All last year, the common theme among the CPG companies was higher profit despite decreasing sales because they had better price realization. CPGs delivered higher profits by increasing prices, reducing promotions and with creative packaging. But that trend is coming to an end for at least one of the companies – P&G. In the recent investor conference call they announced plan to cut prices, add promotions – all in efforts to regain market share. P&G was losing sales for the past two quarters and they are now determined to turn this around, especially in the fabric care sector. As some of its customers turned to cheaper store brands, P&G tried to hold on to them with multi-version pricing. They not only introduced Tide Basic to appeal to price sensitive customers but also introduced high margin super-premium Tide Total Care to keep the customers within the brand family.
The tide has turned now, as they so no cheer in continuing drop in market share, especially in fabric care segment. P&G announced a 13% price cut on its Cheer brand detergent. Is that a move that will help with market share? Probably. But in the key and the only relevant metric of profit they may be giving away too much with a 13% price cut.
P&G’s 10-K states their average gross margin is 50%. With a 13% price cut their margins will drop and the sales have to increase 36% to make up for the lost margin. That is an extremely tall order in the highly competitive and saturated fabric care market. As a comparison, their historical sales growth was in the region of 3% to 8% per year.
Unless they are looking at the total customer margin and not just gross margin on one product. Customer margin is the total margin from many different P&G brands a customer buys. This will reduce the required increase in sales but not near the 8% number (you can do the math on required customer margin for that). There is one more risk with lowering prices, lowering customer reference price and thereby reducing chances of future price increases.
The net is P&G, the inventor of marketing research and customer driven product strategy, is going to trade profits for market share. I will be watching next quarter sales numbers with great interest.