Procter & Gamble's (PG) new CEO, Robert McDonald, steps into power just as the consumer products company faces a price gap with competitors—and a need to regain turf with new, less-premium brands. Procter reported earnings on Aug. 5 of $2.47 billion, down a surprising 18% from $3.02 billion a year earlier.
It's up to McDonald to navigate P&G through these choppy economic waters. The company saw volumes drop as it raised prices. Net sales decreased 11%, to $18.7 billion, while organic sales—which exclude currency changes, acquisitions, and divestitures—fell 1%. P&G said sales fell in several categories across its portfolio, as cash-strapped consumers chose lower-priced products. Procter was hit particularly hard in discretionary areas such as Pringles snacks, Braun electric shavers, Duracell batteries, Oral-B power toothbrushes, and its upscale fragrances. "They seem to be losing share in more places than they are gaining share," says Ali Dibadj, an analyst with Sanford C. Bernstein. "So it was a very disappointing quarter." P&G shares dropped nearly 3%, to 53.91.
In recent years, under outgoing CEO A.G. Lafley, P&G thrived in large part because of its patented trade-up strategy. Emphasis was placed on higher-priced products as it attempted to drive growth by getting consumers to migrate from, say, basic Tide detergent to Tide Total Care. But that strategy has caused some pain during the recession as consumers cut discretionary spending.
The company has suffered from having raised prices on popular brands over the past two years as it tried to offset higher commodity costs and foreign exchange losses. Company officials acknowledged during the conference call that price gaps between its products and cheaper alternatives, such as store or private-label brands, have dented sales. "We are addressing uncompetitive pricing spreads market by market," McDonald told analysts Wednesday. "We are increasing the number of low-tier offerings…to more markets."
Private-Label Threat McDonald gave a rather extensive glimpse into his plan to shake off P&G's current slump and spark a return, in the years to come, to the 4%-to-6% growth the company has been known for during the past few years. Sure, he'll cut prices but probably in no more than 5% to 10% of the company's portfolio. Some analysts wonder if that is enough. In all but one of the past 12 years, private-label products have grown faster than branded products, studies show. The quality of private-label goods has improved to the point that consumers find little difference between them and premium brands, Dibadj says.
That's why many worry that P&G might not be investing enough in developing lower-tier products. The challenge, says Bill Pecoriello, CEO of Consumer Edge Research, an independent consumer research firm, is that lower-tier products also reap thinner margins. So P&G risks losing profitability if it neglects the high end upon which it has built its stellar financial reputation. Still, McDonald can't afford not to try a dramatic shift to the low end. "Even though it is a lower-profit product, you would rather have consumers buy [Procter products] than trade them for a competitor's product and lose share," Pecoriello says. "Once you lose market share, it's always very expensive to get that share back."
The real driver for long-term growth will come by reaching what McDonald calls the "underserved and unserved" consumer. He plans to increase P&G's presence in emerging markets, such as India, Latin America, and Africa, where 86% of the world's population lives. McDonald sees an opportunity to increase sales from these markets from 30% of the business to 40% over the next few years.
McDonald also intends to sell more beauty products in drugstores, where the company currently has little presence. He wants to improve the e-commerce strategy, which now only produces $500 million in business. Under McDonald the company definitely will put more focus on lower-priced products, producing cheaper options in areas such as razors, diapers, and feminine products. But McDonald stressed that P&G will continue to expand its higher-margin businesses such as Olay beauty products and Tide detergents, through internal growth and even acquisitions. "We are focused on an approach to growth that balances continuity and change," he said.
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