In today's Wall Street Journal, there is an article about P&G and Colgate. It says that the companies are beset with two problems:
1) Consumers are trading down from the brand name products of P&G and Colgate to cheaper store brands and private label products.
2) Due to the economy, people are cutting back on discretionary spending in general to save money.
So how did the two companies react to these trends? Both of them raised prices. This appears to have accelerated the defection and reduced unit volume even more. Yet, for now, the steps preserved near-term profits.
According to P&G CFO Jon Moeller, "While painful, pricing to protect the structural economics of our business is the right thing to do."
Protect the structural economics? What good is a strong economic structure if the customers go away?
Am I missing something here? Taking steps to accelerate the movement of customers to the competition? Raising prices at a time when customers are the most price sensitive? Trying to squeeze a few more pennies today which could ruin long-term prospects in the future?
This reminds me of an earlier blog I wrote. It talked about how financially oriented people often get in the habit of assuming the cash flow of the current business model will always continue to flow in. Therefore, job #1 is to squeeze as much profit as possible out of that cash flow.
Unfortunately, if you squeeze too many dollars out, the underlying economic model stops working. Customers will shift to a better economic model (for them), leaving you with a broken, obsolete model.
It sounds like Jon Moeller needs to read that blog.