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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

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By Sarah Nassauer and Sharon Terlep

Updated June 14, 2016 7:57 p.m. ET

Last year, executives at Procter & Gamble Co. PG 0.45% were alarmed when Wal-Mart Stores

Inc. WMT -0.23% 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 HENKY -0.58% . 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 with

Amazon.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.

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 giant Mondelez International Inc. have said the retailer’s efforts to cull

some products from shelves has dented sales.

Mondelez Chief Executive Irene 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.”

Appeared in the June 15, 2016, print edition as 'The $10 Billion Tug of War Between Wal-Mart

and P&

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