Avoiding Oblivion: Procter & Gamble Retools Strategy

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Looking back, it has not been a good two years for Procter & Gamble (NYSE: PG) shareholders.  P&G’s share price has remained stagnant during that time, and the company has botched a number of its core competencies.

Looking Back

P&G, known for its marketing prowess and powerful brand awareness, has made a few glaring errors.  According to The Wall Street Journal:

Cincinnati-based P&G, known for such brands as Tide detergent and Pampers diapers, finds itself in an unfamiliar position.  It has stumbled recently in areas where it has long been adept: understanding consumers, pricing products and getting new and revamped products to market.  Snafus marred the launches, for example, of Tide detergent capsules and an overhauled line of Pantene shampoos and conditioners.

I will address these issues one-by-one.  In 2010, P&G launched a new Pantene product.  Prior to launch, the company studied women’s emotions after using the product, and it even measured consumers’ brain waves after they watched Pantene’s new TV ads.  And to make room in its product line, P&G trimmed down its 2-in-1 shampoo and conditioner, and the large sizes that it pushed to thrifty buyers.

But the changes flopped, and consumers longed for the bulk-sized bottles.  Pantene’s market share of U.S. shampoo fell to an estimated 11.6% last month from 16.5% in January of 2009 – a devastating blow.

In pricing, P&G was snagged by the recession.  The company’s former CEO, A.G. Lafley, pushed expensive brands in the U.S.  Also, the firm was weighed down from its 2005 acquisition of Gilette for $57 billion.  When current CEO Robert McDonald took the helm in 2009, consumers were already starting to step away from P&G’s expensive products, and were far more inclined to buy other products.  As a result, Colgate-Palmolive (NYSE: CL) and Unilever (NYSE: UL) seized the opportunity and snatched up mid-priced and lower-priced sales. 

Finally, P&G botched its product launch of its single-use Tide detergents.  In April 2011, the firm announced its project, but the plan was delayed until 2012.  By that time, its competitors had struck once again, beating it to market.  To make matters worse, children thought the packets looked like candy – so they ate them.  Another round of product retooling followed.

Forward Strategy

P&G has a plan to begin taking back share from competitors Colgate-Palmolive and Unilever.  Colgate-Palmolive, which houses brands like Colgate Total, Ajax, and Murphy’s, has dominated the international toothpaste market, and has a strong presence in India, China, and Brazil.  Unilever, on the other hand, operates a number of hair care, oral care, and deodorant products.  Unilever owns the Dove and Axe brands, and it also competes with P&G with its Surf detergent.

To compete with these brands, and to ultimately boost its stock price over the competition, P&G has two strategies. 

  1. Trim Costs – CEO Robert McDonald has the ambitious goal of saving $10 billion by 2016.  To accomplish the cost-cut, the company’s first in years, it will eliminate 4,000 jobs.  And in May, McDonald enacted a “no fly zone,” an order that stopped spending on activities not related to selling.
  2. Product Focus – in June, McDonald announced that P&G would focus attention on the markets that produce 70% of the company’s operating profit and 50% of its revenues.  To hone in on the goal, P&G will be closely watching its top 40 product markets.

In all, P&G has faced staunch competition from Colgate-Palmolive and Unilever, and its products were hit by the recession.  Now the consumer products company is focused on getting back to what it does best: finding out what its customers want, then giving it to them.

P&G is still an industry titan – it has begun expanding voraciously into emerging markets – but it needs to continue to grow.  Shareholders are growing restless, and they may not be willing to take another two years of paltry returns.

 


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Procter & Gamble Company and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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