Is the Tide Turning?

The following article was on the front page of the Wall Street Journal today (August 6, 2009):

TIDE TURNS ‘BASIC’ FOR P&G IN SLUMP

By Ellen Byron

DALLAS—Procter and Gamble Co., under assault by penny-pinching consumers, has quietly rolled out a version of Tide detergent that the company freely admits isn’t “new and improved.”

The product, Tide Basic, is currently for sale in about 100 stores throughout the South. It lacks some of the cleaning capabilities of the iconic brand—and costs about 20% less. Its very existence is one of the most telling signs to date of how the sour U. S. economy is forcing mass marketers to shift course…

The article goes on to state how Tide powder has dropped 9% in market share since 2007 (from 34% to 30%) and Tide liquid has dropped 19% (from 31% to 26%).

As I read the article, I could not help but be struck by how much this parallels the four major brands I work with closely. All four of them have a broad and rich product lineup with some truly amazing high-end models.  All four of them offer their dealers a strong menu of dealer growth and enrichment programs. And all four of them have, until recently, put their gross margin eggs in the high end of their product line up.

Having worked for over 20 years for one of the largest global manufacturers of HVAC equipment at both the distribution and manufacturing levels, I can tell you that the factories rake in gross margin in direct proportion to the AFUE or SEER of their products. That is to say, as SEER and AFUE go up, so do the gross margin percents (as well, of course, as dollars).  If distributors (or even dealers) knew the amount of gross margin on some of the “trophy” models made by some manufacturers at the factory level, their toes would curl! Of course, distributors copy that gross margin model as they re-sell the products to contractors (getting higher gross margin percents and dollars on trophy units), and contractors likewise do the same to their customers. So by time you compound extra gross margins three times, it is no wonder that trophy units are becoming price-bloated dinosaurs in a new post-Jurassic market.

I have counseled one of my manufacturing partners over the last two years to rethink their pricing strategy (at least in certain US markets) as their trophy pricing was costing them market share. They have finally woken up to this fact and are now aggressively pursuing the market with new pricing tiers, but not until after they took what most manufacturers would consider a staggering hit to their share of market.

So what does all of this have to do the average HVAC contractor? Just this (here, here and here).

I want to believe that when the economic volcanoes and financial asteroids stop pummeling us that life will go back to what it was before the CRASH, but history shows us that 65 million years ago, when the Chixalub Asteroid hit just off the Yucatan Peninsula, things changed drastically and rapidly and a whole fauna of complex biological organisms (the dinosaurs) died off and a new bunch of tiny leaf-munchers (the mammals) took over . I don’t think the major brands will become extinct (although I cannot be 100% certain of that!), but they will have to evolve quickly to survive, and I think they are beginning to do that.

The question that remains is, What will the contractor community look like after the asteroid dust settles? Will contractors still charge head-long into the consumer financial environment with a trophy approach (“good, better best” and so on), or will they evolve and learn how to fit their offering to their customers quickly and efficiently and thereby survive?

The future does not belong to the cheapest. It belongs to the smartest!