223-P&G Takes Off the Gloves

Last year, Procter & Gamble suffered as consumers shifted their purchases away from P&G’s feature-rich products toward lower cost, and less feature-laden, products. Some consumer research indicates that the majority of consumers believe that the lower cost products are as good as, or better, than the higher cost products in many of these P&G markets. P&G was suffering share losses. (See “Basic Strategy Guide Step 7” on StrategyStreet.com.) Ever sensitive to the will of the consumer, P&G has shifted course, at least temporarily. Where it spent the last several years developing new features and benefits for its products, it now has decided to beat back competition with lower prices.

The price reductions are noticeable, both to the consumer and to the financial analysts. P&G reduced its prices anywhere from 2% to 13% across a broad spectrum of products, including laundry detergent, fabric softeners, sanitary napkins, shampoos and conditioners and batteries. The price reductions have reversed Procter & Gamble’s loss of market share. It is maintaining or gaining market share in the majority of its markets today, but analysts and competitors are crying “foul.” These price reductions have taken a significant toll on the relatively rich margins at P&G. Margins on these products have probably fallen between 20% and 30%, so the company’s profits are suffering. P&G’s big competitors have followed the company’s price reduction initiatives so financial analysts are now questioning the wisdom of P&G’s move to reduce prices. One analyst notes that if everyone follows P&G’s price cuts, then no one will be able to maintain profit margins.

The analyst misses the real effect of price reductions and the importance of P&G’s undertaking them today. When research indicates that consumers see little or no benefit to the more expensive over the less expensive products, all branded products in the category have gotten a severe warning shot across their bows. They have to beat back the low-end competitors, especially private label producers. The real enemy for the branded companies is not one another. (See the Perspective, “The Price Segment” on StrategyStreet.com.) The followers among the branded companies will gladly follow the industry leader as the leader raises prices. But they will howl when the leader reduces prices.

The price reductions hurt the near term profits of the branded producers, but they help the long term profits. How can this be? Because the price reductions cause severe margin squeezes and intense suffering among the private label producers. These producers must institute a commensurate price reduction, even though they don’t have the margin structure to sustain such a price reduction. The low-end competitors are then in a double bind. Their prices are falling at the same time that they are losing volume. These low-end competitors, in turn, will cheapen their product and their support for retailers and consumers. As these low-end competitors recede from their positions of relative strength, the leading, branded, companies are able to re-assert their pricing power and gain the benefits of higher prices on higher market shares.

Posted 10/7/10

Update:

In October 2022, Procter & Gamble reported total sales for the year of $80 billion for its 65 brands. Over the course of the year,the company raised its prices to offset a decline in volume. This is a dangerous warning sign due to the threat of private labels.

Overall, Procter & Gamble is the largest consumer products company in the world. However, private label products command nearly 18% of sales in today’s retail market.  Private label sales significantly exceed that average percentage in important retailers such as Kroger, Walmart, Costco and Sam’s Club.

In difficult times, consumers shift some of their purchases to the less expensive private label brands, who compete under the price umbrella set by the leading branded companies such as Procter & Gamble. This pattern seems to run in a cycle where branded companies raise their prices by enough that cause consumers to shift their purchases to private labels, who compete with low prices under the price umbrella set by the branded products. This creates a Leaders Trap situation. Eventually, the branded product companies reduce their prices to take share back from the private label competitors.

There is some permanent cost to the branded companies as they follow this pattern. The private label suppliers become permanently stronger. More consumers view private labels as acceptable alternatives to branded products.  Today, well over 50% of consumers at all income levels hold favorable opinions on private label products. With each cycle, the private label competitors become more challenging competitors. See HERE for perspective on how to compete with low and competitors, and HERE for considerations in setting prices.

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THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.