Price Pressure Hits Package Goods

Price hikes that have driven top-line growth in package goods -- and marketing budgets along with them -- could be in jeopardy, threatened by a fast-emerging combination of consumer and retailer resistance, rising private-label sales and increased promotion.

Package-goods marketers such as Kraft Foods and Hershey have seemingly defied gravity, with sales buoyed by higher pricing that has largely stuck despite the downturn. But now that retail gasoline prices have plunged 30% to 40% in many markets in the past month, consumer expectations are changing as well.

Sunil Garga, principal at marketing-analytics firm Mphasize, believes marketers will have no choice but to pass along cost savings as fast as they can, though he expects a lag of at least several months. "Some companies are already contemplating or will ratchet down prices," Mr. Garga said. "Companies that don't will get their sales hurt."

He said he anticipates that any increased marketing spending made possible by falling commodity costs will go heavily into incentives and price promotion, given the weak economy and rising unemployment. "Everyone I talk to is worrying about what their revenue is looking like in the next few weeks or months," he said. "So value-conscious offers I think will dominate."

It's already starting. Faced with what could be a brutal holiday season for batteries should consumers cut back on toy and electronics purchases, Spectrum Brands' Rayovac already appears to have boosted promotional spending to win display space, said an executive familiar with the industry. While Rayovac is a relatively small player with a share of around 3% in channels measured by Information Resources Inc., according to data from Morgan Stanley, its actions can have a ripple effect on the bigger branded players -- Energizer and Procter & Gamble Co.'s Duracell.

Consumer resistance
That threatens to end what has been a few years of relative peace in a category long prone to price warfare, particularly around the holiday season.

But it's not just batteries where prices are under pressure. The extent to which consumers are resisting price hikes became clear when Kimberly-Clark Corp. reported earnings Oct. 22, showing a global volume decline of 1% despite healthy organic sales growth of 6% driven by price hikes.

Kimberly-Clark Chairman-CEO Tom Falk acknowledged private-label products are making inroads and that consumers even appear to be cutting back use of paper towels, which had modest category-wide volume declines last quarter.

"We've seen a little bit of shift from training pants into diapers as you're seeing consumers are leaving children in diapers longer and maybe opting for the diaper as less expensive per piece than a training pant," Mr. Falk said.

Kimberly-Clark actually hiked what it terms "strategic marketing spending" last quarter in the face of such consumer resistance, but it's not clear how long it and other package-goods marketers can afford to do so. Any retreat on pricing would severely pressure profits or media spending for consumer package-goods companies, which don't have much wiggle room in their margins right now.

Holding the line
Though marketers are starting to see relief on commodity costs -- particularly oil -- most costs aren't expected to ease until the middle of next year. Meanwhile, fourth-quarter earnings for U.S.-based multinationals are under severe pressure from a sudden strengthening of the dollar, which will slash profits from overseas operations.

Mr. Falk said that he, and so far apparently competitors, are holding tight on price. "We're going to want to be competitive," he said, "but ... there's been so much cost inflation our focus is also to improve our margins."

Private-label products have gained about a percentage point of market share to 24.4% in Kimberly-Clark's categories through the first nine months of the year, mostly at K-C's expense, according to IRI data from Deutsche Bank. And ACNielsen data from Sanford C. Bernstein show private-label share up around 0.8 percentage points from a year ago to 13.3% across a broader array of household and personal-care categories.

Analysts and sales representatives say Wal-Mart Stores also has been pushing back harder against price hikes of late. Grocery retailers such as Kroger Co. and Safeway are also stepping up their private-label efforts, in part to push back against price hikes, according to Sanford C. Bernstein analyst Ali Dibadj.

Ominous signs
In comments to USA Today last week, Wal-Mart Stores U.S. CEO Eduardo Castro Wright said the retailer's private-label sales have doubled recently as the economy headed south and prices headed north.

There's no indication quite that dire yet in financial results of package-goods players. But ACNielsen data that track channels other than Wal-Mart and club stores do show private-label sales grew 8.9% in the four weeks ended Oct. 4 in household and personal care, more than quadruple the 2.2% rate for the category.

So far, no major players have broken ranks on prices officially, but industry watchers debate how much longer they can hold out. "In the more commoditized or single-ingredient categories, the prices are likely to come down faster," Mr. Dibadj said. "On the more [value-added], less commoditized categories [such as skin and hair care], you may have more stable pricing."