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Retailer dogfight triggered by Procter & Gamble

Who will blink first?

Procter & Gamble, whose brand managers are in lockstep carrying out boss Ed Artzt’s orders to slash millions from a $1.6 billion-a-year ticket on trade promotion? Or an increasingly feisty cadre of retailers who depend on the $36 billion trade promotion bounty that manufacturers contribute toward 45% or more of retailers’ bottom-line profits?

The answer, as P&G changes the rules by moving more than 50% of its business – and more as time goes on – to an everyday low pricing (EDLP) strategy, could determine the direction of marketers’ advertising/promotion budgets for the next decade.

The recent decision by Safeway, the nation’s No. 3 supermarket chain, to drop some P&G products because of the company’s EDLP strategy was the retailers’ opening salvo.

Still, P&G shows no signs of backing off from its controversial plan. Fact is, with an arsenal of brands that includes the No. I or No. 2 product in 32 out of 42 categories, who stands to gain by offending P&G? What’s more, other marketers are poised to cut their own trade promotion budgets.

Kraft General Foods, Quaker Oats, Colgate-Palmolive, Dial and Lever Bros. have all been tinkering with their pricing and promotional structures in recent months. But none have followed P&G yet in a major way on the EDLP front.

On the other hand, if retailers are successful at keeping trade dollars flowing unabated, the power shift from manufacturer to retailer would be solidified. Between 1981 and 1991, trade promotion grew to 50% of marketing budgets from 34%, while media advertising plummeted to 25% from 43%, according to Nielsen Marketing Research and Donnelley Marketing.

“The lines are being drawn,” says Jeff Hill, group vice president at Glendinning Associates of Westport, Conn. “This is all about levels of power. Who will control trade promotion?”

The stakes for P&G – and any company that follows it – as well as the retail trade are enormous.

Cash-strapped retailers rely on manufacturer dollars for roughly half of their bottom lines, so it’s no surprise they’re threatened. “We are witnessing a true restructuring of the industry-p&g is changing the rules,” says Kevin Price, a senior partner at Westport, Conn.-based Marketing Corp. of America. “Retailers are trying to make a statement to discourage other manufacturers. If they’re wise, retailers should try to restructure business with suppliers to make their bottom lines less dependent on forward-buying and diverting profits.”

A&P, the nation’s No. 4 supermarket chain, is also mulling dropping slower-moving P&G products due to reduced promotional support. Vons, the largest retailer in Southern California, and Stop & Shop Cos., one of New England’s biggest supermarket chains, are considering moves. “We think dictators will end up where most dictators end up – in trouble,” said Stop & Shop chairman Lewis Schaeneman at a recent annual meeting.

Even if retailers decide to drop minor brands only, big brands like Tide, Crest and Pampers could be hurt if retailers give more promotional support to the company’s competitors. Retail execs say P&G competitors are already filling the void left by P&G’s cutback. “It’s very tough to drop their brands, but it’s easy to promote somebody else’s,” said one Northeastern retail exec last week. “It’s more subtle, but we will get our point across.”

Nevertheless, other experts wonder if the retail maneuvering is more posture than threat. Given the clout that P&G has in the marketplace, retail reprisals may be limited to the dropping of a few minor brands. “I’m surprised that it has taken them so long to react,” says analyst Andrew Shore of Paine Webber. “P&G’s intent with EDLP has never been to get away with it 100%. They just want to meet the trade in the middle.”

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