Moving to Margins in a New Marketing Age

Branding is Back: Pricing Power Surge Puts End to Discount Decade

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Marketers are enjoying a sudden surge in pricing power that reflects a fundamental shift in their thinking-the pile 'em high and sell 'em cheap mentality that has dominated mainstream marketing for a decade is finally giving way to a focus on brands and margins.

Pricing power has long been the ultimate arbiter of brand value-a marketer's ability to charge consumers more than it costs them to provide a product or service is largely determined by perception of their product. But it's been under attack by the likes of Wal-Mart, Southwest Airlines and price-focused web merchants for decades. Now, across a multitude of consumer markets, marketers appear to be gaining a new appreciation for higher prices, even when it means fewer customers, according to a recent report by Banc of America Securities.

The report indicates price increases accounted on average for 122%-basically all the sales growth and then some-across a wide swath of consumer markets in the first half of 2006. In other words, unit volume and foot traffic declined on average, but sales still rose, sometimes dramatically, as marketers flexed pricing muscle-in some cases for the first time in decades.

Good old inflation, of course, is a factor. But, while much of the pricing trend is driven by pass-through of soaring oil and raw-material costs, analysts, economists and industry experts said most of the surge reflects increasingly successful efforts to trade consumers up to more expensive products and services.

At the biggest of marketers, the focus appears to be shifting back toward earning premium pricing. Procter & Gamble Co. liked the historical ability of Gillette to trade up its customers to pricier blades and razors so much that it bought the company last year for $57 billion. Now, Gillette is selling new Fusion razors priced 75› a blade above its already-pricey Mach 3 blades. Fusion blades last longer, so unit volume will go down, but sales and profits will go up-and that's the idea, said Peter Hoffman, president of Gillette's blades and razors business.

premium paste

This comes at the end of a five-year period when P&G stopped officially relying on price increases to drive revenue and often cut prices to fix what Chairman-CEO A.G. Lafley saw as overly aggressive pricing in the 1990s. But for the first time in at least a decade, P&G will launch a toothpaste next month-Crest Pro-Health-at a 50› premium on other premium toothpastes. And this month it launched Olay Definity, a mass skin-care line whose $25-plus price points come close to the low end of department-store brands.

P&G rival Unilever, meanwhile, has claimed value leadership (disputed by P&G) for Axe in men's deodorants with products that have pushed the category price threshold above $3 and in some cases $4. Getting such prices is all about Axe's award-winning marketing, led by Bartle Bogle Hegarty, New York. Meanwhile, Crispin Porter & Bogusky's ads for Burger King have helped increase the average ticket even as customer counts have fallen. That may make franchisees nervous, but it's made Burger King management happy.

Carbonated-soft-drink volume is declining broadly, but Coca-Cola Co. has turned to a variety of line extensions, including Coke Blak coffee-infused cola priced at about $2 per 8-ounce bottle-as much as double what it sometimes gets for 2 liters of Coke. The beverage alternatives consumers are turning to-such as bottled water, sports and energy drinks-all come at higher prices than carbonated drinks.

Such marketing-driven pricing, what marketers term "improved mix," don't show up as inflation, said Scott Hoyt, director of consumer industries for Moody's Federal economists are supposed to factor out quality improvements from inflation, though he concedes that can be dicey.

So can some of Banc of America's volume numbers, he cautioned. Flat volume in athletic footwear, he said, likely signals a fashion shift to other footwear. Declining food, beverage and food-store volume or traffic stem in part from syndicated data that exclude faster-growing Wal-Mart, club and dollar stores.

But rising raw-material costs and talk of inflation clearly are giving marketers cover to do what they should have done all along, said Frank Luby, partner at Simon-Kucher & Partners, a Cambridge, Mass., firm that specializes in pricing issues.

"Marketers are starting to move away from the notion that volume and market share are what it's all about," he said. "If you differentiate properly, inevitably you will see a shift in mix and deterioration in volume."

Part of the new outlook is a fundamental shift in metrics marketers are responsible for, he said. Marketers are focusing more on margins and pricing power and less on unit market share.

One key to the turnaround of Kellogg Co. earlier this decade by former Chairman-CEO Carlos Gutierez (now commerce secretary) was to shift the company's primary top-line performance metric from commodity volume to dollars. That can be difficult for global marketers that have to translate multiple currencies into a single set of financial results, but Mr. Luby believes it's fundamental to getting marketing thinking on the right track.

As a result, he sees a growing move away from "Wal-Martization," or driving toward the absolute lowest price, including to some degree by Wal-Mart itself.

Mr. Luby points to Kroger Co.'s successful moves to surrender less profitable price-focused customers to Wal-Mart-backed in part by analytics from Dunnhumby, the same consulting firm that has helped Tesco beat back Wal-Mart in the U.K. The thrust of the strategy: Reward the most profitable customers with some deep discounts on key items to get more dollars from them overall.

Higher-priced merchandise appears to be driving deeper discounts broadly in the U.S. TNS's Marx Promotion Intelligence reported last week that average coupon values rose 8.6% in the first half, the biggest six-month jump ever, mainly behind such pricey household and personal-care items as Fusion razors, teeth-whitening kits, air-freshening systems and at-home diabetes testing.


Burt Flickinger, principal with Strategic Resource Group, notes that the Winn-Dixie bankruptcy and numerous closings of independents-driven largely by Wal-Mart-also have made it easier for Kroger to maintain pricing.

And Wal-Mart's focus on delivering same-store sales growth is lessening pressure it once exerted on manufacturers against price hikes, he said, citing a four-state pricing survey that found Wal-Mart fully passed along recent price hikes in soft drinks.

"When retail is struggling, inflation is really good for retail," he said.

But there are limits. Prices on diapers are hard to raise because retailers advertise them heavily and consumers are keenly aware of them, said one East Coast retail executive.

It's been easier to raise prices on fresh foods and "less visible, less elastic items people won't cross the street to pay less for," such as Reynolds Wrap or Nestle cookie dough, he said. Price hikes also have gone over well on P&G's Iams, he said. "People ... really value what they put in their dog."

Somewhat more than what they put in themselves sometimes. His chain's recent effort to trade people up to higher-priced Angus beef flopped. They bought more bargain-priced ground beef instead.

"When you make this shift [to higher prices and lower volume], it can't go on forever," Mr. Luby said. "There's a risk that you overshoot."

contributing: stephanie thompson, kate macarthur
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