Procter & Gamble Co. said it is raising prices for some of its biggest brands, a strategy shift after the consumer goods giant reported another quarter of lossless sales growth.
After more than a year of fighting weak demand for lower prices for staple foods such as tide detergent and Gillette razors, the CEO said on Tuesday that the company is changing course and wants big price increases on Pampers diapers and bounty paper towels push through.
P & G is just the latest big American company pricing amid a strong US economy and healthy consumer spending. But unlike some manufacturers or food brands such as Coca-Cola Co., P & G has not highlighted tariffs or trade disruptions for its shift. Instead, executives referred to the market dynamics.
U.S. Household income and household expenditure both rose solidly in June, the Commerce Department said on Tuesday, suggesting that consumers are able to boost economic performance. Low unemployment, rising wages and consumer spending this spring helped total output expand by 4.1
This gives P & G and some competitors the opportunity, after resorting to prices, to try discounts to fuel demand when their premium strategy faltered during the 2008 recession. P & G and competitors have cut prices as consumers are less willing to pay top dollar for branded goods and the established brands have faced competition from low-priced online startups.
The company's chief financial officer, Jon Möller, said price increases will "restore structural economics" and could resonate through the industry when competitors respond. He said that other goods going beyond those mentioned could see increases.
"Prices bring uncertainty and affect demand and volume," he told reporters in a telephone conference on Tuesday morning. "We will look closely and adapt on a dynamic basis."
P & G said prices for its Pampers brand in North America rose 4% on average and prices for Bounty, Charmin and Puffs rose 5%. The price increases will come into force later this year or in early 2019. As the largest player, P & G is driving industry-wide price movements.
Despite the above-average growth, P & G continued to forecast modest sales growth in the current financial year of 1 July. P & G expects organic sales to grow by between 2% and 3% for the year compared to 1% in the year just ended. Organic sales exclude factors such as acquisitions, disposals and currency fluctuations.
P & G has informed retailers about these increases, which affect products with higher raw material costs, said a spokesman for P & G. The company can raise prices for other products and cut others. Luv's diapers, for example, will be cheaper.
The managers of rival Colgate-Palmolive have also promised higher prices. In a profit distribution on Friday, Colgate executives said they would raise prices in emerging and developed markets in the second half of the year in response to rising commodity prices.
But executives warned that the increases would be moderate in the consumer goods sector due to the high discounting
"Given the current promotional efforts, we may not see competitors immediately succeeding, and we intend to remain rational, but we understand them as well Need to protect our market share, "said Colgate chief Ian Cook said on the call.
Housewares seem to be a little more expensive. Prices for the top 50 US household and personal care products rose 2.2% in the four weeks ended July 14. This is evident from Nielsen data from Wells Fargo
U.S. Inflation is gradually increasing. The Commerce Department said on Tuesday that the consumer spending index, the Federal Reserve's preferred inflation measure, rose 2.2% yoy in June, up 0.1% from May. This was the fourth month in a row that the brand reached or surpassed the Fed's 2% target over the previous year.
Regardless, the Labor Ministry announced the employment cost index, a measure of wages and benefits for civilian workers. This is the strongest increase since the third quarter of 2008. This indicates a historically low level of unemployment that is driving up the cost of labor.
P & G has joined activist investor Nelson Peltz on its board earlier this year after a controversial proxy vote, has been pressured to show that it can regain buyers who have turned to cheaper and up-and-coming brands, or reduce the total purchase.
The company is likely to be able to drive up prices, but the bump may be short-lived, said SunTrust analyst William Chappell. If others do not follow the example or buyers reduce their purchases, P & G will likely have to rely on promotions to regain sales. "I think most investors expect this, but it's too early to say so," he said.
In the fourth quarter ended June 30, P & G's earnings fell 15% to $ 1.89 billion, or 72 cents a share. Total revenue increased 3% to $ 16.5 billion, driven by currency fluctuations.
The company said organic sales increased 1% as lower prices in four of its five major product segments offset volume gains. P & G said prices fell 2% in the quarter. In the homecare and nursing sectors, the price slump was somewhat steeper and fell by 3%.
In personal care, which includes products such as Gillette razors, organic sales declined 3%. In the beauty segment, which includes hair care products and 2% of household and household care, organic sales increased by 7%.
P & G board member David Taylor said the sales were too weak. "I am confident that interventions will work," he said in an interview with analysts.
Company shares, 13% since the beginning of the year, rose 0.5% on Tuesday morning trading.
Write to Sharon Terlep at Sharon .terlep @ wsj.com