Wal-Mart and P&G: A $10 Billion Marriage Under Strain
As both companies face stalling growth, the big-box retailer challenges the consumer-products giant with more store brands, lower prices and less shelf space
Wal-Mart has been aiming to cut down clutter in its stores. Above, customers shop in widened aisles at a Wal-Mart Supercenter in Springdale, Ark. PHOTO: DANNY JOHNSTON/ASSOCIATED PRESS
Last year, executives at Procter & Gamble Co. were alarmed whenWal-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.
At Wal-Mart, many leading consumer-product brands are being upstaged by items that are newer or less expensive. PHOTOS: THE WALL STREET JOURNAL
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 withAmazon.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.
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Procter & Gamble’s Tide detergent has long been an iconic presence on Wal-Mart’s store shelves. PHOTO: JOHN GRESS/REUTERS
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 giantMondelez InternationalInc. have said the retailer’s efforts to cull some products from shelves has dented sales.
Mondelez Chief ExecutiveIrene 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.”
