P&G MERGER PORTENDS CHANGE

Jon Springer / Additional reporting: Liza Casabona

Now that Procter & Gamble and Gillette have announced their marriage, retailers are preparing to dance with the bride.

Whether that becomes a reason to celebrate will be determined at least in part by retailers' comfort with the additional influence in pricing and strategy the combined companies would wield, observers told SN.

The $57-billion merger of P&G, Cincinnati, and Gillette, Boston, announced Jan. 27 and set to close this fall, would create a powerhouse in the health and beauty care, cleaning and general merchandise aisles with 21 brands that generate $1 billion or more in sales per year. While P&G talked mainly of the match of cultures, the array of brands, and the opportunities for synergies and international growth the merger would provide, observers speculated on retail motives, and debated whether it could spark a resumption of merger activity among consumer goods companies and among retailers.

"This will put together a really powerful consumer products company with a tremendous breadth of product. Two sterling companies, with sterling product lines," Roy White, vice president of the General Merchandise Distributors Council, Colorado Springs, Colo., told SN. "Their leverage in the marketplace, for all types of retailers and wholesalers, is going to be that much stronger."

While some contended the companies combined for the purpose of gaining additional clout in negotiations with retailers like Wal-Mart Stores, others saw it as a deal that helps both entities. Wal-Mart, Bentonville, Ark., is the largest single customer for both Gillette and P&G, and the combined companies do around $10 billion in annual sales at Wal-Mart.

Bill Bishop, president, Willard Bishop Consulting, Barrington, Ill., described P&G as a vendor that prefers "retailers focused on selling," as opposed to those who rely heavily on vendor dollars for promotions and slotting. The additional strength of P&G, Bishop predicted, will accelerate that focus on selling, and benefit those most comfortable with this arrangement.

"Good operators in every channel are going to see some benefit as Procter & Gamble just has that much more weight in their selling bag and more to bring to the market with skill and efficiency," Bishop said. "That says to me that the retailers who are focused on selling and do the best job working with Procter are going to be the disproportionate beneficiaries.

"It's one more straw in the wind that is going to make it important for retailers to focus even more energy on selling and less on buying," he continued. "That's a model Procter & Gamble has taken to the market, and they've stuck to their guns pretty well and sold a lot of product that way. In that sense it will help to accelerate change in the retail community."

However, one distributor described Procter as "less flexible" and more of a "big brother" to retailers than Gillette.

Burt P. Flickinger III, managing director of Strategic Resource Group, New York, said Procter and Gillette have "allocated far too many resources to Wal-Mart," and predicted the supermarket and drug channels would benefit as concern rises over Wal-Mart's private-label potential. Wal-Mart's gaining control of White Cloud, a one-time P&G brand whose trademark expired after P&G put its efforts behind its leading Charmin Ultra brand, is one such example, he said.

"There's some cause for concern that Wal-Mart's going to be developing their own brands and proprietary products," Flickinger told SN. "Wal-Mart still needs brands, but they are becoming less of a priority."

Recent sluggish sales at Wal-Mart, excluding fuel, food and pharmacy, have alerted consumer goods companies to reallocate their resources in the food and drug channel, Flickinger added.

Wal-Mart declined comment to SN on the deal.

To be sure, that's not a point of view that all observers hold. Jason M. Gere, an analyst for A.G. Edwards, New York, argued the deal would enhance P&G's relationship with Wal-Mart, noting that the top brands of both Procter and Gillette "already have earned better shelf space and in-store promotions," which appeals to Wal-Mart as it attempts to grow category sales through better products. "Overall we see the deal enhancing what is a strong relationship between two (actually three) great operators," Gere said in a research note. "If there is any pricing pressure to come out of this deal, maybe it will happen within the drug store and supermarket channels."

Gary Giblen, director of research for C L King, New York, told SN: "I think it was done mainly to affect the balance of power vs. Wal-Mart -- but that would also affect the big three [supermarket] chains."

Another analyst, Robert T. Campagnino of Prudential Equity Group, New York, in a research note said the merger was "a negative development over time for food and drug retailers. ... We see this as a continued shift in power away from the food retailers and back to the manufacturers."

Supermarket retailers noted the deal combined two excellent vendors. In a television interview last week, Larry Johnston, chief executive officer of Albertsons, Boise, Idaho, said his company could benefit from the efficiency of fewer points of contact with vendors. Gary Rhodes, a spokesman for Kroger, Cincinnati, told SN, "We view this announcement as a merger of two well-respected, consumer product companies that have succeeded by focusing on the needs of their customers and consistently delivering quality and value through their brands."

The merger, which is subject to regulatory and shareholder approval, would be the largest in P&G's history and reminded many in the industry of Kraft's acquisition of Nabisco. (Both Nabisco and Gillette were run by James Kilts at the time of their mergers. Kilts, Gillette's chairman and chief executive officer, will join the P&G board of directors and become a vice chairman, the companies said).

Some saw the agreement as a signal there would be additional mergers in the CPG arena -- and perhaps, an answer from the retail side. Business mergers have perked up since the November elections, analysts said, reflecting increasing boardroom confidence. "This could lead to something like Colgate buying Church & Dwight and other deals," Giblen said.

"The relative growth of the CPG marketplace is making it absolutely mandatory for consolidation to continue," said Bishop. "This [Procter and Gillette] merger is a big one, but more are probably an inevitable thing in our world."

Mergers among supermarket retailers in the late 1990s, Giblen added, were driven in part by a need to gain additional clout with product vendors, and should vendor consolidation continue, retailers may revisit that avenue.

"As branded manufacturers get more size and scale it makes sense that retailers would look to do that too. This could really stimulate a major new round of [merger] activity in the supermarket sector over the next year or two," said Flickinger, explaining that large companies like Kroger and Albertsons may look to merge with regional retailers such as Pathmark, Giant Eagle, Price Chopper, Raleys, Bashas' and Harris Teeter.