Image source: Wal-Mart.
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If you're a consumer products company, then chances areWal-Mart is your most important customer. Clorox , for example, makes more than a quarter of its revenue from this one retailer each year. The resulting dependence is critical enough that management believes it poses big risks to its business.
If Wal-Mart chooses to shift strategies by dropping the number of brands on its shelves or promoting competing private label brands, that would "harm the company's sales and reduce the ability of [Clorox] to offer new innovative and improved products to consumers," according to its 10-K report.
Procter & Gamble isn't quite as reliant on Wal-Mart, but the retailer is its single biggest customer, responsible for 14% of sales each year ($11 billion worth as of 2015). Unfortunately for P&G, many of Wal-Mart's latest initiatives run right up against P&G's interests in the way that Clorox warns its investors about.
Basically, Wal-Mart is trying to get back to healthy growth by improving the shopper experience on a wide range of elements including store layout and employee training. The changes seem to be helping: Customer traffic has edged higher for the last six straight quarters. Yet three strategic shifts are directly pinching P&G: brand variety, pricing, and store brands.
Image source: P&G.
According to a recent article in The Wall Street Journal, the two companies are "increasingly butting heads" as they try to get back to solid sales growth. Wal-Mart is whittling down the number of products that it offers, and while that makes for a cleaner look for stores, it also leaves less room to show off P&G's blockbuster brands like Gillette razors and Pampers diapers. In another point of growing contention, Wal-Mart is demanding lower prices on home products so that it can better compete against rival supermarket chains. To the extent that P&G yields on price, it means more customer traffic and revenue for Wal-Mart, but lower margins and perceived value on P&G's brands.
Finally, Wal-Mart is busy pushing its in-store brands, directly challenging P&G's dominance of the category in some cases. Last quarter the retailer credited its private label expansion into the laundry, home care, and paper goods products as helping it deliver comparable-store sales growth at its Sam's Club locations. At least some of those gains had to come at the expense of P&G brands like Tide, Dawn, and Bounty.
It should help that Procter & Gamble's portfolio is now down to 65 brands from 165 two years ago. Executives say these cuts are aimed at making the company more profitable, faster growing, and easier to manage. But they'll also help ensure that P&G gets enough shelf space for what's left of its portfolio.
As far as the challenge from store brands, P&G has to produce enough innovation in its categories to give shoppers compelling reasons to stick with its higher-priced alternative. With a huge budget dedicated toward research and development and a decades-long commitment to product innovation, the company should have a big advantage over retailers like Wal-Mart here.
P&G hasn't introduced a new hit product worth over $1 billion in annual sales in more than a decade, though. Until it raises its innovation game, it's not likely to turn the tide against market share losses, with or without help from its No. 1 customer.
The article Does Procter & Gamble Co Have a Wal-Mart Problem? originally appeared on Fool.com.
Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Procter and Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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