Facing stalled growth, the two companies, longtime partners, are
increasingly at odds in the aisle
By Sarah Nassauer and Sharon Terlep
Last year, executives at Procter & Gamble Co. were alarmed
when Wal-Mart Stores Inc. stocked a European competitor right next
to the company's iconic Tide detergent. It was a barb for the
consumer-products giant, which has long considered Wal-Mart's
shelves to be its most valuable retail real-estate.
P&G employees rushed to a nearby Wal-Mart to snap pictures
of the rival premium detergent, Persil, owned by Germany's Henkel
AG. They set up a "war room" in an office near Wal-Mart's
Bentonville, Ark., headquarters. To help fend off Persil at
Wal-Mart, they gave Tide's marketing budget a 30% boost, according
to people familiar with the situation.
Wal-Mart, the world's largest retailer, and P&G, the world's
biggest consumer-goods company, are increasingly butting heads as
both try to wring more revenue out of their slow-growing
businesses.
Their efforts, which at times have come at the expense of the
other, risk straining a partnership that has been lucrative for
both sides and a foundation of their businesses. Both companies are
now headed by new chief executives who, under pressure from
investors, are relying on aggressive managers to outdo the
other.
Although Wal-Mart's sales rose by nearly 1% in the quarter ended
April 30, the company's annual revenue fell last year for the first
time since it went public in 1970. It also closed 154 U.S. stores
en masse earlier this year, another company first.
P&G, meanwhile, hasn't created a blockbuster product with $1
billion in annual sales since 2005. Overall annual sales growth has
been stagnant since the recession, hitting a four-year low of $70.7
billion in 2015. The company has also cut more than 20,000 jobs
since 2012.
The pair expanded into behemoths together, leaning on each
other's largesse to sell pallets of everyday items such as
detergent and diapers from Wal-Mart's vast, fast-multiplying
stores. Last year alone, P&G sold roughly $10 billion worth of
goods through the retailer.
That symbiosis has become strained as shopping shifts online and
consumer tastes lean away from some of P&G's iconic brands to
less expensive alternatives.
Wal-Mart is spending billions on e-commerce and higher store
employee wages. At the same time, it is pressuring suppliers to
reduce the price of bestsellers as it tries to keep pace with
Amazon.com Inc. and a slate of discount chains. The turmoil has led
Wal-Mart to close stores, shrink inventory and push suppliers,
including P&G, for concessions.
P&G, conversely, wants Wal-Mart to accelerate sales of its
products, preserve higher prices on some items and provide more
space on shelves. It has shed dozens of products, including
CoverGirl makeup and Duracell batteries, to focus on premium brands
such as Gillette and Tide.
"They need each other," said Lou Pritchett, a former P&G
vice president of sales who met with Wal-Mart founder Sam Walton in
1987 to establish the business relationship. "They know it.
Sometimes it can get incredibly tense."
Both companies declined to offer specifics about their dealings.
"We have a long-standing relationship with P&G," said Lorenzo
Lopez, a Wal-Mart spokesman. "We will continue to work with them to
deliver everyday low prices for our customers."
"We value the strong relationships we have with our retail
partners and work closely with them to serve consumers, build our
categories and grow shareholder value," said P&G spokesman
Damon Jones.
Competitive pricing
The stress was apparent about two years ago, when German
discount chain Aldi began lowballing the price of P&G's Febreze
Air Effects, which accounts for nearly a quarter of Wal-Mart's
sales of air-freshening products, according to a person familiar
with the matter.
Aldi had hit Wal-Mart where it hurts, eating into its own
profits to steal market share in an aisle where Wal-Mart dominates.
Home fragrance products sell well with its core low-income
customer. A spokeswoman for Aldi declined to comment.
Over the course of months, Wal-Mart became increasingly
agitated, demanding P&G make the air freshener more affordable,
according to people involved in the negotiations. The retailer was
unhappy P&G had agreed to sell the product to Aldi in the first
place, these people say.
Finally, last year P&G capitulated, giving concessions that
made it possible for Wal-Mart to offer the product for as much as
27 cents less per can. Aldi and Wal-Mart now generally sell the air
freshener at the same price in the U.S.
Wal-Mart and P&G have long been held up as a model of how
two companies with sometimes opposing goals can grow together.
P&G opened an office near Wal-Mart's Arkansas headquarters
in 1987, a move that spurred thousands of other suppliers to set up
shop in the retailer's backyard, where they could plan product
releases and share consumer behavior data. The two companies joined
forces to put into practice P&G's long-standing model: persuade
middle-class shoppers to pay more for products they didn't know
they needed.
When P&G in 2001 introduced Crest Whitestrips -- $40 home
teeth-whitening kits -- Wal-Mart reconfigured the toothpaste aisle
to showcase the product and support its unusually high price.
P&G scored valuable space for cardboard displays and small
mirrors. As a result, shoppers could check the color of their
teeth, subtly marketing Whitestrips as a beauty product as opposed
to a clinical one.
