Size Matters: P&G Ups Trade Layout to Big Retailers

EXCLUSIVE: Wal-Mart is Exception in Plan to Boost Revenue by $100 Million

By Published on .

Procter & Gamble Co. thinks it's found a new way to bring in $100 million in sales annually -- "cutting the tail" off trade promotion by relocating spending from smaller retailers to more efficient giants.

Oddly enough, though, one retailer that could lose out is the biggest of them all-Wal-Mart.

"Cut the tail" is a phrase P&G has used internally to describe the new system heavily influenced by the recently acquired Gillette, according to executives familiar with the plan. Details of the new ystem are to be presented to retailers this month and will take effect in January. The impact on smaller retailers will be phased in over several years.

The plan will probably maintain P&G's overall trade dollars at the current level, but they're likely to be allocated differently, with more spread among the top 15 to 20 retailers and less on everyone else. "Based on the way it's constructed, it can't help but have that effect," said one executive.

Another person with knowledge of the strategy said P&G believes the new system could bring in another $100 million in annual sales globally by 2008, a chunk of the $750 million in "revenue synergies" the company had projected from the Gillette deal.

Overall, the plan probably will make P&G's trade system look more like those of other package-goods marketers, said Ken Harris, managing director of WPP Group's Cannondale Associates, terming it "a blast from the 1990s." But because it's a P&G program-and one that involves billions in retail-promotions funds in the U.S. and globally-the impact on the retail industry is bound to be huge. With sales around $70 billion, P&G is twice the size of even a giant like Kraft Foods.

P&G's old system based funding primarily on averages of retailer performance. The new system will give retailers trade-promotion dollars based on success in reaching current-year sales milestones and on how well they execute marketing and merchandising plans, the executives said. This format will likely benefit larger retailers because they're generally growing faster.

Stronger, more progressive supermarket retailers such as HEB, Bashas and Wegmans are likely to benefit, said Burt Flickinger, principal of the consulting firm Strategic Resource Group. But he believes the biggest retailer of all-Wal-Mart Stores-may come out somewhat worse within P&G's new framework. That's because it's based on current performance, and Wal-Mart isn't performing quite as well as it has in years past. Mr. Flickinger noted that when the effect of rising gas prices on store sales is factored out, Wal-Mart's same-stores sales have actually declined during much of the past year.

"Some of the below-the-line resource commitments to Wal-Mart aren't working out as well as they have in the past," Mr. Flickinger said. "So maybe instead of being a little over-resourced to Wal-Mart, [P&G will now be] a little more balanced."

"Trade funding and programs are available to every customer. Period," a P&G spokesman said in a statement in which he declined to discuss individual retailers. "We will continue to partner with our customers to deliver maximum ROI for both of us, no matter how large or small, offering options for all customers in order to meet the needs of their high-potential shopper. ... We always comply with the letter and the spirit of the law, including Robinson-Patman."

'plain vanilla'

P&G is widely seen as having had the industry's strictest interpretation of the Robinson-Patman Act, which requires marketers to give all retailers the same prices, services and promotion opportunities unless differences are justified by cost savings or other retailer-performance factors.

One executive said compliance with the law in the Gillette system is "just as rigorous if not more so than P&G's." But he said P&G's old system of trying to treat all retailers the same had resulted in too many programs that were "plain vanilla," adding that even with a more limited menu of promotion options, Gillette's system could be more flexible.

P&G has encountered little pushback from retailers so far, and Gillette didn't run into problems when it rolled out its system a few years ago, the executives said. Some sales reps for P&G's smaller and regional accounts initially disliked the proposed changes, one of the executives said, but Gillette's approach quickly won favor from key executives, including Chairman-CEO A.G. Lafley and Vice Chairman-Global Operations Bob McDonald.
Most Popular
In this article: