Procter & Gamble (P&G) is a leading company in consumer goods based in America. In the year 2012, it made sales worth $83.68 billion, and it was ranked fifth on the list of most admired companies by Fortune magazine (Pg.com n.pag). P&G was formed in the year 1837, and since then it has grown tremendously to emerge as a leading company in the consumer goods industry.
For P&G to stay in the competition, it had to reduce its price per unit quantity since they were losing its market share to the retailers who had introduced cheaper products. P&G resulted to increasing its promotional and advertising expenditure to revive its sales. Promotional expenditure over the years has accounted for a large share of the marketing budget in the fast-moving consumer goods industry (L.Charles, 300). These strategies affected their overall growth as a company because of the increase in operational costs (Pg.com n.pag). This strategy by P&G will be around for some time because of the competitive pressure in the fast-moving consumer goods industry. The volume growth of products by P&G will be present, but there will be no proportionate profit growth (Prusty 223). P&G is another strategy to protect its existing products introduced variations of these products. The goal behind this move was to retain the existing market share while attracting new customers.
These variation products served the purpose of reducing competition while competing with the cheaper products that were rolled out by the retailers. This move by P&G is risky because an existing consumer of a brand may move to the new product leading to an overlapping effect. The new product collects huge revenues for the company while the revenue of the existing product falls (L. Charles 301). To deal with this eventuality, P&G increased advertisements and promotions to improve the sales of its products in the market. Product variation is necessary for a competitive industry. One of the negative impacts of product variations is that it is seen as a temporary solution. P&G opted to reduce prices of products and sell larger volumes of products with the same price warding off competition based on price. This move has helped in retaining customers, but it has affected the profitability of the company. The amount of earnings earned by P&G has reduced as evidenced by the last eight quarters (Walit n.pag). P&G also resulted in massive marketing of the existing product in the shampoo market and introduced another product to compete in the market. This was a smart move by the management because it targeted new consumers and the already existing consumers.
Private labels have been previously linked to low-quality products. This phenomenon has changed over the past years. Retailers who produce private labels have improved their quality tremendously that they can compete with major brands. Retailers have taken the opportunity to create strong brands of their own. This move has increased the market share enjoyed by the private labels. Currently, private labels account for most of the fast-moving consumer goods sold in the market (Kumar 202). Retailers develop private labels as a strategy to keep them ahead of the competitors, and finally emerge as market leaders. This has brought different private labels in the market owned by different retailers who want to wade off competition. Private labels are posing an amount of threat that multinational companies cannot afford to ignore. Private labels have increased the power of retailers. Consumers are more price-sensitive, and retailers are enjoying profits at the expense of manufacturers. Private labels have taken part of the market share from P&G because they are cheap, and they enjoy prime spaces in retail outlets. Private labels are also enjoying the brand loyalty they are getting from the brand loyalty of a retail outlet.
Private brands pose a threat in taking over some market share from large multi-companies (Kumar 202). Despite most of the arguments leaning on the success of the private labels, analysts argue that private labels perform well when the economy is suffering. P&G has the challenge to stay ahead of the retailers through innovation to establish and retain a strong relationship with their consumers. P&G can compete with private labels. This is possible because they are producing private-label goods, as well. Top brands like P&G often adopt strategies that aim at building a good relationship with the customer, which promotes their goods in the market. Tough economic times and reducing market share have pushed top brands to cut their prices in the hope of edging out the competition. This move means that consumers get to enjoy products at a lower price, and the top brands increase their volume sales (Prusty 223). P&G is one of the top brands, which have cut down their prices as a strategy of warding off competition. The big question remains. Dose a reduction in price result at the end of the competition?
Price wars are not favorable to companies in the short term because profit margins reduce threatening survival in the market. In the long-term perception, price wars favor the top brands because they can afford to survive amidst reduced profits. Consumers will lose in the long term because with fewer firms in the industry prices tend to increase rather than remain stable (Walit n.pag). The price increase might pass the initial price before the start of price wars. P&G started the price war to expand its market share and edge out the competition. P&G anticipates that the volume growth will compensate for the reduction of the prices among its prices. This move reflects the focus of P&G from a value-based company to a volume-based company. Most likely, the turnover of the company will increase considering the past success when they reduced the prices of Ariel sachets in India. P&G hopes the same success will result in the other products (Prusty 223). This move has been facilitated by the knowledge that customers are price-sensitive, and they will buy larger volumes of products at cheaper prices. It is argued that price reductions on smaller packages mostly result in economies of scale that favor affordable large packs (Dyer 312). The shift to a volume-based company will work in favor of P&G considering the massive marketing campaign they have started.
The level of competitiveness being experienced in the fast-moving consumer goods industry will eventually determine the structure of this industry. The key to remaining relevant in the industry is to have the right reaction strategy. P&G will survive this price war because they are doing it for the future advantage of the organization. As described in this paper, positive results have begun to be experienced. During harsh economic times, a volume-based strategy is bound to succeed more than a value-based strategy.
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Kumar, Nirmalya. Private Label Strategy: How to Meet the Store Brand Challenge. Harvard: Business Review Press, 2007. Print.
L.Charles, Charles W. Strategic Management: An Integrated Approach. South-Western College: Pub, 2007. Print.
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Prusty, Sadananda. Managerial Economics. Motilal: UK Books of India, 2010. Print.
Walit, Vyas. “FMCG Industry: Rising ad spend, competition to hit margins.” The Economic Times. 2010. Web.