P&G: Not Hard To Fix

By Jane Genova - July 5, 2012 | Tickers: AVP, CL, PG | 0 Comments

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This could be the beginning of the end.  That mindset always gets attention.

So, it was predictable that when Procter & Gamble (NYSE: PG) lowered its financial forecast for a second time in three months, there would be plenty of negative response.  And all that would go high profile. RBC Capital Markets analyst Jason Gere cut his rating to “Sector Perform” from “Outperform.”  Originally that was published in AP.  It has bounced around to, among others, Yahoo Finance and Bloomberg Business Week.  The vulnerability of the entity, which supposedly could be slouching toward extinction, also provides the platform for smug observations.  Influential, The Economist speculates if chief executive officer Bob McDonald can hold onto his job.  In that article, Sanford C. Bernstein’s Ali Dibadj describes P&G’s global strategy of being in 950 product markets by 2016 as arrogant.  Many of us might recall that management expert Jim Collins lists “Hubris Born of Success” as the first stage of decline in his book “How The Mighty Fall.”

The reality is that P&G, with a market cap of $167.83 billion, is not going down the drain. Actually, it has already started the turnaround. For instance, by selling Pringles to Kellogg, it exited snacks and returned to what it knows, that is, household products, personal hygiene (including diapers), and beauty.

In addition, some of its problems such as pricing policy are not as severe as presented.  Not having a direct sales force in some emerging nations such as India, as does Unilever, can be fixed. The potential of its new Tide Pods will likely make up for its early packaging stumbles.  During the past 52 weeks its stock declined 4.68%, with the price recently at $61.25.  Once the restructuring is complete, the stock could reach a new high. Let’s look at some of this in detail.

Pricing vs. Competition, Private Label

P&G is castigated on two fronts for its so-called premium pricing in a recessionary economy.  One is that its price points are higher than those of competitors.  However, some of that might be perceptional.  In Wal-Mart, Route 80, New Haven, Connecticut, Crest Complete, 8 ounces, is $3.57 or about 44.6 cents an ounce.  Colgate Palmolive’s (NYSE: CL) Total, 6 ounces, is $2.96 or about 49 cents per ounce.  On the shelves there were no 8 ounce size Colgate toothpastes. Therefore, the Crest prices appear significantly higher.  P&G sales representatives should address this with retail.

Second is the issue of private label. However, research information firm Symphony IRI found that the price of private label rose 5.3% in 2011, higher than the industry average of 1.9%.  Pricing is becoming closer between private label and national brands.  Part of that is the increased cost of commodities. Part is that its manufacturers are investing more quality.  Another part is the greater expense of the packaging which is often right up there with national brands in design.

Therefore in high-stakes categories such as detergents which could shrink, fade, and prematurely wear out clothes as well as cause allergies, consumers could opt to spend a little more for a trusted brand.  In the New Haven Wal-Mart, 100 fluid ounce Tide, with added value for sport freshness, sells for $11.97 and has a point of purchase display.  The same size Great Value, without any added value or special display, sells for $9.97. National brands are about reducing risk.  For generations, Tide has been serving that purpose.

Direct Sales Force

Going global entails accommodating the distribution patterns of the host nation.  IBM had been a pioneer in that by developing local talent to manage its operations.  Currently, in some developing countries such as India and Brazil direct selling remains standard.  This year, P&G expects those markets to contribute 37% of total revenues, compared to 23% in 2005. 

During Coty’s attempt to acquire for Avon (NYSE: AVP), there was speculation that P&G could also make a bid. Both in the U.S. and around the world, Avon’s crown jewel is its direct sales force. That was the asset Coty was primarily seeking.  In addition to this possibility of acquiring Avon, P&G could also take over or form joint ventures with direct sales companies based outside the U.S. One example could be Natura Cosmeticos in Brazil.  Since P&G is also in the beauty category, that type of alliance could be a natural fit.  In itself direct sales is a good business. P&G could make it a profit center. Snacks are out, a direct sales force could be in.  

To make that kind of shift it might become less centralized, a structure some analysts would welcome.  According to the World Federation of Direct Selling Associations, global direct sales increased to $153.7 billion in 2011 or up 10%, compared to $139.7 billion in  2010.  

Innovation

During his June 20th talk at a Deutsche Bank conference McDonald admitted significant problems in innovation.  One bright spot has been Tide Pods, a 3-chamber product which combines liquid detergent, stain remover, and brightener.  It was launched during the Academy Awards.  The cool concept and fun packaging are bringing to mind how Apple goes about product development. That kind of aura could reposition P&G as less stodgy.  

Unfortunately, that very attractiveness presented a problem. Children ingested the pods and severe poisoning occurred.  The company reported that it has created a double latch for the tub container.  In Wal-Mart today, where 72 pods retail for $17.97, even though I have poor motor skills, I could open the case with one easy motion. There was no barrier, such as a paper or plastic liner, between my hand and the pods.   

The devil is in the detail with new products. It’s up to P&G to fix this one and prevent it from happening in future ones.  In high tech, fumbles are expected in early releases. Reviewers are often tolerant.  When they happen in consumer products the company is immediately open to ridicule. 

Experience as Brutal Teacher

Experience, especially in a media-saturated era, is a brutal teacher.  But companies do learn and restructure.  Those include Ford, Johnson & Johnson, Ann, and Starbucks.  The rub is that turnarounds take time.  Impatient capital doesn’t like that.  Expect P&G to get hammered more.

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