Even some of the best grocers run with paper-thin margins of just a couple percent. So key players such as SUPERVALU
P&G announced on Monday that it had raised prices on its Pampers diapers brand by 7%, while its Pampers wipes climbed 3%. Prices of its Charmin and Bounty paper products ticked 5% higher. Rival Kimberly-Clark also announced its own price increases of 3% to 7% on its Huggies diapers and wipes, following the company's recent 9% dip in quarterly earnings. Clorox
These price increases are tentative steps for companies offering branded consumer goods, which have suffered from consumers' willingness to trade down to cheaper private-label products during financial hardship. With consumers already beleaguered by increasing gas and food prices, such companies have to tread carefully. In tougher times they fought to maintain market share with strategies like smaller packaging sizes while maintaining the same prices.
Still, as fellow Fool Rich Smith points out, parents often refuse to trade down on products for their babies. Diapers have pricing power. But P&G is leaving the price of its lower-priced Luvs brand unchanged, presumably to capture some of those willing to trade down, not to a private label, but to another branded category.
In a still more tenuous position are the grocery retailers themselves, who compete largely on price and not differentiation. How much of these price increases they have to eat themselves remains to be seen, but they're clearly in a weaker strategic position than the consumer goods companies or retail behemoths such as Wal-Mart
Of course, that doesn't mean there aren't bargains in the grocery aisle. I'm partial myself to SUPERVALU, which is deleveraging itself with its substantial cash flows. Trading at just nine times this year's earnings and with a clear value driver in the deleveraging, shares of SUPERVALU are in real bargain territory. So who do you think wins from price increases and who loses? Let me know in the comments below.
Jim Royal, Ph.D., owns shares of P&G. Wal-Mart is a Motley Fool Inside Value selection. Wal-Mart is a Global Gains recommendation. Clorox, Kimberly-Clark, Procter & Gamble, and Wal-Mart are Income Investor picks. Motley Fool Options has recommended buying calls on SUPERVALU. Motley Fool Options has recommended a diagonal call position on Wal-Mart. The Fool owns shares of Clorox, SUPERVALU, and Wal-Mart. 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.