Wal-Mart lets everyday low prices rise a bit

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Wal-Mart is easing its stance on price increases and putting top-line growth ahead of profit gains. And that's good news for brands.

With the retailer allowing marketers to push through broad price hikes on package goods, the likely result is higher marketing budgets-and a potential boon for media companies going into the upfront. Marketing is one of the easiest costs to cut when rising material costs slam margins and escalating oil costs have hit household products particularly hard.

After successfully passing on price increases last year for toilet paper and paper towels, package-goods players now are raising prices in other categories, such as detergent, diapers and batteries (see chart below).

Procter & Gamble Co. said its net pricing rose 1% globally last quarter. That may not seem like much, but it's the first such increase in four years, and given a tougher pricing environment in Western Europe and the limited scope of initial increases, P&G likely realized average gains of 3% to 4% on U.S. categories where it raised prices.

More increases are coming this summer, though P&G was cautious about projecting any benefit until it sees how competitors react. Unilever earlier this year cut prices on detergent amid P&G's increase, said retail buyers, though it since has relented with a modest increase.

Clorox Co. said last week it would follow 12%-13% price hikes on Glad products taken earlier this year with a 9% rise for bleach in August and 5% in other laundry and cleaning products. Kimberly-Clark Corp. said it would follow P&G in diapers. And Energizer and Gillette Co. both said they'll raise battery prices 7%.

A number of factors appear to be helping price hikes stick, including the very real impact of oil prices, which has led private-label manufacturers to lead price increases in some categories, such as diapers. But perhaps the biggest factor, according to some industry executives, is that Wal-Mart is providing little push back.

ACCUSTOMED TO COSTS

"Price increases are not as big a deal as they used to be," said one Bentonville sales rep, who believes one of the reasons is now that Wal-Mart has moved more into the food business, it's become more accustomed to price fluctuations based on commodity costs. "Wal-Mart still battles it," he said, "but it's not nearly so drawn out."

Some executives close to the company believe Wal-Mart no longer sees a need to widen its already substantial price gap with competitors, particularly with its stock near five-year lows, largely over concerns about weak same-store sales growth.

In what appears to be a different move to boost same-store sales, Wal-Mart quietly changed the compensation plan for store-level managers in February to base bonuses on store sales growth rather than profit growth. That in turn could lessen impact of a factor that has helped check price hikes by brands-Wal-Mart's private-label program.

"It's huge," said one vendor executive of the change, because Wal-Mart's store managers have broad leeway in pricing and promotion. Now that they're compensated for the higher ring, they're more likely to support higher-ticket branded items. The new system should encourage managers to raise prices faster when local competitors end promotions, too, he said. A Wal-Mart spokesman wouldn't comment on the change, but said store managers only have authority over pricing to match local competitors.

Beyond the local level, Wal-Mart already has begun reducing support for its cheapest private-label entries and focusing more on mid-price store brands. As manufacturers raise detergent prices, rather than try to poach business with its private label, Wal-Mart has priced its "Ultra" above such brands as All and Church & Dwight's Arm & Hammer.

Still, industry watchers doubt Wal-Mart will open floodgates for unwarranted price increases. "Wal-Mart will increase same-store sales the old-fashioned way, by bringing more customers through the door" said Gary Stibel, managing director of New England Consulting.

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