Package goods may experience '70s flashback

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Post-Katrina hikes in energy and other material prices threaten to spread some 1970s-style malaise around the household and personal-products industry, with marketers choosing among price hikes, layoffs, earnings warnings or marketing cuts.

So far, most marketers are publicly embracing alternatives other than spending cuts. But the cost squeeze is likely to intensify their already-keen focus on boosting return on marketing investment. Procter & Gamble Co., for example, last week told analysts it had discovered bigger-than-expected savings in such areas as media and "professional services" from its acquisition of Gillette.

That didn't keep Citigroup analyst Wendy Nicholson from cutting P&G from buy to hold on material cost worries. Deutsche Bank already had downgraded Kimberly-Clark Corp. and Clorox Co. for the same reason.

Package-goods players were at the forefront of a broader stock-market funk amid growing worries about inflation and slower growth despite easing energy prices. In a report titled "That '70s Show," Deutsche Bank analyst William Schmitz said the household and personal-care environment "is starting to resemble the dismal decade of the 1970s, where the group underperformed the market and actually declined in terms of absolute return."

Clorox Co. last week lowered earnings guidance and issued its third round of price increases in less than a year, this time on 40% of its products effective in January. Chairman-CEO Jerry Johnston said in an Oct. 6 investor conference that prior rounds have stuck. P&G executives were also bullish last week on their ability to raise prices or change product formulations to cope.

But while Wal-Mart Stores and other retailers have so far accepted cost-justified price hikes, some competitors aren't playing ball. Deutsche Bank pointed to Information Resources Inc. data showing Kimberly-Clark Corp. has gained share in recent weeks by only partially following P&G's diaper price hikes.

Even so, marketing spending continues to enjoy strong industry support, at least rhetorically. "We're going to maintain spending at around 10% [of sales]," Mr. Johnston said.

Some marketers appear to be cutting jobs over marketing. Georgia-Pacific Corp., marketer of Brawny and Quilted Northern, last week said it would cut 1,100 jobs in the U.S. and Europe. That follows restructurings by Kimberly-Clark, Colgate and Unilever aimed in part at boosting or maintaining marketing spending.

P&G, however, slightly lowered its Gillette-related job-reduction target last week from 6,000 to as few as 5,000. But Chairman-CEO A.G. Lafley didn't commit to maintaining marketing-spending levels.

Yet there's hope package-goods marketers can hold on in the malaise. One reason they suffered in the `70s was that price controls helped spawn expensive trade-promotion practices that lingered for decades. One way Clorox is maintaining strategic marketing spending is through improved marketing-mix analytics, Mr. Johnson said, allowing it to rein in trade spending.

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