Procter & Gamble fights for control over setting prices

MANUFACTURER VS. MARKETERS

July 12, 1992|By Michael Dresser | Michael Dresser,Staff Writer

Procter & Gamble Co., one of America's corporate monarchs, seems an unlikely revolutionary.

But if the Cincinnati-based consumer products giant prevails in a struggle with tradition-minded wholesalers and retailers, the result could overthrow the grocery industry's decades-old system for setting prices.

Procter & Gamble, attempting to smooth the swings of high regular prices and low promotional prices, is pushing a simplified system known popularly -- if not always accurately -- as "everyday low prices."

Like most manufacturers of consumer products, the company spends substantial sums to promote its brands. Some money goes into direct incentives to consumers, such as coupons. But much of it subsidizes periodic discounts to distributors. It is this money that is at the heart of the issue.

Procter & Gamble has simply become fed up with a system in which a large chunk of its promotional spending builds up distributors' coffers rather than building up brand loyalty among consumers.

Its bold move is being watched closely by fellow manufacturers. If P&G can impose its will, the initiative is likely to spur vast changes in the way goods move to the nation's markets and what people pay for them.

"It is revolutionary -- no question about it," said Kevin Price, senior partner of the Marketing Corporation of America, a marketing consultancy in Westport, Conn.

The result? Most consumers could see lower average prices, made possible by more efficient, lower-cost distribution. But those who already shop the specials aggressively might have to bid farewell to many of the best bargains.

Meanwhile, grocery retailers and wholesalers that have structured their companies around the traditional way of doing business face a full-scale assault on their bottom lines. They generate much of their profit by buying goods heavily at %J promotional prices and passing only a portion of the savings on to consumers. Such maneuvering would largely disappear if P&G gets its way.

Some companies have dropped some Procter & Gamble products or have de-emphasized their display. And P&G competitors -- who may secretly want to follow their rival's course -- are moving to seize vital shelf space and promotional support from disgruntled distributors.

Still, if any consumer products company can impose its will on the grocery industry, it is Procter & Gamble, which racked up $27 billion in sales in 1991 and produces the No. 1 brand in dozens of products. Grocery executives might be furious with P&G, but none is going to remove Tide laundry detergent or Pampers disposable diapers from the shelves.

Procter & Gamble plays down the conflict even as it plows forward with its program, which recently expanded to cover 50 percent of its products.

"We don't even call it everyday low pricing," said company spokeswoman Ann Jenneman Smith. "Value pricing strategy" is the company's preferred term.

Ms. Smith said the "consumer-driven strategy" will simplify a system that has become increasingly complex and inefficient. "Our drive is to ensure the value of our brands, and one of the things we're trying to do is drive out unnecessary costs," she said.

Promotional pricing creates a "host of distortions" that add unnecessary costs to the manufacturing and distribution system, says Mr. Price, the marketing consultant. He estimated that the everyday low prices could cut $2.10 in costs from a $25 case of packaged food.

Promotional pricing also encourages wholesalers and retailers to wait for a sale, then stock up at the low price -- a practice known as "forward-buying." Astute maneuvering through the system can account for 40 percent to 60 percent of a retailer's bottom line, Mr. Price says.

The up-and-down movements of prices play havoc with manufacturing. Factories lurch between long stretches of slow production and brief surges of demand that require heavy overtime payments.

Meanwhile, vast stockpiles of products sit in warehouses, exposed to theft, damage or loss of freshness. Patrick L. Kiernan, senior vice president of the Grocery Manufacturers Association, estimates that the food industry has 84 days of inventory, worth some $100 billion, on any given day.

"Why do we keep the same amount of inventory that the American auto industry does?" he asked. "Why does a case of cornflakes not flow through the system as quickly as fresh corn?"

Many grocery manufacturers are asking the same questions. Already, Kraft General Foods is experimenting with everyday low pricing on some products. If Procter & Gamble's challenge to the system succeeds, many are expected to follow its lead.

After the company announced its changes late last year, executives of several major retail chains, including Safeway and A&P, said they would take a hard look at the P&G products they FTC carry.

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