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Pricing Can Be Hazardous To Your Career

August 2011 Corporate, Pricing

As the global economy continues to be stressed and prices for all kinds of raw materials continue to rise, manufacturers are looking for ways to preserve profits. Although manufacturers are substituting materials where they can and locking in long-term contracts to protect themselves from price hikes, they may ultimately face the conundrum of passing along rising costs in the form of price increases to their customers.  While larger more diversified companies as well as vertically integrated manufacturers may have some leverage to mitigate cost increases, many must pass along some or all of these costs.

Consumer package giant Colgate-Palmolive (NYSE: CL), announced last quarter plans to raise prices on some household staples.  Colgate has seen a continuous drop in its earnings and profit as consumer confidence remains choppy and executives are hopeful that consumers still have some room to adsorb these and future price increases. Unfortunately, higher prices are forcing some consumers to look at cheaper brands even in highly brand loyal categories such as toothpaste.

The world’s number one and two appliance manufacturers, Whirlpool Corporation (NYSE: WHR) and Sweden’s Electrolux AB (STO: ELUX-A.ST) have raised their major appliance prices twice this year to help offset soaring costs for raw materials including steel and copper. But with the demand for appliances weakening, analysts say the companies are likely to face opposition from retailers.

A major risk for these manufacturers is if competitors begin cutting prices to boost volumes. Whirlpool and Electrolux are facing increased competition from Samsung Electronics Co. (KSE: 005930) and LG Electronics Inc. (KSE: 066570), where, in the past, these companies, less concerned with profitability, have gained market share by lower pricing.

The Japanese Tsunami and nuclear disaster, Egyptian and Ivory Coast civil unrest as well as spiraling raw materials costs have impacted sales at Swiss food company Nestle SA (VTX: NESN.VX), Frits van Dijk , Executive Vice President said the company struggles to pass higher costs on to consumers. Although price increases will likely slow the rate of sales growth, overall growth won’t be halted, van Dijk said. “We have to find ways and means to cope with raw materials increases. Price increases are one solution, but clearly not the only solution,” he said. “We have seen it in the past when you increase prices for a few months, you get a bit of headwind and the consumers have to adapt,” said van Dijk. “But on the other hand, it is the whole industry that is suffering. Everyone ultimately will have to go through price increases. The whole price level goes up a bit, but the consumers get used to that after a while.”

Unilever (NYSE:UN), the world’s second biggest consumer products behemoth after Procter & Gamble (NYSE: PG), is raising its prices faster and faster. The price of its food, household and personal care products went up 5.1% in the fiscal second quarter, a monumental increase from 1.8% growth in the previous three months, as the company increasingly passes on its cost burden on to consumers. Unilever said its price gains are not “indiscriminate”. It is more aggressive on bar soaps and spreads, as they have a greater exposure to volatile raw material costs. It also uses its market-leading brands as a lever to increase prices and is both reformulating and rolling out new products of a higher value. Around 30% of its sales come from newly-launched or innovated lines. However, there is no cause without effect. While pricing is driving sales, volumes are softening and customers, used to an aggressively promotional environment, are now feeling the pinch and cutting back.

This week, Mikkel Vendelin Olesen, CEO of Pandora (PNDORA.KO), a Danish jewelry maker, resigned under fire from the board, after price increases for its jewelry products were rejected by buyers. The company had increased prices to try and offset a surge in gold and silver prices, but had seen sales fall sharply at the end of second quarter and worsen in July.  This rejection of price in the marketplace wiped out almost two-thirds of the company’s market value precipitating Olesen’s resignation and a re-evaluation of corporate pricing strategy.

Board member, Marcello Bottoli, the acting CEO of Pandora said prices on key products have already been cut and no new retail price increases are likely either this year or next. The company plans on returning it focus to its core competencies of mass marketing, affordable luxury and good old fashioned execution of the basics around price, promotion, inventory and customer service. So what went wrong at Pandora?

Although pricing is just one of the basic marketing tools, it is one of the strongest levers. If price is executed strategically it can result in significant profits for the organization.  On the other hand, if price is used haphazardly to offset increasing costs or covering ineffective strategy deployment it may result in adverse effects.  Too many CEOs are using price to cover ill developed corporate strategy and should be held accountable if their decisions result in a negative impact to the organization. For now, consumers are bearing the grunt of this fight back. But for how long will they tolerate it? If volumes continue to erode, the industry may need to think again or more CEOs may follow the path of Olesen at Pandora.

 



About the author

Dr Frankel an innovative strategic leader with a proven track record of identifying global market opportunities to drive revenue, profit and market share growth. He has over 15 years industry experience in consultancy, start-ups and fortune 100 companies in a number of different roles from business strategy, pricing, competitive intelligence, system development and operations. During his career he has helped companies deliver multi-million dollar improvements on profitability via pricing and business intelligence while increasing market share and maintaining customer satisfaction. He has a BS and PhD in biophysical organic chemistry from the University of Arizona and an MBA from Washington University Olin School of Business in St. Louis.

David Frankel
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