P&G puts the screws to suppliers

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Procter & Gamble suppliers, watch out. The package-goods titan is wielding its new-and-improved clout to wring price concessions out of its business partners-causing one to slash earnings estimates 6%.

That's a bad omen for other media or marketing-services shops heavily dependent on a package-goods industry P&G now dominates, particularly ACNielsen, which handles its $20 million retail scanner account.

P&G, strengthened by its Gillette acquisition, squeezed its $100 million-plus relationship with newspaper coupon-insert vendor Valassis Communications hard enough that on Oct. 20 the company reduced its 2006 earnings guidance about 12ยข per share or $6 million below consensus analyst estimates. The stock plunged nearly 15% to $32.40.

Although in a conference call Valassis Chairman-CEO Alan Schultz blamed overall pricing deterioration in newspaper coupon inserts, which make up about half the company's business, he said the majority of the earnings impact came from a new contract inked Oct. 17 with P&G. The signing came only two weeks after P&G Chief Financial Officer Clayton Daley told analysts the company had found greater-than-expected savings in areas such as media, professional services and promotional retail displays.

Even before acquiring Gillette, P&G was Valassis' biggest customer, accounting for more than 10% of its $1 billion-plus in annual sales, about half from coupon distribution and the rest from other direct-marketing services. But after the merger P&G discovered that even though Gillette was less than a fifth its size, the razor marketer was getting a better deal from News Corp.'s News America coupon distribution unit than P&G was from Valassis. P&G told Valassis it wanted the same pricing deal Gillette was getting from the competition, Mr. Schultz said.

Losing money

The negative earnings impact from P&G's deal on Valassis appears to be more than $3 million, even though the vendor appears to be picking up a substantial amount of Gillette's coupon business. P&G is expected to add Gillette's brands to its existing BrandSaver single-sponsor insert program, which accounts for about 85% of its coupon-distribution business with Valassis. For Valassis to still lose money despite picking up so much business, the price concessions may have been as high as $10 million.

Combined with Gillette, Mr. Schultz said P&G will account for more than 15% of Valassis' core coupon-distribution business, which has sales just less than $500 million.

The P&G deal exacerbates a price war that already has cut costs for coupon inserts 19% since 2002, Mr. Schultz said. Among those watching closely are two other major Valassis clients, Unilever and L'Oreal, though Mr. Schultz said only about 4% of 2006 contracts remain unsigned.

A likely cost-cutting target for P&G is VNU's ACNielsen, which handles the estimated $20 million U.S. retail scanner business for P&G and Gillette, plus similar services for the two companies elsewhere globally. Although P&G signed a seven-year U.S. deal with ACNielsen in 2002, it's routine to renegotiate such deals after client mergers.

Double payments

P&G is also the biggest client in a fiercely competitive scanner-data duopoly. Potentially adding to P&G's clout, ACNielsen rival Information Resources Inc. has extensively stepped up investment in computing infrastructure and gained market share since it was acquired by a group headed by Symphony Technology Group and taken private in 2003, according to industry executives.

One executive familiar with the matter said P&G and Gillette would most likely be allowed to eliminate double payments for data from categories where both already compete, such as deodorant and oral care.

P&G and ACNielsen declined to comment.

Some media executives doubt, however, that P&G can exact deep savings from other media players not so dependent on it. Since P&G primarily markets to women and Gillette primarily to men, they tend to buy different media.

But the deal pushes P&G past General Motors Corp. as the biggest media advertiser in the U.S., and the company is an important advertiser for cable channels and magazines directed at women, bought by Gillette's Venus, Oral-B, Duracell and Braun.

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