After reporting another quarter of tepid growth, Procter & Gamble PG recently announced it is raising prices on some of its signature products. The company will increase the price of its popular Pampers brand by 4%; the Bounty, Charming and Puff brands will be hiked 5%.
Procter & Gamble suffered from increasing commodity prices as well as other factors that have plagued most consumer staples companies: aggressive discounting as a response to weak demand, increased competition and pressure from retailers to keep prices low. All these factors in conjunction contributed to slower sales growth and diminished margins.
Despite the planned price increases, P&G is still anticipating a modest growth in revenue in its current fiscal year, which began on July 1. The company said it expects organic sales to grow 2% to 3% for the year, compared to 1% for same period last year.
Results for the fourth quarter ending June 30 saw profits drop by 15% to $1.89 billion, or 72 cents a share . Revenue increased 3% to $16.5 billion, including foreign currency swings.
P&G’s decision to raise prices was, in part, due to an economy that continues to show signs of robust growth, increased consumer confidence and spending as well as creeping inflation that appears to have been making household products more expensive.
Nonetheless, price increases are fraught with risk in an industry sector that has been undergoing profound changes.
Procter & Gamble, like other consumer staples companies, has had to adapt and readjust its traditional strategy of generating revenue by selling its signature brands exclusively. For decades, the consumer staple companies were able to raise prices with impunity. Each enjoyed consumer loyalty and their products were household names that shoppers felt comfortable purchasing by virtue of their ubiquity and consistent quality.
Today, a new generation of consumers no longer exhibits the brand loyalty of their parents — a factor upon which these companies had always relied for passing through price increases to consumers, who identified, indelibly, with the brand.
Today, these companies face increased competition as well as a new generation of consumers who are not wedded to the company’s flagship products as were a previous generation of consumers, who could recite the advertising jingles in their sleep. These newfound economic realities have been responsible for the staples sector's anemic growth and performance the past two years.
Procter & Gamble’s Gillette unit is a case study in the formidable challenges facing the company in particular, and the sector in general. For decades, Gillette razors had a near monopoly on the men’s shaving market. Their cartridge razors commanded a premium price and Gillette rarely, if ever, discounted its well-known brand.
Consumers are no longer willing to pay a premium for the company’s razors when they can get a similar product with comparable quality for half the price.
That is exactly what Harry’s, a scrappy online startup provided consumers. Their campaign has been so successful in eroding Gillette’s dominant market share that it has been forced into an advertising assault on the tiny mail-order company.
Many men, tired of the price-gouging for a simple cartridge razor, were only too happy to jettison Gillette when a comparable product appeared at a substantially lower price.
The Gillette-Harry’s scenario is an example of how many giant consumer staple companies’ products no longer enjoy price inelasticity.
As the David vs. Gillette Goliath story indicates, however, relying on price increases as a long-term business strategy is not the optimal way to grow revenue and maintain operating margins in a dramatically evolving price-conscious consumer environment. Other companies are addressing the operating margin problem by controlling costs and acquisitions
New business models will need to be adopted and existing processes changed if the consumer staple companies are going to survive in the 21st century internet economy.
Disclosure: I have no positions in any of the securities referenced in this article.
