P&G is raising prices in September - here's why

Yahoo Finance’s Brian Sozzi sat down with P&G Vice Chairman and COO Jon Moeller about the company’s latest quarter and 2021 outlook.

Video transcript

BRIAN SOZZI: P&G easily beat sales and earnings estimates this morning. But more important than that, P&G said it will begin raising prices in mid-September. The culprit you ask, commodities price inflation. I spoke with P&G Vice Chairman and Chief Operating Officer Jon Moeller about the quarter and his decision to raise prices.

JON MOELLER: We're seeing a return to higher levels of consumption in categories that suffered as a result of the pandemic. For example, dry shaving, as people stayed home, they didn't shave as much. Certainly our away from home business that serves hotels and restaurants is starting to see a little bit more life. And, you know, some of the beauty businesses like deodorant, for example, the market had declined a little bit. And that's beginning to pick up on the margin.

The other good thing is that the businesses that benefited from the change in consumer behavior that occurred during the pandemic continue to benefit. Our home care business, for example, in the last quarter, sales were up 17%. So we've always said this is a long-term tectonic shift, certainly at the margin in terms of people's focus on health, hygiene, and a clean home. And that probably doesn't end either when they leave home.

I'll certainly have my hand sanitizer and surface cleaner close at hand as I return to the office when that happens. So, again, there's benefit from that increased focus. People are still spending more time at home, even as we transition. So that's more jobs to do at home, washing of dishes, preparation of meals, et cetera. And they're starting to resume consumption of items that benefit them more outside the home.

BRIAN SOZZI: Yeah, full disclosure, Jon, I've got about 15 years worth of hand sanitizer at my home. So I'm good for right now. But what happened? You know, I think there's this view on the street that late in the latter part of this year, in the second half of this year, growth rates will slow down in some of those categories that benefited from the pandemic. What does the back half look like for P&G?

JON MOELLER: We do expect some slowdown in growth rates but still growth in those categories. And while those tailwinds will dissipate in a couple of those categories, we expect renewed headwinds, as I was saying, in categories that struggled during the pandemic. The same is true with markets and channels. So it's going to be a little bit of push and pull. And there will be some volatility as we go through it.

But, you know, if you look at two markets, our two largest markets, the United States and China, that are arguably either beginning a transition in the case of the US or are further along in the transition to a new normal in the case of China, in the quarter we just completed, the US grew 7%. China grew 22%, albeit off a base that was partly affected by lockdown. If you look at a two year stack basis, it was about 12% growth.

So we're seeing, in aggregate, a continued growth as we slowly transition to the new normal.

BRIAN SOZZI: The buzz word this earnings season early on appears to be asynchronous, that some economies are coming back faster than others. Do you see that in your business? And what economies are growing quicker than others right now?

JON MOELLER: We definitely see that in our business. The US economy is growing very well and shows signs of growing even faster as we go forward and get more people vaccinated. China is growing very well. On the other hand, markets that unfortunately there hasn't been as much progress made for many reasons in dealing with the vaccine and, in fact, many markets headed back into lockdown. Many of the markets that I have profit responsibility for like India, like Turkey, like Brazil, it's still very tough sledding.

And we have a lot of work to do as a global society to address that. So it is a bit, unfortunately, asynchronous at the moment.

BRIAN SOZZI: P&G out also today, Jon, saying it will raise prices. Where are you raising prices? And why are you raising prices?

JON MOELLER: We announced a price increase in three categories in the United States, baby care, feminine care, and adult incontinence, to cover increases in commodity costs, primarily in the petro complex. And that's kind of routine, a routine part of our business model. Commodity cost increases generally affect all manufacturers, including private label manufacturers. And so we expect to be able to carry those price increases through once they're launched in September.

BRIAN SOZZI: What's the earnings benefit from doing that?

JON MOELLER: Generally, the price increase is offset by the commodity increase. So there's not-- it's-- I'm over-generalizing and making it simple, but it's essentially earnings neutral.

BRIAN SOZZI: Is there one category that is going to get a higher price increase than others? And what is it about that category?

JON MOELLER: Well, pricing's a broad topic. And we routinely price behind innovation. That's our primary mode of pricing. And in doing that, we launch products that have a higher value impression to consumers, albeit at a higher price not a lower value impression. So our pricing mindset is tied up around our innovation mindset, which is the lifeblood of our company and our business and will continue to be going forward.

That creates, though, a positive cycle in terms of consumer and customer value that we want to maintain.

BRIAN SOZZI: Do you anticipate-- listen, a lot of folks out there remain on very tight budgets. Do you anticipate a volume hit as you take up those prices?

JON MOELLER: Sometimes there is. But, again, to the extent, we're talking pennies here. And to the extent that we deliver more value through improved performance or a better usage experience, typically, we can see volume increase not decrease.

BRIAN SOZZI: How would you grade the state of the US consumer?

JON MOELLER: Like almost everything in the United States right now, I would say mixed. But generally, you see increases in consumer confidence. You certainly have seen increases in retail store sales. And so broadly, as an aggregate, things are pretty positive.

BRIAN SOZZI: Before I let you go, is there one big innovation that is going to move the needle for P&G this year that you're pretty excited about?

JON MOELLER: There is a lot of innovation that will collectively move the needle. A good example is Dawn Powerwash, which we launched about a year ago. It's generated $150 million in sales in the last year and has been a big part of the 4% increase in market share for the Dawn brand in the United States. It simply does a better job in cutting grease and enables consumers to use less water in doing that. And there are those kinds of innovations across the portfolio. It should be an exciting year.

BRIAN SOZZI: Sales of Dawn Powerwash clearly on fire. P&G stock a little bit less on fire this morning after earnings up slightly here in the early going in today's session.