P&G's Price Cuts Ripple Through Consumer Products -- 2nd Update

Household goods from diapers to toilet paper to razors are getting cheaper, but what is a boon for shoppers is squeezing profits at the world's biggest consumer-goods companies.

Under pressure to boost sales, Procter & Gamble Co. resorted to widespread discounting late last year to win back customers. P&G, which makes Tide detergent and Pampers diapers, said Tuesday that average prices on its products fell in the most recent quarter for the first time since 2011.

Kimberly-Clark Corp., which sells Huggies diapers and Kleenex tissues, partly blamed its rival's lower prices for weak sales as it unveiled a broad restructuring Tuesday, including at least 5,000 layoffs.

A healthy U.S. economy and the lower corporate tax rate have done little to alleviate the challenges these companies face. Retailers such as Wal-Mart Stores Inc. are pushing for steeper discounts as they struggle to compete with Amazon.com Inc. Meantime, costs of pulp, oil and other raw materials used in the products have risen more than expected.

The dynamics are setting up a tug of war this year between consumer-products companies that are pouring money into new products and marketing in hopes of commanding higher prices, and retailers and shoppers increasingly accustomed to discounts.

Kimberly-Clark Chief Executive Tom Falk said in an interview that P&G's discounting, along with pressure from retailers and a decline in the U.S. birthrate, have reduced demand for the company's baby-related products and other items. That is driving the industrywide push to cut prices, he said.

However, Mr. Falk said, the competition hasn't reached the intensity of previous eras. "It's not the worst I've ever seen by far," he said, recalling a time in the 1990s when P&G cut diaper prices by 10%. "There have been more aggressive price wars."

P&G, Kimberly-Clark and Johnson & Johnson reported earnings Tuesday. J&J CEO Alex Gorsky told analysts and investors on a conference call that the company's consumer-health business had maintained market share despite a "global category slowdown" in the market for the goods.

He acknowledged J&J needed to do more to accelerate the consumer-health unit's growth, and pledged to take a number of steps. That includes "relaunching" the Johnson's Baby franchise, which includes baby shampoo, "with new formulations and new packaging to meet the purchasing preferences of millennial parents."

For its part P&G aims to combat price pressure with new offerings and by focusing on the higher end of the market, where products have richer margins and shoppers are more willing to spend, finance chief Jon Moeller said on a call with analysts. He pointed to the company's new Oral B power toothbrush and pricier new Olay skin-care products as examples, and added that the discounting won't last.

Lower prices had the biggest impact in P&G's grooming segment, where the company last year took the unusual step of publicly announcing plans to slash prices across its Gillette razor brand amid market share losses to cheaper online competitors. But pricing also fell by 1% on average in its health-care, household goods and personal-care units.

P&G has been under pressure from activist investor Trian Fund Management to improve its performance, and recently ended a high-profile proxy fight by giving Trian co-founder Nelson Peltz a seat on its board. Mr. Peltz has argued the company is overly complex and has failed to keep pace with recent trends.

Bernstein analyst Ali Dibadj questioned whether lower prices are a new reality for the industry, a particular concern for investors as prices on raw materials have been going up.

"Arguably you have been pricing below your market inflation rates for years now," Mr. Dibadj said on the call with P&G. In the consumer-products industry, "pricing not keeping up with inflation seems to be a bit of a trend now. Is this retailers pushing back? Are consumers saying, 'These are commodities?' "

In response, Mr. Moeller said, "You are right to point to this as a pain point in the immediate present." P&G said it didn't start the price war.

Price reductions by big household brands are overdue, said Gary Stibel, founder of New England Consulting Group in Westport, Conn., in an interview.

"Prices have gone so high they've made themselves vulnerable to discounters," he said. "When you take pricing [increases] year after year, you raise the umbrella to a point that others can slip underneath it."

U.S. pricing on Kimberly-Clark's disposable diapers dropped 0.8% last year, while P&G's diaper prices fell 0.4%, according to Nielsen figures provided by Wells Fargo. Paper-towel prices slid 2.7% last year for Kimberly-Clark, while P&G's paper-towel prices rose 1.8% for the year. Nielsen's figures exclude online sales, some retailers and promotional activity, such as coupons.

P&G said organic sales, a closely watched metric that strips out currency moves, acquisitions and divestitures, rose 2% in the quarter ended Dec. 31.

In all for its fiscal second quarter, the Cincinnati-based company reported earnings of $2.5 billion, or 93 cents a share, down from a profit of $7.88 billion, or $2.88 a share, a year earlier. The prior year's quarter included a benefit from a divestiture. On an adjusted basis, earnings rose 10% to $1.19 per share. Quarterly revenue rose 3.2% to $17.4 billion.

P&G's decision to streamline its beauty business by selling the bulk of it to Coty Inc. in 2016 helped organic sales in the segment to jump 9% -- the largest margin among company segments -- during the quarter.

Kimberly-Clark said it would cut about 13% of its global workforce, or at least 5,000 jobs. The Irving, Texas-based company had entered 2017 predicting 2% organic sales growth but ended the year with flat sales. It expects just 1% growth for 2018.

Imani Moise and Jonathan D. Rockoff contributed to this article.

Write to Sharon Terlep at sharon.terlep@wsj.com

(END) Dow Jones Newswires

January 23, 2018 19:41 ET (00:41 GMT)