|Source: Deutsche Bank|
The retailer's heralded sustainability initiative, labeled a "win-win-win" for the companies, the environment and consumers, is turning into less of a victory lap than expected for brand marketers. For example, the push could cost Procter & Gamble Co. $200 million alone by one estimate.
The reason: Wal-Mart's initiative pressures marketers to invest substantially upfront to reduce packaging and energy use. The savings in shipping costs and packaging materials that could offset that, however, aren't going mainly to marketers' bottom lines. Those savings instead appear to be going toward giving better prices to Wal-Mart and its customers.
Savings for whom?
A press release Wal-Mart issued Sept. 26 taking credit for instigating the massive industrywide liquid-laundry-detergent "compaction" initiative, which began rolling out in the South in September, made no mention of cost savings, though it did note substantial reductions in resource use.
But speaking at the Clinton Global Initiative on sustainability the same day, Wal-Mart Chairman-CEO Lee Scott did note the cost-savings impact of persuading General Mills to straighten the once curly noodles in boxes of Hamburger Helper, thus reducing thousands of pounds of packaging. "It is basic good business practices that ultimately caused the price of the product itself to go down," Mr. Scott said. "And it is better for the environment."
"We're beginning to realize there's value to doing what's right not only for sustainability, but also for profitability and providing services and products to our customers," said Joe Grady, VP-divisional merchandise manager for health and beauty products at Wal-Mart, speaking Sept. 18 to suppliers at the Health and Beauty America show in New York. "We're not looking to take all of the savings and just put it into the customers' hands or into our pockets. We want to share together."
Trouble is, while Wal-Mart is sharing the savings, it's not sharing the upfront investment, estimated at $100 million for Procter & Gamble Co. alone in the case of laundry-detergent compaction. The size of that investment and unpredictability of the results has been one factor that weighed down the company's stock in recent months, though the price recently has gone up.
Following the money
P&G said it's not passing along its savings from detergent downsizing to any retailers. "There are no plans to change, i.e. decrease or increase, our price per load of our [compacted] laundry detergents," a P&G spokeswoman said in a statement, though she added that prices are set by retailers.
Wal-Mart's plans do appear to include lower prices. During the initial rollout of compacted laundry detergent in the South, the price per load of the compacted product has been at times significantly lower than that of the old formulation. That led Deutsche Bank analyst William Schmitz last month to change his assumption that detergent compaction would be price-neutral. Now, he believes per-load wholesale and retail laundry prices will fall 10% on average.
P&G and the industry will still save money, he projects -- just not as much. Those price cuts would reduce P&G's savings from an originally projected $109 million to $72 million and the overall industry savings from $238 million to $191 million.
They also would lop about $200 million off P&G's annual sales, or about 0.25%, at a time when its slowing organic-sales growth has become a preoccupation with investors.
While laundry marketers privately protested his analysis, Mr. Schmitz said he's yet to see evidence it's wrong. "If compaction is such a great windfall for everybody," he asked, "why would Unilever try to sell [its North American laundry business] ahead of all these great savings?"
Unilever has come in for considerable praise, both from Mr. Scott and Mr. Grady, for numerous efforts to save the planet, such as its triple-concentrated All detergent, a recent Suave repackaging that cut plastic use 16% and elimination of Axe gift-pack shipping trays that saved $2.8 million dollars last year. "Unilever was able to keep a portion of those profits," Mr. Grady said.
That could be an improvement, actually, for marketers. The first sustainability effort Mr. Grady said he participated in three years ago with Duracell (now a P&G brand) to switch to reusable battery displays has saved $16 million, all of it passed on to consumers through lower prices.