168-Look Out Below

The small consumer battery business is in the midst of a price war. The short-term losers in this war will be the industry leaders. But the longer term losers would be the low-end Price Leader competitors in the market.

Energizer Holdings is the industry leader’s market share, with a 39% share. Procter and Gamble follows closely with its 36% share of the market with its Duracell line. Low-end private label suppliers make up most of the remaining market. (See the Symptom and Implication, “Most competitors are offering low prices after a period where leaders held prices high” on StrategyStreet.com.)

The price wars have been a feature of this industry over the last couple of years. In the latest move, Procter and Gamble has offered a discount-in-kind for its packages of batteries. The former 20-pack package will go to 24 batteries. The 16-pack will go to 20 and the 8-pack will go to 10. All of these changes in batteries-per-pack will come without an increase in price for the package. So, the price per battery in these packages will fall 20% to 25%. Analysts estimate that this will translate to an 8% to 10% reduction in average price for the entire Duracell line. This is, indeed, a significant price reduction.

Energizer has no choice but to follow this Duracell price reduction. Consumers have shown little loyalty to either brand when there is a price difference involved in the purchase decision. Energizer will either follow or lose share quickly. It will follow.

Any time an industry leader loses 10% of its revenues, without reducing its cost by an equivalent amount, the pain on the bottom line is extreme. The average business unit makes a pretax return on sales of about 9%. The batteries are more profitable than average but losing 10 percentage points off your previous margin structure will hurt anyone. So, both industry leaders, Duracell and Energizer, will suffer in the short term.

You might ask yourself, why would two companies who, between them, own 75% of the market engage in a price war with one another? In normal situations, they would never do this. But, battery prices have been high for a while. The industry leaders have held a price umbrella over cheap, private label, brands who have gained share over the recent years. This price war is really aimed at the Price Leaders. They will be the long-term losers in this war.

The private label brands do not have the margin structure that will allow them to take equivalent price reductions in order to keep a significant price advantage over Duracell and Energizer batteries. This price war will cripple them and reduce their ability to maintain the quality of their products and services.

Buy your consumer batteries now. Within a couple of years, the cheap private label brands will have suffered and fallen on hard times. Then, they will gladly follow the inevitable future price increase that the industry leaders will institute to make up for the margin losses of today.

This periodic price war to knock back private label competitors is a common pattern in consumer products. You will see it frequently with well-known consumer brands in cereals, soups, cigarettes, detergents and other products. In these markets, high prices support high marketing costs and high margins, and allow private label suppliers to grow market share for a period of time. Eventually, the branded companies reduce prices, sometimes drastically, to remove the private labels’ price advantages and drain them of market share (see the Symptom and Implication, “As large competitors match low prices, other competitors face difficulties” on StrategyStreet.com).

Posted 2/8/10

Update:

Duracell and Energizer have both gained market share in the small consumer battery market over the last several years. Both have a market share close to 38%, with Duracell slightly larger. Duracell prices are slightly lower than those of Energizer, which may account for Duracell’s greater market share growth. Battery experts give the nod to Duracell for longer life and to Energizer for leakage control. However, most experts conclude there is little to choose between these two battery companies. Clearly, the private label competitors have gradually lost share over the last 12 years while the two industry leaders have strengthened an already dominant market share position.

The two industry leaders have used their superior Value Proposition and pricing pressure to keep private label suppliers from creating a hostile market. See HERE for more explanation.

9/22

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