The WSJ is reporting that the big consumer brand companies are struggling to raise prices. P&G reported that prices fell by 2% in the first quarter of 2018—primarily driven by its Gillette razors. Unilever too reported that it was only able to raise prices by 0.1% in the first quarter. A combination of Amazon and a decline in brand loyalty are blamed for the lack of pricing power.
A lack of meaningful innovation and a shifting ad market may have more to do with the pricing issues at the big brands than Amazon or brand loyalty. Pricing power, innovation, and quality go hand in hand. Consumers aren’t stupid. Adding a fifth razor blade to the Mach brand of razors and jacking up the price isn’t going to convince the consumer to pay more. Gillette is unfortunately learning that the hard way. But that says a lot less about brand loyalty than it does about the poor value proposition that Gillette is offering.
The quality difference must be tangible for branded goods companies to maintain premium pricing. Gillette’s initial multi-blade razors were a step up from the single blade disposable Bic razors, but five blades?—c’mon.
It has been a long time since I changed my last diaper, but I know Pampers are still of superior quality and can demand a higher price than the generics.
It also seems difficult to reconcile the idea that there is a lack of brand loyalty when you see an emerging brand like Halo Top in ice cream take a massive amount of market share. Halo Top innovated when the big brands didn’t. If you aren’t familiar, Halo Top is a healthier, low calorie ice cream sold by the pint. It may not be as tasty as Ben and Jerry’s, but it has about half the calories per pint.
Healthier alternatives have been gaining favor at the grocery store for years, but the big brands have been slow to innovate in that space. Anybody could copy what Halo Top is doing and I’m sure some are, but based on the company’s sales, consumers are loyal to the brand.
What is the takeaway here? The problems the branded consumer goods companies are facing are fixable. More meaningful innovation, better quality, being more responsive to consumers, and yes better marketing will help over time. Oh, and if that doesn’t work, acquiring emerging competitors is always an option.
Jeremy Jones, CFA
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