Value Strategy Offers Alternative To Price Cuts For Some Firms

Some health and personal care companies are promoting their products' value and creatively streamlining production, rather than slashing prices to compete with private-label and less expensive goods in the faltering economy.

"Price decline doesn't have to become part of the automatic equation" when finding a balance between necessary pricing and maintaining underlying volume growth to offset the current negative impact of foreign exchange and commodity price, Colgate-Palmolive CEO Ian Cook said at the Consumer Analyst Group of New York Conference Feb. 20 in Boca Raton, Fla.

"Consumers will pay a premium, in some cases a modest premium, for perceived value - even in these times," he said.

For example, by advertising product value Colgate grew its toothpaste market share to nearly 45 percent worldwide and outpaced many competitors' 2008 sales, even though it recently raised its prices, Cook said (¹ (Also see "P&G, Colgate Hike Prices To Offset Rising Commodity Costs" - Pink Sheet, 12 May, 2008.), p. 7).

Colgate emphasizes how single products with multiple benefits, like Colgate Total , save consumers from buying multiple products, such as a toothpaste and separate whitening product, he said.

Colgate also offers value with "promotional packs" that bundle two products together - such as toothpaste and a toothbrush - and larger containers that cost less per ounce.

Colgate also seeks professional endorsements to deliver a value message to their patients, Cook said. "We have increased the number of dental offices that we visit and, in doing so, have quite substantially increased the brand that those professionals recommend most often to the consumer who continues to stay and grow overall market share."

These strategies helped boost Colgate's full-year global sales 11 percent to $15.3 billion, and increase net income 12.5 percent to $1.96 billion (² (Also see "Colgate Jumps On Weak Ad Market To Reconnect With Consumers" - Pink Sheet, 2 Feb, 2009.), p. 13).

Colgate also delivers its value message to consumers directly through increased media use. The company is taking advantage of lower media advertising rates, which declined between 5 percent and 20 percent depending on geography and the outlet, Cook said.

Colgate is not the only company capitalizing on less expensive media. Church & Dwight steadily increased media spend over the years, but will hold it at about 12.1 percent in 2009, CEO Jim Craigie said at the conference (³ (Also see "Sales & Earnings In Brief" - Pink Sheet, 10 Nov, 2008.), p. 15).

However, he explained, "with media spending down 10 percent to 20 percent in cost versus prior years, we'll actually be increasing the amount of hits we get out there in the marketplace."

C&D will rely more on infomercials with toll-free telephone numbers to deliver its value message and test new products. Infomercials allow the company to tweak the marketing programs, cost structure and pricing before launching a new product nationally, Craigie said.

Likewise, Procter & Gamble delivers its value message with monthly coupons sent to 58 million out of 110 million U.S. homes. The coupons add value by closing part of the price gap between P&G products and competitors' created last year when P&G raised prices, said CEO A.G. Lafley at the conference (⁴ (Also see "P&G, Colgate Hike Prices To Offset Rising Commodity Costs" - Pink Sheet, 12 May, 2008.) p. 7).

Even though price increases put P&G "temporarily at historically high premiums versus competitors and impacted short-term share," the company still delivered 2 percent organic sales growth, held global value share and delivered on earnings per share guidance, he said.

With this success in mind, P&G plans to increase prices about 20 percent this month in Russia to partly recover negative foreign exchange impacts, he said.

Creative Cost-Cutting Measures Increase Value

The firms further plan to offset foreign exchange impacts and increased commodity costs with creative cost-cutting measures and streamlined production.

For example, P&G reduced costs as a percent of sales by one-third in the last five years and garnered $600 million in savings to date by standardizing operations through a Global Shared Services operation, Lafley said (⁵ (Also see "P&G Braces For “Tough Year” Of Navigating Turbulent Economy" - Pink Sheet, 3 Nov, 2008.), p. 11).

He explained that when it comes to cost-cutting and savings, P&G is "leaving no stone unturned."

P&G will save at least $15 million this year by consolidating its printer services from nine different manufacturers to one single global supplier, he said. This will reduce the number of printers at P&G by two-thirds, improve service and save paper.

In addition, "reducing the number of colors for our packaging around the world from over 4,000 - believe it or not - to fewer than 2,000, saves $50 million a year," he said.

P&G will save an additional $20 million in North America by outsourcing talent and music negotiations to a third-party specialist.

The company keeps commodity costs down with "formula flexibility" that allows it to substitute more expensive materials with less expensive alternative raw materials without reducing product performance and value, Lafley said.

P&G invested four-fold more in alternative raw materials this year compared to last year, he said.

The company also cut energy costs by 46 percent since July 2002 through cogeneration, an energy efficiency process designed to simultaneously generate electricity and useful heat, he said.

At "one of our largest paper manufacturing plants, we developed a proprietary process that enables the plant to recover [heat used to dry paper] and dramatically reduce carbon emissions. Energy saved by this one project alone is greater than the energy consumed at 80 percent of all our manufacturing facilities around the world," he explained. "Currently we have four operating cogeneration units. We're constructing two more."

C&D also is building a new "state-of-the-art" manufacturing plant in Pennsylvania that will "deliver future savings," said Craigie.

In addition, it will close one of its plants in New Jersey, which will save $170 million, added C&D Chief Financial Officer Matt Farrell at the conference.

Finally, C&D recommends saving by being "very stingy," Craigie said. He explained, "We walk the walk on tight overhead controls. We don't have company cars. We don't have company planes. We don't have golf club memberships."

- Elizabeth Crawford ([email protected])