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Excerpted from WSJ, “P&G, Others Are Confident Higher Prices Will Stick” By E. Byron and A. Cordeiro, Feb 20, 2009

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Chief executives from several big household-products makers voiced confidence they could make higher prices stick, even as the recession ratchets up pressure on retailers and consumers to cut costs.

“Our products don’t deliver value [just] because the prices on the shelves are lower,” A.G. Lafley, chief executive of Procter & Gamble Co., told analysts and investors … Like several other industry executives … Mr. Lafley said his company doesn’t plan to roll back the significant price increases it has made over the past several months.

Pricing has become a contentious issue between retailers and their suppliers, as retailers — desperate to lower prices as consumer spending weakens — want their suppliers to help them foot the bill. But manufacturers such as P&G … argue they need to maintain prices to offset stubbornly high commodity costs, currency fluctuations and lower sales volumes …

Clorox Co. CEO Don Knauss told the conference his company had succeeded recently in imposing additional price increases … Nestlé SA, whose brands include Gerber and Purina, cited higher prices as a factor in the 70% increase in net profit it reported for 2008. And Kimberly-Clark Corp., known for its Scott, Kleenex and Huggies brands, said it would maintain its prices, at least for now, after hefty increases in 2008.

P&G’s Mr. Lafley described the promising sales performance of several new products that command significantly higher prices than established ones in the same P&G product lines … Newly launched Tide Total Care, which claims to make clothes last longer, is priced 60% above the base Tide detergent. Clairol’s Perfect 10 hair color, which touts better color quality and faster results, is 70% pricier than P&G’s basic Clairol Nice ‘N Easy, but aims to tempt women trying to cut back on even costlier hair-salon appointments.

Rather than broadly lowering prices, many household-product manufacturers plan to emphasize the extra benefits they say make their premium-priced products worth the money. In ads for its Charmin brand, P&G focuses on the toilet paper’s durability, saying that means users require fewer sheets. It also advertises … that Olay skin cream outperforms products costing hundreds of dollars …

Continually adding product features — and then advertising heavily to advise shoppers why they should pay more for them — is a critical way manufacturers of branded products drive higher profits and fend off increasing competition from private-label goods.

Indeed, P&G is the world’s biggest spender on advertising, constantly telling consumers that paying more for the company’s paper towels, mouthwash or diapers is worth it … Still, as more consumers cut spending — even on staples such as food — some industry watchers fear the time will come when they are unable or unwilling to pay for product features they can do without. Some observers also worry about the prospect of another “Marlboro Friday,” the day in 1993 when Philip Morris said it would sharply reduce the price of its Marlboro cigarettes to better compete with bargain brands.

The dramatic price cut, in addition to launching a tobacco price war, unleashed a wave of doubt about the value of big brands and their ability to sway consumers to pay more for them …

Mr. Lafley tried to calm concerns about drastic price cutting, arguing that P&G’s brands are still increasing their market share. “I don’t think you are going to see a return to irrational price wars,” he said.

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Full Article:
http://online.wsj.com/article/SB123508966388628145.html?mod=testMod

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