Gillette is shaving its prices by as much as 20 percent and focusing on its less-expensive products to compete with cheaper rivals, such as Dollar Shave Club. And the move is rattling investors, according to The Wall Street Journal.
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But Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business foreshadowed the razor giant’s move, calling price sensitivity for personal products “the new normal” in this October 2015 piece, “Consumer Goods Behemoth Faces Pressure.”
For years, Gillette owner Procter & Gamble had thrived by charging a premium price for premium brands, Kass said. Then, things changed. More and more people began treating consumer goods like interchangeable commodities. P&G, Kass says, has been slow to adjust.
“It’s basic economics that manufacturers like Procter & Gamble could raise their prices when their goods were relatively inexpensive,” Kass said.
That’s because, up to a certain price point, people don’t pay much attention to price increases of a dime or two. At those levels, the demand for things like razors and detergent is inelastic, to use the economic terminology. People will buy what they want despite small price moves. However, Kass added, “Procter & Gamble has raised its prices to the point where demand is becoming elastic.”
Kass noted in 2015, “exorbitant” prices for Gillette razors were leading people to seek out lower-cost substitutes, such as generic razors or the low-cost Dollar Shave Club, which was acquired by Unilever. Executives might be inclined to say price sensitivity is a temporary blip, caused by the recent recession. But with the economy steadily improving, it appears that price sensitivity is the new normal.
To bring prices into line with those of its competitors, Kass said, P&G will have to make its manufacturing processes significantly more efficient or reduce its profit margins on razors.