CINCINNATI - It’s a 14-minute walk between the headquarters of the Kroger Co. and Procter & Gamble Co., a proximity that helped the companies become natural allies in the quest for consumer dollars.
But these Cincinnati neighbors are behaving more likely rivals lately, thanks to a shifting retail landscape and the rise of e-commerce platforms like Amazon Inc. Consider this:
- P&G launched a direct-to-consumer offering for razor blades last year (in response to the upstart Dollar Shave Club) and it’s testing a Tide Pods delivery service in Atlanta.
- CEO David Taylor said in an Aug. 2 conference call that P&G now has six categories with e-commerce businesses that exceed $100 million in annual revenue, including baby care, oral care, grooming, hair care and fabric care.
- Kroger expanded its Simple Truth brand to include household products this year. “I never understand why people are OK drinking my milk, but they want Windex to clean their bathroom mirror instead of Kroger cleaner for their mirror,” CFO Mike Schlotman told analysts in May. “Our share of wallet in those categories is a lot lower and I think the Simple Truth brand starts to unlock that mystery a little bit.”
Both companies say they enjoy a strong, collaborative relationship that isn’t likely to suffer from increased competition. And $600 million in e-commerce sales would hardly put a dent in Kroger’s annual revenue of $110 billion. However, P&G is growing e-commerce revenue at triple-digit rates in some of its largest global markets. Plus, many experts think private-label sales in the U.S., now at roughly 18 percent, will eventually climb to the 40 percent range now seen in Europe.
University of Chicago Marketing Professor Jean-Pierre Dube said the expansion of private-label brands is definitely a threat to consumer-product companies that fail to generate excitement for their brands with innovation and advertising.
“In Europe, half of dry goods sold are private label,” Dube said. “Private labels are smaller in the U.S., but there’s been a slow, steady shift. The traditional branded package good is going to have to look at itself in a different way.”
Dube added that companies like P&G can dramatically improve profitability by locking in loyal consumers with automatic refills and subscription offers. He expects P&G and other consumer product companies to launch more direct-to-consumer services in the future.
“They don’t really need the retailer like they did 30 to 40 years ago,” he said. “I think this is step number one to re-invigorating that relationship they have with the customer.”
Trust and commitment
P&G and Kroger aren’t ready for divorce court yet.
“A lot of our customers love P&G product and we’re going to have that product,” Kroger CEO Rodney McMullen told WCPO in June. “We’re much more focused on 'How you expand the market?' rather than, ‘How do I get somebody to move from your product to my product?’ So far, what we’ve been able to do is expand the category.”
Kroger spokesman Keith Dailey said the companies engage in an annual planning process that’s “rooted in trust and commitment” and helps P&G rank at or near the top of Kroger’s list of top consumer brands every year.
“We agree on sales and growth figures and build plans to hit those numbers,” Dailey said. “And it’s not limited to selling. We will plan all elements of the business partnership including logistics and other process improvements. Then we measure progress, learning together and adjusting as needed throughout the year.”
Kroger Vice President of Corporate Brands Gil Phipps has a favorite saying: “We’re not offering knock-off versions. We want to be a knock out.” So, Kroger expects its private-label brands to compete for shelf space, the same as branded products.
“Many of our Simple Truth products – food and non-food – are the only product of its kind,” Dailey said. “For example, our Simple Truth glass cleaner was the first organic glass cleaning product in the market.”
For P&G, the retail environment is about category building as well as competition, CEO David Taylor reminded investors in an Aug. 2 conference call.
“We'll work with our retail partners to build the value of our categories behind strong product innovation and more effective in-store and online merchandising of our leading brands,” he said.
P&G is accomplishing that in the laundry aisle, where category volume is up 4 percent, thanks to new products like Tide Pods and Downy scent beads. Among P&G’s strategies in this category is the “odor defense collection,” which touts Tide Pods’ “proprietary formula of enzymes” and Downy’s “Fresh Protect Odor Defense Beads” to keep athletic clothing from smelling like body odor.
Consumer-product companies compete best against private-label brands when they’re able to convince consumers their products are different and better than cheaper private-label brands, said a November 2014 Nielsen report.
“Private label success is strongest in commodity-driven, high-purchase categories,” the report said. “Private-label growth typically comes at the expense of small and mid-sized brands, while category leaders remain relatively safe.”
Spokesman Damon Jones said P&G welcomes competition from retail brands and stressed that online sales efforts are not a reaction to the private-label threat.
“Our fundamental approach is to make sure our products are available everywhere consumers want to shop,” he said. “At the end of the day, consumers make the choices that best suit them. In no way does the fact that they have private-label brands alter our mutual desire and commitment to serve consumers. When we do this well, we all win.”