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Procter & Gamble Pulls the Plug on Jobs

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

The timing, frankly, could have been better. In the thick of a still delicate economic recovery during which a key concern is finding and keeping jobs, consumer goods giant Procter & Gamble (NYSE: PG) announced it’ll chop its workforce. Around 5,600 unfortunates will be let go over this and the next fiscal year, and although this is a small number considering the army P&G currently fields (approximately 127,000) it’s enough to add worry to an already spooked economy.

But by the sometimes perverse logic of the stock market, it’s an encouraging development. The stock traded up after the layoffs were announced and although no one likes the idea of job cuts, it was apparent that the company had to slice somewhere. As a consumer goods behemoth with many, many products, it was always manpower-heavy, and it did a very smart (although, unfortunately, no longer fashionable) thing by committing the time and resources to training its management and staff in the Procter & Gamble way of doing things.

That way of doing things also included pumping lots of capital into the marketing and sales of the firm’s products in the developed world. That helped lift P&G to the peak of the consumer goods mountain, but it needs to change if it wants to stay there. The developed world’s economy isn’t developing much, while despite the occasional hiccup countries like India, for example, continue to motor ahead. The company’s restructuring isn’t only about trimming headcount, it’s also about re-aligning its focus and resources on the economies with the most potential. This is a good move that shows admirable flexibility for such a big firm, and it’s a departure from the limiting “we do it this way” mentality that often infects the corporate culture of a market leader.

It also demonstrates heads-up management that’s swerving to avoid trouble before it happens. P&G is certainly far from crisis mode, however its recent results haven’t blown anyone away. Its two most recent fiscal years saw top-line growth that while okay was certainly not exemplary (at 4.6%), while both net profit and margins declined. The same can be said of the firm’s latest quarter compared to the previous one. Meanwhile, the company is heavily leveraged with $19.3 billion in debt against a cash position less than one-fourth that amount.

So its new program is certainly a step in the right direction. Additionally, it’s hoped that this will provide the company a head start against its rivals in the ever-competitive world of consumer products. Going by recent results, it seems that all of the major players in the industry could use the same kind of shake-up. Colgate-Palmolive (NYSE: CL), the firm most comparable to P&G, saw its most recent quarterly revenue drop nearly 5% over the preceding three months, against its bigger rival’s 3.7% gain. Additionally, on a relative basis it’s more heavily burdened by debt and has relatively less cash to service it. Johnson & Johnson (NYSE: JNJ) eked out a quarter-on-quarter revenue increase, however at 1.6% this was notably less than P&G’s rate. Although JNJ operates more in the medical realm than does its two rivals, its global footprint, distribution and brand portfolio composition are roughly similar.

Which is even more reason to make an effort to separate from the pack. Nobody likes the idea of job cuts – except, okay okay, the stock market – but if a company has to sacrifice for the future it’s best to swallow the bitter pill and make plans for improvement. P&G is about to experience the pain of job cuts and re-alignment, but if all goes well, the company and its investors will reap the longer-term gain.

Motley Fool newsletter services recommend Johnson & Johnson and The Procter & Gamble Company. The Motley Fool owns shares of Johnson & Johnson. Eric Volkman has no positions in the stocks mentioned above. 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.

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