economic times.
Growth of eCommerce and Direct-to-Consumer Channels
The rise of digital shopping in the FMCG sector is another trend changing the game. By strengthening their eCommerce platforms, brands are cutting out the middleman, avoiding traditional retail markups, and keeping prices competitive. Subscription models and online multipack deals have become popular, offering consumers convenience and value. This shift reflects a broader change in how Australians shop, with more people embracing direct-to-consumer models for their everyday needs.
Comparing Response Strategies
FMCG companies are using a mix of strategies to handle inflation’s challenges. Here’s how some of the most common approaches stack up:
Strategy | Advantages | Disadvantages | Best Suited For |
|---|---|---|---|
Shrinkflation | Keeps prices steady; allows consumers to adjust gradually | Risk of consumer backlash; could harm brand image | Established brands with loyal customers |
Premium Positioning | Boosts margins; reinforces a high-quality image | Limits audience reach; needs strong brand reputation | Niche or luxury brands |
Private Label Expansion | Controls costs and protects margins | May face hurdles in quality perception and marketing | Retailers and manufacturers with broad product ranges |
Value Engineering | Cuts costs without reducing product sizes | Requires R&D investment; possible quality concerns | Large manufacturers with technical expertise |
Direct-to-Consumer | Improves margins and builds customer relationships | Demands more marketing and logistical efforts | Brands with strong digital capabilities |
Many FMCG companies are finding success by blending these strategies, creating a more balanced response to inflation. This approach allows them to meet diverse consumer needs while staying competitive.
For businesses looking to refine their approach, consulting firms like Uncommon Insights in Australia offer tailored strategies to help FMCG companies thrive in challenging times. These trends and case studies highlight how adaptive thinking can keep the FMCG sector resilient, even during periods of economic strain.
Conclusion: Managing Inflation for FMCG Success
Navigating inflation is no small feat for FMCG businesses. Success lies in finding the right balance between strategic pricing and a deep understanding of consumer behaviour. Leading FMCG companies are focusing on creating value in innovative ways rather than simply increasing prices.
Adaptive strategies like shrinkflation, premium product positioning, and direct-to-consumer models have become key tools for staying resilient. Often, the most effective results come from blending several approaches rather than depending on just one.
By leveraging detailed consumer insights and real-time data, businesses can better understand price sensitivity, predict shifts in consumer behaviour, and fine-tune their strategies as needed. This data-driven mindset not only helps avoid costly mistakes but also uncovers opportunities that might otherwise go unnoticed.
Collaborating with consultancies such as Uncommon Insights offers FMCG companies tailored solutions that seamlessly align pricing strategies with consumer needs while enhancing operational efficiency.
As inflation continues to shape the Australian FMCG market, businesses that prioritise adaptability, consumer insight, and data-informed decisions will stand out. Inflation, while challenging, can also serve as a chance to build more resilient, customer-focused operations that thrive in an evolving landscape.
FAQs
How does inflation affect consumer behaviour differently in Australia’s cities and rural areas?
Inflation affects how Australians spend their money, but the impact varies significantly between urban and rural areas. In cities, people tend to tighten their belts when prices rise, especially on non-essential items. This shift often mirrors broader consumer sentiment, as urban households are generally more attuned to inflation trends and adjust their spending accordingly.
In rural areas, however, inflation hits harder on everyday essentials like food and fuel. With slower income growth and a higher reliance on these necessities, rural households feel the pinch more acutely. This often forces them to prioritise basic needs over other purchases. These contrasting behaviours shape the demand for fast-moving consumer goods (FMCG), with city dwellers seeking better value for money, while rural communities adapt to stricter financial constraints.
How can FMCG businesses maintain consumer trust while using shrinkflation?
During times of shrinkflation, maintaining consumer trust hinges on honest and open communication. Businesses in the FMCG sector should be upfront about why product sizes have changed. Explaining these adjustments clearly can help customers see the reasoning behind them, while also reinforcing the brand’s dedication to delivering quality.
To foster trust, use tools like clear product labelling, regular updates on social media, and direct messaging. These efforts show consumers that their loyalty matters. On top of that, introducing value-focused measures - such as loyalty rewards, special discounts, or promotions - can reassure customers. Pair these initiatives with unwavering product quality to keep confidence strong, even as packaging or sizes shift.
How can FMCG businesses adjust their pricing strategies during inflation using market insights?
FMCG businesses can tackle inflation head-on by keeping a close eye on consumer behaviour, competitor pricing, and economic trends. By analysing this data, they can spot opportunities to adjust pricing strategies in a way that maintains profitability without alienating customers.
Leveraging advanced analytics and AI tools takes this a step further. These technologies allow businesses to optimise prices in real time, predict demand more accurately, and assess price elasticity. With these insights, companies can adapt swiftly to changing market conditions and consumer preferences, staying competitive while protecting their profit margins during inflationary times.
