Reading the Wall Street Journal piece about the battle between Walmart and P&G over laundry detergent is like watching two sloppily obese drunks attempt to maul each other in a bar fight.
Walmart is now offering a German brand of laundry detergent – Persil – in order to get pricing leverage over P&G who’s Tide is the commanding market leader. “ ‘Wal-Mart never wants to have a weak balance of power against a supplier,’ said Susan Lee, a former P&G employee who is now a partner at consulting firm Simon-Kucher & Partners, where she works with consumer-products makers and retailers. ‘If Persil sales do well, Wal-Mart can shift the balance of power.’ ”
Far less than 50% of the money P&G charges the likes of Walmart actually goes to the value added part of their business – the cost of actually making the soap. The bulk of it goes to non-value adding waste, with marketing and advertising, mega-ERP systems and the paychecks written to legions of folks in headquarters buildings sucking up most of the cash. Nonetheless, “Last year, P&G was able to effectively raise prices on some Tide varieties by reducing the amount of detergent and number of loads per container.”
The value provided to the customer, it seems, has precious little to do with pricing at P&G.
Walmart, of course, is even worse. The price it charges is anywhere from 2 or 3 all the way up to 10 or 12 times the price it paid for the goods. The value Walmart adds for customers in exchange for all of this markup, however, rounds off to virtually nothing. The chances of anyone working at the local Walmart giving a customer any help whatsoever with the question of whether Tide or Persil is better for their particular laundry situation: Zero. The most a Walmart employee will do to help is to tell you which aisle the laundry detergent is on.
Since Walmart can’t help the customer in any way, shape or form, the customer will do the obvious – make the decision based on other inputs and buy the product wherever it is cheapest, be that Amazon, the Dollar Store or elsewhere. Walmart only gets the sale – only deserves to get the sale – when it is cheapest. Since customers won’t pay the waste of its business model – massive distribution centers and the expense of vast brick and mortar stores – there is no one left to pick up the tab other than suppliers. Hence the strategy of pitting suppliers against each other.
This story, in a nutshell, describes just how economically dysfunctional big corporate thinking is. It also describes the huge opening lean companies have before them. These guys think pricing is driven by ‘whatever the market will bear’ rather than on the basis of value created for customers. They think customers are largely dim-witted sheep to be manipulated by marketing, rather than intelligent decision makers. They think supply chains are zero sum games and that profits derive from gaining the upper hand on either suppliers or customers, rather than from sharing in the benefits that come from creating superior value for end customers.
What it all adds up to is opportunity. I have no idea how the laundry detergent business will shape up, but the downward slope of things for both Walmart and P&G will inevitably continue. Laundry soap will, sooner or later, end up in a Dollar Shave Club model or something similar in which someone out there – some lean producer keenly focused on value – will be making and selling some pretty good stuff without all of the bloat, waste and nonsense of the likes of Walmart and P&G. It will inevitably be provided by someone focused on customers; and by someone who has no respect for those fat, drunken brawlers and their outdated economics who have missed the point of lean thinking and the true power of the Internet entirely.