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Deflation? Tell That to Colgate and P&G

Posted by Larry Doyle on May 1, 2009 1:09 PM |

Analysts and economists are pointing toward a near term decline in prices while raising concerns about inflation down the road. Disinflation (a slower pace of inflation) or deflation (an actual decline in prices) are a crushing blow to a company’s bottom line. That said, companies are incentivized to discount prices in order to move inventory. Consumer discretionary items are much more subject to discounted prices than consumer staples.

My better half came home from the supermarket the other day commenting on definite increases in price on a wide array of basic staples. To that end, I am not surprised to read that Colgate and P&G are raising prices. Can price increases in the face of rising unemployment stick? Will consumers who have traditionally bought these brands change product loyalty? The WSJ reports, P&G, Colgate Hit by Consumer Thrift.

If price checking is not already part of your regular exercise when shopping, it should be. Make no mistake, raising prices at this juncture is a high risk proposition for Colgate, P&G, or any other company. However, do not be surprised to see more slight price increases on staples along with slight declines in product sizes.

What prompted some of these price increases? The WSJ reports:

To offset higher commodity prices and global currency swings, P&G and Colgate raised prices in the quarter through March. P&G said higher prices increased its total sales by 7%. Colgate raised prices by 8%.

Despite pressure from retailers to lower prices for cash-strapped shoppers, neither company conceded much willingness to do so.

Higher prices hurt sales volumes, especially in emerging markets, but still paid off for the companies.

“While painful, pricing to protect the structural economics of our business is the right thing to do,” P&G Chief Financial Officer Jon Moeller said.

Analysts said higher prices could backfire. “Investors are certainly concerned by unit-volume trends, especially on the Procter side, and wondering whether they’re going to have to lower price points or kick up promotions,” said Bill Pecoriello, CEO of ConsumerEdge Research LLC, a consumer-products research boutique in Stamford, Conn.

While impulse buyers like myself are a retailer’s dream, it is obviously prudent to comparison shop. However, if we see ongoing increases in commodity prices and volatility in currencies, (both of which are likely to occur in the face of massive deficit spending), these price increases may be more the norm than the exception.

Don’t be surprised if stockpiling of goods becomes a prudent discipline.


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