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Big brands lose pricing power in battle for consumers

Retail & Consumer industry

Big brands lose pricing power in battle for consumers

Names from P&G to Nestlé feel the pinch as shoppers show less loyalty and trade down

The pricing issue was raised repeatedly throughout earnings calls in the past few weeks by consumer goods groups © Bloomberg

A week after Nelson Peltz bought a $3.5bn stake in Procter & Gamble, the first salvo in months of jockeying between the activist billionaire investor and the consumer goods giant, P&G made a calculation. 

After years of losing market share to challengers like Dollar Shave Club, P&G announced it would cut the price of its trademark Gillette razors by up to 20 per cent — Barclays analysts called it “an act of desperation”. 

The move came as P&G responded to Mr Peltz’s arguments that the company needed to win back customers, even if it meant discounts on what had long advertised as “premium” products. “You told us our blades can be too expensive and we listened,” the Gillette website explains.

P&G is not alone. The super-brands that dominate the grocery aisles in stores and online have a price problem, which has echoed through income statements of the largest consumer goods companies in recent weeks. 

The last three months of 2017 marked the first time since 2011 that the average prices for products sold by P&G and Colgate-Palmolive fell, with particularly severe declines in categories such as razor blades and nappies where online competition is strongest. 

Rival Kimberly-Clark announced it was laying off 5,000 employees as it revealed declining prices for products such as nappies. Mondelez International, which makes Oreo biscuits and Ritz crackers, reported that prices for the year rose 1.5 per cent on average, but slipped in its two biggest markets — North America and Europe. 

This is good news for shoppers, but it has pressured profits at the world’s biggest consumer-facing companies. “Pricing is looking tougher than we have ever seen in [consumer] staples,” say analysts at Société Générale.

The product manufacturers are being squeezed by the big retailers — notably, Amazon and Walmart, which together sell $600bn worth of goods a year. Walmart has long put pressure on suppliers to cut prices. Amazon’s rise has exacerbated the “deflationary impact”, Société Générale says, creating a “much tougher environment in the US”. After Amazon bought Whole Foods in June, the price war grew more intense in groceries, pushing prices to historic lows that punished producers. 

Brand loyalty has suffered in the process. Equipped with the tools to compare prices online instantly, and bombarded with more choices, shoppers are growing more likely to opt for cheaper and discounted products — particularly in categories such laundry detergent and shampoo. To keep their spots on store shelves, brands are having to accept lower prices.

“There’s more info online for people to be able to judge: is this just marketing? Should I pay more for it?” says Kathy Gersch, vice-president at Kotter, a consultancy. “The heyday of the brand itself being enough of a differentiator to demand a higher price point . . . is diminishing.”

Brian Gladden, chief financial officer at Mondelez, says his company faces “a competitive retailer environment”. He expects Mondelez’s pricing in North America and Europe, which fell 0.6 per cent and 0.1 per cent, respectively, last year, to be “about the same” in 2018. 

Amazon’s rise in grocery has squeezed both retailers and manufacturers © AP

Former Amazon employees say the company’s algorithms scan prices across competitors in real time, automatically adjusting its own so it can offer the lowest price. While most big brands have wholesale agreements with Amazon, third-party sellers are prolific on the site, complicating price control further. A 34oz bottle of P&G’s Pantene Pro-V Shampoo & Conditioner was listed by 10 different sellers — nine of them third parties — on the shopping site.

Amazon’s dominance makes it difficult for brands to abandon the platform, or try to sell directly on their own websites. “You have 200m customers on Amazon. If you walk away, there’s 200m people who are going to just buy from your competitors,” says James Thomson, a former Amazon manager who consults brands. “You’re probably not going to win.”

“This is a pretty dire situation,” he adds. “If brands are worried about meeting quarterly targets, they can’t afford to lose Amazon sales.”

Still, “the retailers have nothing to gain by pushing [consumer products makers] into bankruptcy”, says Bryan Roberts, director of TCC Global Retailers, a consultancy, noting in some categories, iconic brands still have clout. Even disrupters like Aldi, the discount German grocer, have been forced to sell brands such as Coca-Cola, he points out. 

The pricing issue was raised repeatedly throughout earnings calls in the past few weeks, as executives tried to reassure investors. Jon Moeller, chief financial officer at P&G, admitted that “significant retail competition” coupled with slow market growth is “forcing prices down”.

“We’ve made some changes in our Luvs [nappies] pricing . . . to respond to those realities,” he said. But he added that while it is an immediate “pain point” he does not think pricing has “gone through the sea shift that should reflect your view on the industry long-term”. 

Unilever, which reported its full-year results on Thursday, revealed that underlying prices in North America fell 1 per cent in the last quarter of the 2017, compared with the same quarter a year earlier. This was steeper than the 0.1 per cent decline for the full year but volumes increased 3.2 per cent in the quarter. 

Graeme Pitkethly, finance director of the Anglo-Dutch company that makes Dove soap, Axe deodorant and Hellmann's mayonnaise, said: “Over the last few years US prices have been relatively strong compared to Europe, so it’s not really a surprise that, as you see Amazon and e-commerce growing, you start to see a softening happening in pricing.” 

However, the US accounts for only 13 per cent of sales at Unilever, which is instead far more reliant on emerging markets. These, led by India and Indonesia account for almost 60 per cent of its revenues, which totalled €53.7bn last year.

Investors are still waiting for last quarter’s results from the three European companies with the biggest US exposure — Nestlé;, L’Oréal, and Reckitt Benckiser. However, Nestlé, the Swiss food group behind Kit Kat chocolate and Nescafé coffee, has said Amazon and discounters were having a deflationary impact on US prices, according to SocGen.

Consumer goods companies have responded to the pricing pressures by aggressively cutting costs, led by the “zero-based budgeting” model of 3G Capital, the New York-based private equity group that has transformed the consumer industry with bold acquisitions. 

Adjusted operating income margin at Mondelez climbed 1.3 percentage points to 16.3 per cent last year, as the company embarked on a $3bn cost-savings programme running through this year. P&G has pledged to cut $10bn in annual costs by 2021, while Unilever expects to save €2bn through a three-year cost-cutting drive.

The strategy may be an enduring one for these groups as they reckon with their declining pricing power, analysts say.

“It takes a long time to admit you’re not a growth company any more,” says Ali Dibadj of Bernstein. “It’s getting to that point.”

McDonald’s prepares for fast-food street fight

McDonald’s unveiled a number of promotions last year © Bloomberg

Fast food is staging its own race to the bottom. The price of groceries in the US fell to a 40-year low last year, forcing restaurants into efforts to win back customers with more incentive to cook for themselves at home.

There has been “little to no” growth in visits to restaurants in the past two years, according to market researchers NPD Group, while trade publication QSR defined 2017 as the worst for restaurants since the financial crisis, after sales dropped sharply in the second half of the year. 

McDonald’s, the largest burger chain, has looked to attract customers by going back to its roots as a vendor of cheap food. It unveiled a number of promotions last year, such as dollar drinks and $2 coffees. In January, it overhauled its Dollar Menu in the US with a new “Value Menu”, offering cheeseburgers for $1 and other items priced at $2 and $3. 

“We don’t see any significant broader market growth this year, so we know we’re in a market share fight — and value is where the street fighting really hits,” Steve Easterbrook, McDonald’s chief executive, told investors this week.

Analysts warn this could have a snowball effect as rivals look to keep up. “Fast food competitors are gearing up to combat this new value effort from McDonald’s, setting up 2018 as a potential year for intensive discounting in the fast food space, particularly in the first part of the year,” analysts at Credit Suisse said. 

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