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P&G slashing prices to compete against store brands

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KAI RYSSDAL:Procter & Gamble announced a healthy quarterly sales gain this morning. Seems though that the increase was mainly the result of heavy promotions and lower prices — so the company’s profit actually dropped 12 percent. You could fairly say as P&G goes, so goes the rest of the consumer products industry. And, perhaps, prices for a lot of other things that we buy.

Here’s our senior business correspondent Bob Moon.

Bob Moon: It all began when the bad economy forced many strapped consumers to turn to the cheapest prices they could find. Store brands became an increasingly popular option — the world’s biggest consumer-goods company took notice and started slashing prices.

Bill Chappell: Procter & Gamble’s the 800-pound gorilla, and once the 800-pound gorilla decides to move, everybody else has to follow.

Analyst Bill Chappell tracks the industry at Suntrust Robinson Humphrey. He points to one example: The promotional price for a 50-ounce bottle of Tide sank to as low as five bucks in the past few months. Chappell says that kind of deep discounting has nearly closed the gap on store brands, and left rivals with no choice but to price accordingly.

Chappell: So it’s kind of been a trickle down effect, where once P&G started this a couple quarters ago, all of the competitors, from Colgate to Clorox to smaller companies, have had to match those type of promotions and pricings.

Now the question is, will this create a “new normal” in the minds of consumers — possibly beyond daily necessities? Marshal Cohen is chief retail analyst for NPD Group.

Marshal Cohen: When they see that there’s deflationary prices in the stores, they tend to expect that from other products.

Already, though, he says the price war is cutting into profit margins. Trouble is, companies won’t find it easy to backtrack.

Cohen: What happens is, the consumer says, “Whoa, whoa, wait a minute. I don’t want… Do I really have to pay that much for that? Maybe I will brand switch again.”

So enjoy the lower prices on the things you need — but Cohen says brace yourself for the things you want.

Cohen: What we may see is the everyday commodity products at lower prices, so we will have price deflation. But on the other side of the equation, impulse purchase items, you’re actually going to see an increase in prices, in some of the things that the consumer doesn’t have such high frequency of usage.

It might just all even out in the end.

I’m Bob Moon for Marketplace.

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