Most Wal-Mart suppliers have a contract that governs supplier
agreements, setting terms for payment windows and fees to move
goods through Wal-Mart's warehouses. Not P&G. The
Cincinnati-based giant is one of a handful of suppliers that
operate on more informal terms, using emails and handshakes to sort
out particulars, say people familiar with the relationship.
Top P&G executives and Wal-Mart executives have
traditionally been close. In the early 2000s, the heads of the
companies sometimes stayed in each other's homes when in town for
meetings, according to former managers from both companies.
In tough times, said one of these managers from Wal-Mart, the
two titans can seem like they are in "a bad marriage" who "stayed
together because of the kids."
Doug McMillon, formerly the head of Wal-Mart's international
operations and CEO of its Sam's Club warehouse chain, was promoted
to run Wal-Mart two years ago and has shaken up its leadership
ranks.
"We get to reimagine retail again, and that's what we are going
to do," Mr. McMillon told the crowd gathered in Bud Walton Arena,
named after Sam Walton's brother, at the company's annual
shareholder meeting earlier this month. Mr. McMillon said that the
company aims to add up to $60 billion in new revenue growth over
three years.
David Taylor, a P&G veteran who had run several of the
company's biggest divisions, took over as the company's CEO in
November and also promised to revive sales. One person he is
relying on to deliver results is company star Mindy
Thompson-Sherwood, who was put in charge of the company's Wal-Mart
business in late 2014.
The P&G veteran touted "DRIVE 3,4,5" as a new office
rallying cry to expand annual sales at the big box by 3%, 4%, then
5% by fiscal year 2017 -- faster than Wal-Mart's own global growth
projections.
To motivate her troops, Ms. Sherwood, a marathon enthusiast,
played clips from the film "Gladiator." She told workers to "get in
the arena" to fight other consumer-goods giants by growing at
Wal-Mart, say former employees. Some workers donned gladiator-like
armor for the occasion, say these people.
Around that time, Mr. McMillon appointed a new U.S. chief
executive, Greg Foran, who has pushed his team to fight harder in
negotiations with suppliers. All buyers are now required to hone
their negotiation skills in previously optional workshops with the
Gap Partnership, a U.K.-based negotiation consultancy.
Cutting back
Wal-Mart has upset some suppliers by cutting back on promotional
display areas in stores and adding more of its own store brands. To
reassure them, Wal-Mart executives have said less-cluttered stores
draw more shoppers and that store-brand products drive customer
loyalty and traffic.
In February, Mr. Foran and his newly appointed chief
merchandising officer, Steve Bratspies, took the stage at an
Indianapolis conference for suppliers and delivered a stern message
about rooting out inefficiencies, say several people who attended.
Wal-Mart expects "healthy tensions" with suppliers and "will be
maniacal about managing costs," Mr. Bratspies told the crowd --
taking a more aggressive tone than in recent years, according to
these people.
In recent investor presentations to discuss financial results,
executives from major Wal-Mart suppliers including snack giant
Mondelez International Inc. have said the retailer's efforts to
cull some products from shelves has dented sales.
Mondelez Chief Executive Irene Rosenfeld said Wal-Mart's
strategy of fewer display areas hurt "impulse-driven" foods like
candy and cookies in the first quarter. "I think we're performing
quite well within those constraints, but it is having somewhat of
an impact on our overall performance," Ms. Rosenfeld told investors
during a conference call in April. Mondelez was spun off from Kraft
Foods Group Inc. in 2012 and owns brands such as Oreo and
Trident.
Over the past year, according to vendors and documents reviewed
by The Wall Street Journal, Wal-Mart has managed to get many of its
thousands of suppliers to sign a new contract that includes more
fees to move products through Wal-Mart's warehouses and earn shelf
space in new stores. P&G resisted the terms in a series of
tense meetings, say people familiar with the negotiations.
P&G "got a pass," said one of these people. Instead P&G
executives reminded Wal-Mart how it had invested in a network of
"mixing centers," large distribution centers from which P&G can
ship products quickly to a larger number of retail locations,
reducing the cost of Wal-Mart's supply chain, said this person.
A battle last year over the popular Swiffer mop suggests the
tensions aren't likely to abate soon. P&G's consumer research
revealed that existing packages weren't large enough to prompt
repeat purchases, and so it upped the number of wipes in a pack,
improved the handle and increased the price, say people familiar
with the change. Around the same time, Wal-Mart introduced a less
expensive store brand, irking P&G.
To settle the matter, P&G had to offer a temporary discount
on the company's Swiffer products. Not only did P&G employees
worry about lost sales, they believed the store-brand refills were
of a lower quality and would stop first-time Swiffer users from
sticking with the habit.
"They sell crappy private label, so you buy Swiffer with a
crappy refill, " said one of the people familiar with the product
changes. "And then you don't buy again."
Swiffer brand products "are noticeably better" than their
private-label rivals, Mr. Jones, the P&G spokesman, said.
Responded Mr. Lopez, the Wal-Mart spokesman: "Our Great Value
products provide a quality alternative for customers looking to
save money."
Write to Sarah Nassauer at sarah.nassauer@wsj.com and Sharon
Terlep at sharon.terlep@wsj.com
(END) Dow Jones Newswires
June 15, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.