Ever wonder how that huge stack of paper towels at the end of the grocery aisle can sell at such a low price? Most often, the manufacturer has sold the product to your supermarket at less than the usual wholesale price. In fact, he may even have handed over cash to help promote his product.
Sounds pretty mundane. But as consumers scan the papers for specials on toothpaste and dog food, manufacturers and supermarkets use these promotions as a battlefield in their nationwide war over the control of consumer-goods prices--and profits. Now, Procter & Gamble Co., one of the mightiest of marketers, is adopting an everyday-low-pricing policy that may put an end to the complexity and cost of this war.
SHELF ASSURED. Manufacturers and supermarkets are duking it out because of two big problems. First, with U.S. population growth slow, large annual increases in consumption are a thing of the past. Second, real product innovations are scarce, so companies are often unable to distinguish their brands in meaningful ways. The short-term solution to this sluggishness has been price-cutting promotions that bring shoppers in and boost sales. In for a penny, in for a pound: As soon as one promotion ends, the pressure builds for another to keep sales numbers on the rise.
The need for a promotion fix gives the supermarkets plenty of power. They control the promotions--and the shelves. So the stores demand a wealth of subsidies from manufacturers, who often pay fees for shelf space and allocate more cash for marketing ploys such as "rotos"--the store-sponsored newspaper ads featuring special prices and coupons.
It all adds up. In 1970, manufacturers offered retailers promotional discounts averaging about 4%, according to consultants McKinsey & Co. Now, it's more like 10% to 15%. Some 44% of every dollar spent on advertising and promotion by manufacturers now goes to such discounts and fees, according to Donnelly Marketing Inc. That's up from 34% a decade ago.
But it doesn't end there. In a practice called forward buying, supermarkets pounce on special wholesale deals and stock up on far more merchandise than they plan to sell during the promotion. Later, they get a wider margin by selling the remaining goods at the regular price. Or, in a practice few will talk about, retailers may "divert" some of the low-priced shipment by selling either to a supermarket outside their area or to a middleman who will do the diverting himself. And you thought selling paper towels was simple (table).
HABIT FORMING. With all the increased wheeling and dealing, there is mounting evidence that promotions seriously distort the supermarket business. Supermarkets now need warehouses to store "deal" merchandise, transportation to ship it, and office clerks to make sure wholesalers and retailers are getting the most of each deal. According to experts such as Marc C. Particelli, a senior vice-president at Booz Allen & Hamilton Inc., these buying operations now account for more than half of supermarket profits.
That leaves manufacturers fuming. Industrywide, Procter & Gamble claims, only 30% of trade promotion money actually reaches the consumer in the form of lower prices, while 35% is lost in inefficiencies and another 35% winds up in retailers' pockets. "It's a marketing expense that's like pouring sand in the ocean," complains a top executive at one big food company.
Worse, factories must gear up to meet the huge swings in demand caused by forward buying and diversion. Both manufacturers and retailers "are always building toward a surge or drawing down after a surge," notes retailing consultant Willard R. Bishop. For the food-processing industry alone, the inefficiencies caused just by forward buying may add costs of up to $3 billion, or 2% of annual industry sales, according to estimates by Walter J. Salmon, a retailing professor at Harvard business school.
Marketers also worry about subtler damage. Most sophisticated consumer-product manufacturers, says Best Foods Div. President Robert J. Gillespie, are concerned that the yo-yoing of shelf prices "debases the value of our products" and teaches consumers to shop for what's on sale.
STEADYING DOWN. These concerns are forcing P&G to attempt a cure for promotion sickness. It is sharply reducing the number of steep discounts on wholesale prices that it periodically offers stores. Affected are 40% of its product line, including such stalwarts as Crisco, Cascade, Jif, and Oxydol. But at the same time, P&G has reduced its wholesale list prices for these products. According to analyst Jay Freedman of Kidder, Peabody & Co., P&G has reduced its wholesale list prices by 25% on Oxydol, 13% on Cascade, and 10% on toilet tissue. These adjustments leave the total costs to retailers about the same. P&G is also still offering some promotional funds.
So why bother? P&G hopes lower list prices will cut away the manufacturing and handling inefficiencies caused by deal buying, lead to reduced regular prices on store shelves, and build up brand loyalty among consumers. Says a P&G spokesperson: "We essentially saw an erosion in our brand equity, and the strategy is intended to restore the pricing integrity of our brands."
The risk, of course, is that angry retailers may opt to shun P&G products in favor of rivals that continue to offer lucrative deals. And hungry competitors may increase those deals in an effort to snatch shelf space and volume from P&G. Although Procter acknowledges that early on it saw some loss of business, a spokesperson says business has turned up and was "very good" for the last five months of 1991. In the last quarter, P&G's U.S. unit sales were up a healthy 5% in most categories.
As for the competition, "I haven't seen either Colgate-Palmolive or Lever Brothers try to take advantage of the situation," says Jules Rose, chairman of Sloan's Supermarkets Inc. in New York City. Colgate and Lever declined to comment on P&G's actions, but many other manufacturers salute Procter. "It's too bad if people don't take this kind of leadership and follow this statesmanlike position," says Gillespie of Best Foods, which makes such brands as Hellmann's mayonnaise and Skippy peanut butter.
JUNGLE LAW. Past attempts to hold the line on promotions generally haven't been successful, however. Coca-Cola Foods, for instance, tried a similar move with its Hi-C brand in the early 1980s, but rivals grabbed market share by boosting their deals. Ten years later, competitors may find the temptation to boost short-term volume with promotions irresistible. Earnings at many packaged-goods companies haven't proven as recession-proof as the conventional wisdom once held. P&G's salvo is "a gutsy move, but it's a hard thing to do in this environment," Chris Lamb, director of branded cereal trade marketing at Ralston Purina Co., told a recent industry conference.
Most big supermarket chains and grocery distributors are keeping mum. But industry consultants report that some are angered. Because their marketing, distribution, and administrative structures are all geared to handle deals, they fear that P&G's new policy could make them uncompetitive with rivals such as Wal-Mart Stores Inc. that already use everyday low pricing.
Some retailers are beginning to retaliate, cutting down on the sizes and types of P&G items they sell or reducing their promotion of Procter's brands in favor of rivals'. Outsiders say Vons Cos., the large California chain, is so upset at Procter's policy that it has refused to stock P&G's new sizes of Pampers. Vons officials were not available for comment.
Still, there are some early signs that P&G has started to change the way the game is played. Sloan's Rose says he recently got a call from a diverter in Denver who was offering a special on Top Job, a P&G cleanser. Because of its new, everyday-low-price strategy, Rose says, "P&G was offering it at 10c less per item than he was."
THE TRADE PROMOTION TWO-STEP How one supermarket could profit from promotions 1 For one week only, Super Colossal Products offers a special promotional price on Kleeno detergent to California stores: $20 a case, or 20% off list price 2 Buy-Now Supermarkets of Happy City, Calif., orders 10,000 cases. Super Colossal expects Buy-Now to use the 20% savings to promote Kleeno by passing the savings on to shoppers 3 Super Colossal allocates funds to Buy-Now to promote Kleeno. Buy-Now uses some funds for advertising and pockets the rest. It sells only 5,000 cases at a discounted price to shoppers 4 Buy-Now later sells 3,000 cases to shoppers in its stores--but back at the usual, higher price 5 Buy-Now sells the remaining 2,000 cases at a slight markup to XYZ Markets in Buenos Dias, Ariz., where Super Colossal has not offered the special wholesale price available in California DATA: BW