Procter & Gamble has less pricing power than Unilever or Nestlé
Consumer goods companies like Procter & Gamble face higher costs and need to raise prices. It seems simple, but it is not, because some have more power to squeeze customers than others.
The problem is seen in the drop in gross margin, a figure that reflects P&G’s pricing power. Toilet paper maker Charmin took a 530 basis point hit in its latest financial quarter. It raised prices 8%, but customers bought fewer and less profitable items. Overall, P&G’s gross margin for the quarter fell 330 basis points, not taking into account currencies.
Its closest rival, Unilever, has a similar problem: It saw its gross margin drop, but not by as much. The part of the income that remains after paying suppliers fell 210 basis points in the half. At Nestlé, gross margin fell 280 basis points.
Some products do better than others. Some of Unilever’s food brands, like Ben & Jerry’s ice cream, occupy a niche that is not easily challenged by a cheaper supermarket rival. Nestlé enjoys something like this with Häagen Dazs. Also pet food, since animals can be the most loyal customers. Detergent or toilet paper brands often have more substitutes.
The ingredients are also important. For the head of P&G, Jon Moeller, inflation will mean that this year there will be “significant headwinds.” His two rivals are more exposed to food commodity prices, which have either stabilized or fallen. Therefore, Unilever expects inflation to peak in the second half.
Moeller’s solution to gross margin decline has been to cut SG&A expenses to preserve its operating margin. These expenses were reduced by 350 basis points on a currency-neutral basis. For now it helps, but it could be risky: If marketing brings loyalty, and loyalty reduces the risk of customers choosing substitute products, today’s savings could be at the expense of tomorrow’s profits.
