Vons fights new Procter & Gamble pricing strategy.

P&G: Supermarkets profit unfairly on 'trade allowances'

The Vons Cos., Southern California's largest retail grocer, has taken a lead role in a supermarket soap opera where the outcome could fundamentally change the way retail and wholesale grocery firms do business.

Vons, based in Arcadia, is fighting a new pricing strategy adopted recently by Cincinnati-based Procter & Gamble Co., the nation's largest non-tobacco consumer products maker. The new strategy represents a basic change in the way P&G sells its goods to grocery wholesalers and retailers, and could lead to the end of the traditional grocer's marketing strategy of attracting customers by periodically featuring sales on certain popular products.

More significant to retailers and wholesalers, the new policy, if instituted on the wide scale envisioned by P&G, could effectively wipe out a major source of income to those vendors, perhaps threatening their very livelihood.

"If Procter can push this through, our bottom line is going to take a real hit. We really have no idea what we could do to replace those earnings," said a top executive with a West Coast wholesale grocer who had just left meetings where a response to the P&G policy was being discussed.

Said Tim Simmons, editor and publisher of Supermarket News, in a recent editorial in the grocery industry trade publication: "For many retailers, this scenario is a nightmare of the first order."

At the heart of the dispute is a sales practice known in the grocery industry as a trade allowances. In simplified form, trade allowances are a discount given grocery retailers and wholesalers by manufacturers such as P&G that are designed to support special in-store product promotions. They allow grocers to sell basic items such as toilet paper, soap and detergent at reduced prices for a specific time period without the retailers or wholesalers having to underwrite the cost of the sales.

However, manufacturers have become increasingly unhappy with how stores and wholesalers have handled trade allowances. The manufacturers charge that little of the money provided by the allowances actually goes into promotions and other product support. Instead, they say, stores abuse the allowances, to the point where most large wholesalers and retailers rely upon them for at least half their annual operating income.

Trade allowances take a few different forms:

* The manufacturer's products are sold to supermarkets at a discounted prices. By not passing the savings on to its customers, manufacturers claim, supermarkets often make a windfall profit on the full-priced sale of discounted items.

* The manufacturer gives supermarkets cash to fund advertising and in-store promotions (usually based on prior volume of goods sold). Much of this money is pocketed by supermarkets, according to manufacturers, rather than used for product support.

* "Bill backs" are payments made by the manufacturer to supermarkets to reimburse them for cash outlays made to underwrite advertising campaigns and in-store promotions. Manufacturers argue that supermarkets routinely overbill and profit from the difference.

Privately, wholesale and retail sources agree with these scenarios. P&G's strategy is to end the allowances on a certain percentage of their products and thus eliminate some of the worst abuses. Some 40 percent of P&G products are now sold to customers under the new pricing strategy; P&G says it has no specific product percentage goal for the strategy, but insists it will not eliminate all allowances.

The new strategy will also result in considerable operational efficiencies within P&G, company officials claim, which should lead to lower prices to consumers.

Vons is being identified by industry sources as one of the staunchest opponents to the P&G plan. Cautious in discussing its battle with P&G, Vons, through a spokeswoman, characterizes the dispute as "a difference in viewpoints."

Vons had fiscal 1990 sales of $5.3 billion. P&G's sales for 1991 were $27 billion.

"We do remain with a different attitude toward allowances than Procter & Gamble," said Vons spokeswoman Vickie Sanders. "We're a promotional operation, and their pricing strategy doesn't enhance promotions."

Sanders said Vons believes the strategy helps stores like Wal-Mart, which offer discount prices and don't depend upon special sales or in-store promotions. Vons and P&G are currently discussing the new policy, she said, but there has been no resolution.

Both Vons and P&G refused to discuss details of the negotiations. Though Vons denies it, sources claim that the store has stopped carrying certain P&G items in retaliation for the loss of trade allowances.

Other retailers quoted anonymously in Supermarket News said they were also considering retaliating against P&G by refusing to order certain P&G products.

Cook is managing editor for the Orange County Business Journal