Why Price Fixing Is A Dangerous Game
Last year, EU regulators fined P&G and Unilever to the tune of $456 million for price fixing laundry detergents in eight European countries. Henkel, their competitor blew the whistle on the cartel.
This begs several questions. First, how is it that two of the world’s most respected corporations are involved in an act that is unequivocally illegal? My educated guess says that P&G and Unilever top management knew nothing of the conspiracy until the regulators came knocking. Collectively, these giants employ 300,000 people, the vast majority of whom are committed to delivering results ethically. I suspect the price fixing was done by several zealous outpost employees who stepped over the line to guarantee millions in profit to the mother ship.
Let’s be clear on this: the perpetrators of the crime were not underlings of P&G and Unilever. Regional underlings do not orchestrate an eight country price cartel. So, knowing that price fixing is unlawful, why would these European executives put their companies and themselves at such risk?
My take is this: they knew their actions were illegal, but they did not view them as immoral. They either colluded to collectively benefit from higher prices or negate nasty price wars that ravage bottom lines. In their minds, they weren’t gouging the consumer; they were simply ensuring their products garnered a fair price. If the public didn’t want to pay that price, they could always buy Henkel or a private label brand.
Behind this logic lies a fundamental issue within the business profitability model. Corporate overhead and other expenses are generally covered by 80-90% of annual sales revenues – it is the last 10-20% that generates the surplus for the bottom line. As much as ‘branded’ companies pride themselves on being differentiated ‘value-added’ marketers, they continually exchange ‘price buyers’ with their competition. In the heat of battle, there is a hell of an incentive to discount products for easy market share, even by the most disciplined of marketers.
In Canada and the United States, there is so much ‘trade money’ offered and generated by volume incentives, co-operative advertising and in-store promotion schemes, that aggressive retailers channel these funds into lowering a brand’s selling price to generate store traffic. Picture the reaction of a supplier’s top management when they witness their brand featured at a selling price below what the retailer paid. Now imagine how their rivals feel about that. The natural competitive reaction is to join the discount fray and recover lost market share.
At Jacobs Suchard (now owned by Kraft), I faced this issue in the fiercely competitive coffee market. We dealt with the challenge by ensuring that our competitors understood how we chose to compete. I communicated our philosophy through annual reports, speeches and media interviews that made it clear to the market that we were brand differentiators, keen to compete on product features. I also made no bones about my eagerness to defend market share at all costs against ‘non-strategic’ competitive aggression. ‘Non-strategic’ was the pseudonym price aggression. This was an indirect means of telling competition to “play ball.”
What Not to Do
So while price fixing may continue, it’s not a practice any business leader should participate in. Never meet with competitors to discuss pricing. And if you do, don’t do it in restaurants, coffee shops or convention venues. According to recent court filings, the Canadian Competition Bureau is claiming that the CEO of Nestle Canada handed a competitor an envelope stuffed with his company’s pricing information, saying: “I want you to hear it from the top – I take my pricing seriously.”
Subsequent class-actions relating to the allegations have been settled in Canada, with several chocolate makers including Nestle, Mars, Hershey and Cadbury agreeing to pay more than $20 million. As you might guess, that CEO of Nestle is no longer with the company. He lost his job and his reputation.