Move Suggests a Kinder, Gentler Retailing Behemoth

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CINCINNATI (AdAge.com) -- Recent spikes in energy and other raw-material prices are prompting something almost unheard of in the package-goods industry -- list-price increases that
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Wal-Mart appears to be accepting. The quiet move is enabling manufacturers to maintain, or even increase, their marketing budgets.

Kinder, gentler
Sensitive to a spate of publicity painting it as a bully, Wal-Mart appears set on becoming a kinder, gentler behemoth, according to some supplier executives and industry watchers.

Wal-Mart's recent willingness to go along with cost-justified price increases appears to be in line with the chain's indication to supplier executives in late January that it wants to be a better partner. A Wal-Mart spokeswoman, however, said the retailer has not changed its policy or strategy on pricing. "We remain committed to selling for less," she said.

"They are not going to allow manufacturers to [increase their margins] at consumers' expense," said Gary Stibel, a principal with the New England Consulting Group. "On the positive side, Wal-Mart is listening, and they understand that, even though the federal government doesn't get it, there is inflation in this country right now."

P&G Chairman-CEO A.G. Lafley and Alberto-Culver Co. CEO Howard Bernick are among executives who have told analysts in recent months that unnamed major retailers appear willing to go along with cost-justified increases. But it's clear the change in attitude is from Wal-Mart, which accounts for 30% to 40% of the sales in U.S. categories where those companies compete.

The power
"At the end of the day, Wal-Mart has got the majority of the power, so this has got to have been sold to Wal-Mart first and foremost," said Bill Steele, an analyst with Banc of America Securities.

Industry executives say many other retailers have long accepted price increases, even welcomed them. But suppliers with the temerity to seek price hikes at Wal-Mart needed -- and still need -- approval two levels up from the buyer, who generally has little incentive to champion them.

List-price increases have become largely extinct since the 1990s, as Wal-Mart came to rule package-goods retailing. Only last September, Mike Duke, president of the Wal-Mart Stores USA division, bragged to analysts that Wal-Mart had a 2.7% deflation rate last year in its purchases, comparing like items to like items.

But one package-goods marketing executive said costs had been so tame for package-goods companies that Wal-Mart and other retailers faced few cost-justified price requests. "The only cost most package-goods companies saw rising until recently was media," the executive said, adding that Wal-Mart will not accept price hikes based on that.

Tissues and towels
The bigger change may be that competitors in tissue, towel and baby-care products appear to have declared a truce in their long-running price war.

P&G, Kimberly-Clark Corp. and Georgia-Pacific Co. have recently announced they will hike prices 6% to 9% in July on their tissue-towel brands -- the first industry-wide price increase since the 1990s. P&G and Kimberly-Clark haven't announced a similar increase in diaper pricing, but P&G does appear to have eased promotional intensity, said Deutsche Bank Securities analyst Andrew Shore.

The implication is that there is less pressure for the paper brands to slash marketing budgets to pay the freight for soaring energy, plastic, grain and other raw material prices. Peace in the paper segment may also be a good omen for food companies that are also facing new pressure to raise prices as commodity prices jumped 25% in some cases this year.

Four years ago when energy prices last spiked, brand marketers were largely forced to swallow the increases by cutting marketing or surrendering profits. The cost surge was among factors that caused P&G to miss its earnings target for two quarters, costing Chairman-CEO Durk Jager his job.

That same year, P&G was forced to roll back a price hike on its tissue and towel brands when Kimberly-Clark wouldn't follow. Two years later, when K-C proposed a diaper price increase, P&G not only wouldn't follow, but also stepped up promotion to levels K-C called unprecedented in the industry.

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