ANALYSIS: Will P&G’s bravery pay off?

Procter & Gamble took a risk with its everyday low pricing policy and the impact is already being felt, writes Claire Murphy

Procter & Gamble took a risk with its everyday low pricing policy and

the impact is already being felt, writes Claire Murphy



Nine months ago, Marketing revealed that Procter & Gamble was

introducing its everyday low pricing policy in the UK.



Spending on promotions and vouchers would be cut and savings passed on

as price reductions to shoppers.



It was a brave strategy which had already worked in the US and brands

such as Fairy Liquid, Flash and Pampers in the UK have since had their

prices cut.



The strategy is also being introduced in the German market.



The impact of these moves is still being felt. Last week it was reported

that a team of marketers is being sent into Germany to help counter

resistance from the country’s large retailers.



This year’s annual ACNielsen figures for the Top 100 Grocery Brands have

shown sales for some key P&G brands have fallen.



Fairy Liquid has fallen by almost 7% to pounds 64.6m compared with last

year, with Pampers down 2% to pounds 163.1m.



On the face of it, it would seem that P&G might have some problems. But

the company’s tone is confident. Dick Johnson, P&G’s UK director of

corporate affairs, maintains that rival multi-pack (buy one, get one

free) promotions are partly to blame for the drop in sales. ‘P&G

measures its business on a long-term basis,’ says Johnson. ‘Look at our

long-term track record and you won’t find a better one.’



There is little doubt that P&G expected some teething troubles as part

of its policy of reducing investment in promotions. But it is playing

the waiting game, sticking to EDLP as one plank of its Efficient

Consumer Response (ECR) policy.



P&G has used ECR to put under the microscope every aspect of how it does

business, from new product development through to the number of stock-

keeping units in stores, the size of boxes and the way stock is ordered

and supplied to retailers.



It has led the way in recent months in calling for greater

standardisation of soap-powder boxes and co-operation, even with its

arch-enemy Unilever, to simplify the soap-powder market.



That policy has meant reviewing not just how it does business with its

customers but its relationship with retailers. Not only did P&G

previously offer a myriad of promotions to consumers but it also laid on

special offers to the retailers.



Bulk discounts were offered, in which retailers would buy tonnes of one

product line to qualify for the discount, but then might not reorder for

months.



With ECR, P&G is trying to iron out the inconsistencies in ordering,

reducing excess stocks for it and the retailer.



P&G knows that it will take time for these new ways of thinking to bed

in and retailers may initially be reluctant to accept change. That

reluctance won’t have been helped by a report by UK stockbroker

Kleinwort Benson earlier this year which predicted EDLP could wipe as

much as pounds 60m off the bottom line of food retailers.



John Pepper, P&G’s chairman and chief executive, told shareholders at

the annual meeting in October that ‘volume and sales results for the

July-September period will be below what we have traditionally

achieved’.



‘There are a number of factors contributing to this. One is the further

roll-out of Efficient Consumer Response in parts of Europe, Japan and

other markets in Asia, causing one-time trade inventory reductions,’ he

said.



‘ECR offers huge savings, but it does result in short-term reductions

in trade inventories. We experienced this impact in our US business when

we first began this initiative here a few years ago.’



But once they come round to the fact that consistently lower prices

means that they can plan their businesses better, the belief - and

evidence from the US - is that orders will return to at least original

levels and margins increase.



Analysts too are unworried by what they regard as minor hiccups which

will accompany such changes.



Salamon Bros New York analyst Carol Warner says: ‘Despite the problems

in Germany, where they encountered isolated resistance, UK retailers

have seen the benefits of the EDLP in the US and are happy with it.’



P&G warned analysts before its first quarter results that the change in

European pricing strategy would hit worldwide volumes. As it turned out,

sales in Europe, Middle East and Africa grew by 6% to dollars 11.7bn

(pounds 7.8bn), with earnings (profit) up by 14% to dollars 767m (pounds

511m).



Short-term problems aside, P&G’s Efficient Consumer Response has won the

backing of the City as a brave marketing move to address some of the

problems in the industry - and knock the market into better shape for

the new millennium.



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