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Private Label vs. Branded: A European Test Case for P&G
Can Innovation and Value Overcome High Prices for P&G?
Procter & Gamble Co. reported its Q3 2023 results, showing a four percent increase in net sales to $20.1 billion. The quarter marks the fourth straight reporting period the Cincinnati-based consumer goods giant lost volume in the wake of higher prices. Like a broken record, the primary driver is higher prices for brands such as Dawn and Luvs, which boosted organic sales by seven percent.
Europe is shaping up to be an interesting test case for the company. In Europe, branded consumer goods companies face significantly more pressure from private label brands. This varies by category, but generally speaking, US private label market share is around 20%, and Europe often exceeds 30%. Part of this has to do with overall consumer attitudes; the other has to do with European retailers' perspectives. Through COVID, they've hesitated to increase prices along with branded consumer goods companies. Now, the gap between P&G's product prices and, say, Tesco's, is higher than ever.
But don't count on any price cuts.
"I don't think that trying to eliminate the price differential is a meaningful and helpful strategy for us," CFO Andre Schulten told investors. P&G is going to revert to its playbook. "We need to create innovation… create product and packaging innovation, communication strategies, and in-market executions that are able to provide value to consumers and retailers."
It's something to keep an eye on in the coming months. Can innovation and value beat price…in uncertain times?
Margins are expanding:
Gross margins, profitability accounting for production cost, expanded to 48.2% from 46.7% the year before.
Operating margins, profitability accounting for production costs and selling/marketing expenses, expanded to 21.2% from 20.8%.
Inflation is lessening…kind of.
Freight and transportation costs are expected to be roughly in line with the prior year, reflecting a more balanced capacity situation with the driver-to-load ratio returning to historical norms.
Commodity basket shows a mixed bag with some help in resin-based commodities and pulp but limited moderation due to the increased pricing of high-energy usage materials. Upstream suppliers continue to try to recover their input cost increases and labor inflation.
P&G is having success meeting consumers where they are.
P&G isn't focused on pushing consumers into new price tiers. Rather, it's investing across all of its brands—even during times of stress.
Management isn't looking to convert Luv customers into Pampers buyers (nearly double the price). Rather, they're looking to invest in product, packaging, communication, and retail execution to push back against private labels.
The optimization imperative is still going strong.
Management still predicts $1.5 billion in savings from automation and digital capabilities initiatives; $400-$500 million in annual savings expected from programmatic media buys.
Believes there's a significant amount of low-hanging fruit around media buys.
They said it:
CFO Andre Schulten on European pricing competition
The most recent rounds of pricing have gone into effect just in February and March across -- and I'm calling out across Europe and U.S. because those are most visible. So it's hard for us, as Jon said, to determine the outgoing elasticities at this point.
What I can tell you is that elasticities remain stable, remain favorable. And I think it is also a function of continued investment. It is a function of continued innovation. Every price increase or most price increases are connected to innovation, meaningful innovation for the consumer. That also guarantees retail support.
They are linked to strong value communication. We've talked about area cold water, tight cold water, Charmin rollback or Olay value communication. **And that is meaningful for consumers as they come under pressure. Many of our categories are categories where the consumer doesn't want to risk failure. You don't want to wash your clothes twice, and you certainly don't want to deal with a diaper failure.
So all of that, I think, is helping us to maintain favorable elasticities across the board. The most important insight for us is, and that's what you see us doing in Q3, we need to continue that investment. We need to look for opportunities where our value is exposed, and I'll call out Europe as an example because of private label pricing at a lower pace than the branded competitive set. It is critically important that we maintain that investment level to maintain the value equation.