Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Executive Update Date: Mon, 23 Nov 92 12:15:13 EST Message-ID: <12.1992Nov23.121514@AmeriCast.com> 11/23/92 TITLE Executive Update Consumer Goods Makers Pine For Simpler Days Value-Pricing Movement Seeks To Stabilize Prices By Reducing Pro- motions Marilyn Much In New York Packaged goods manufacturers may well remember the 1990s as the decade when they tried to turn back the clock. Faced with es- calating trade promotion costs, price wars and manufacturing inefficiencies, many consumer products makers are trying to get back to standard pricing - a practice lost in the 1970s, when inflation pushed up prices, and in the 1980s, when fierce Market- ing competition spawned price wars. The objective is to strengthen brand loyalty by differentiating products based on quality and value, not just price. Procter & Gamble Co. has led this move- ment by gradually introducing a value-pricing approach into the marketplace over the past two years. What the concept boils down to is this: P&G takes a portion of its promotion spending - typically earmarked toward such incen- tives as trade allowances and merchandising displays - combines that with savings from increased efficiency at the manufacturing level and reduces list prices. This approach provides more con- sistent, reliable wholesale pricing, with smaller swings from deal to deal. P&G's Folgers coffee brand moved to value pricing 12 months ago. A $2, 13-ounce can could swing in price as much as 50 cents in either direction before the strategy was imple- mented, a P&G spokeswoman calculates. Since moving to value pric- ing, Folgers' shelf price has decreased and the swings have di- minished. And most significantly, sales have increased. Now oth- ers are taking Cincinnati-based P&G's cue, according to a recent study by the Management Consulting Group, a unit of Marketing Corp. of America, Westport, Conn. A striking 55% of the 52 manufacturers surveyed said they have tested or implemented some form of value pricing in recent months, while another 16% are planning tests. Consumer products giant Kimberly-Clark Corp., based in Dallas, has already implemented the pricing strategy on its Huggies diapers. And cereal makers such as Chicago-based Quaker Oats Co. are considering some variation on the approach, experts say. Common goals include: Investing in brand equity and goodwill. Reducing price swings and, therefore, peaks and valleys in the manufacturing process. Delivering meaningful benefits to consumers such as improved per- formance or better taste. "Over the past several years, trade promotions have been focused on pricing at the retail level, a system that has resulted in falling margins for both manufactur- ers and retailers, because they have inadvertently triggered price wars in certain product categories," said Anil Jagtiani, managing director of Management Consulting. "One way to bring sanity back to marketing and to refocus efforts on consumers and brand building is to get the inefficiencies out of trade promo- tions and invest those savings in merchandising and advertising." The inefficiencies he refers to cover the entire distribution chain. Management Consulting's research indicates that marketers spend more than half of their time developing and managing trade promotions. But the greatest waste occurs in manufacturing, ex- perts say. Deep discounts create surges in manufacturing, buying and warehousing, which has a domino effect across the whole sys- tem. "The production system gets thrown into disarray when you ship 50% of your annual volume over a two- to four-week period," said Jagtiani. "Carrying additional capacity to meet these peaks often creates excess inventory positions" during periods when volume is off due to less promotional activity, he explains. According to Jagtiani, manufacturers can save an impressive 7% of sales by reducing production, distribution and administrative inefficien- cies associated with wide price swings. In fact, P&G Chairman and Chief Executive Edwin L. Artzt has said he expects the value pricing approach to save P&G as much as $175 million in trade promotion costs annually. P&G has already reduced list prices 8% to 25% on about 50% of the company's brands. On average, these price cuts have been 20% greater than the value of the trade al- lowances they replaced, a spokeswoman says. P&G has taken other initiatives to cut prices and enhance value. In all, it has reduced its coupon funding by about a third from its high point in fiscal 1990 and 1991, says the spokeswoman. With the proliferation of coupons in various products, P&G has found that cents-off promotions are not an effective trial device relative to other promotional vehicles. For example, P&G will eliminate all coupons for Pampers and Luvs disposable diapers beginning next month. P&G has already lowered the price on diaper products by 7% a case. "By eliminating coupons, we will drive lower shelf prices for diapers because we will reduce the costs of couponing in such areas as printing, handling and redemptions," the spokeswoman said. This shift does not signal the end of couponing at P&G, however. The spokeswoman notes that the company might use couponing in the future for a trial promotion of new products. While value pricing is really beginning to take off in the manufacturing sector, P&G's contr- oversial strategy has raised the ire of some retailers, such as Safeway Stores Inc., which has publicly opposed the approach. "Some of the retailers are saying that value pricing is unfair to them because they have hired people to manage major trade promo- tions, they have built the warehouses to fill the orders, and now the manufacturers are taking the incentives away and the re- tailers are stuck with the people to manage these operations," said Tom Hustad, professor of marketing, Indiana University Busi- ness School, Indianapolis. Some retailers in the Midwest have protested P&G's approach by charging listing fees for new pro- ducts placed on the shelves and charging delisting fees if the product doesn't sell, Hustad says. +++@Z hY~ This article is copyright 1992 Investors Business Daily. 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