Deepening price war weighs on P&G and puts ad budget under pressure

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Credit: Courtesy P&G

Its skirmishes are looking more like a broader price war for Procter & Gamble Co., fueling relatively weak 1 percent organic sales growth for the packaged-goods giant last quarter.

In previous quarters, P&G's organic sales and unit volume grew at about the same pace. But this quarter unit volume grew 2 percent, twice as fast as organic sales, which exclude the effect of currency, acquisitions and divestitures, with lower prices reflecting the difference. P&G's shares were down almost 4 percent in Thursday afternoon trading.

Lower prices haven't led P&G to cut overall marketing spending—yet. Like prior quarters, P&G continued to cut agency and production costs last quarter, but Chief Financial Officer Jon Moeller said on a media call that overall marketing spending was up 1 percent, reflecting increased media and sampling.

Still P&G has less room to keep cutting prices while maintaining marketing outlays, especially with commodity and transportation costs on the rise. The saving grace for P&G is a lower tax rate and a weaker dollar, helping prop up margins. Profits for key competitors such as Unilever, L'Oreal and Henkel are being squeezed by a stronger euro without the benefit of the U.S. corporate tax cut.

Moeller said he expects pricing to be negative again this quarter, but that it should start going up again sometime in the fiscal year that starts July 1. Analysts on P&G's earning call expressed skepticism, noting that pricing has been soft for many quarters.

P&G's main price cuts were from a big reduction in Gillette razor prices a year ago. But P&G Thursday also pointed to lower prices or increased promotion in categories that included diapers, paper towels, toilet paper, hair care and toothpaste. That included rolling back last year's list price increase on toothpaste.

Moeller also pointed to retailer inventory reductions that carved a percentage point off sales growth last quarter. But other industry players that have reported so far don't appear to have been similarly affected. Johnson & Johnson's consumer business grew 2 percent organically last quarter, and Unilever's grew 3.7 percent, even though the latter pointed to tougher price competition specifically in North America.

Moeller pointed to lower private-label pricing by retailers, however, rather than branded competitors in diapers and paper products. Baby care is particularly tough. Excluding that business, Moeller said P&G's sales growth year to date would be 3 percent and profit growth up 9 percent.

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