This Time it Might be Different

By Chad Henage - July 16, 2012 | Tickers: ENR, PG, TGT | 0 Comments

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In a recent article by Matt Koppenheffer of The Mötley Fool, he examined several companies that as Warren Buffett says, "could be run by a ham sandwich." One of the three companies he mentioned was Procter & Gamble (NYSE: PG). In his own words, this business, "could run on autopilot and continue earning attractive returns for shareholders." As proof, he pointed out that in 2000, some of the same worries were being brought up about Procter & Gamble slowing down, and the company grew earnings-per-share by an average of 11% over the next multiple years. While I understand Matt's point, my concern is, there has been a huge change in consumer preferences that directly affects Procter & Gamble's business.

It's not the year 2000

The difference between Procter & Gamble in year 2000, versus Procter & Gamble today, is their competition has gotten smarter, while private label brands have improved. For as long as I can remember, analysts have expected earnings growth of at least 10% from Procter & Gamble. Today those same analysts expect growth of about 6.5%, this tells us a lot about the direction the company is headed. Even more telling is those same analysts expect revenue growth of just 1.6% this year and less than 1% next year. The Great Recession of 2008 - 2009, has caused consumers to rethink which brands they purchase, and why they spend the money they do. In an effort to cut down on expenses, many consumers have tried brands they never would have before, including private-label brands. Let me walk you through a few examples that I found, where the price difference is significant enough that consumers are choosing brands other than Procter & Gamble's.

Gillette

Gillette is part of the Procter & Gamble family, and the primary way this business makes money is selling razor blades. The company's most recent innovation is the Gillette Fusion ProGlide. While the company is well known for providing the "best shave a man can get", the pricing of these cartridges is causing consumers to take note. Four cartridges of this type of razor cost $16.52 (at Wal-Mart). Energizer Holdings (NYSE: ENR) subsidiary Schick, sells their Hydro cartridges in a four pack for $11.77. Both razor blades are the top-of-the-line from each respective brand, and there is a nearly 29% difference between the pricing. Consumers looking to save money may opt for the Schick blades versus Gillette. If a consumer wants a standard razor and doesn't want to spend this much, Energizer also sells the Wilkinson Sword brand of three-blade razors, in an eight pack for just $5.98. When consumers are offered a choice for twice as many shaves for 64% less cost, penny-pinching consumers may choose to opt for more razors for much less money.

Pampers

The Pampers brand of diapers has been a staple billion dollar brand for Procter & Gamble for a while. This is yet another example, where the price of this name brand is significantly different than not only their competition, but also private-label brands. For the same size diaper in either Pampers, Huggies, Parents Choice, or Up & Up, there can be a difference in cost per diaper of as much as 51%. Given that Parents Choice is made by Wal-Mart, and Up & Up is produced by Target (NYSE: TGT), you can see that Procter & Gamble has some new competition for their multibillion-dollar products. 

Tide

As one last example, one of the most famous brands that Procter & Gamble owns is Tide laundry detergent. The company sells a 100 ounce bottle of this detergent through Wal-Mart for about $12. However, for the exact same amount of detergent, consumers could purchase the Up & Up (by Target) brand for $7.99. This is a situation where a name brand is being sold for a price 50% higher than a private label competitor. When price differences reach this level, budget conscious shoppers are certain to consider trying the store brand.

Conclusion

So what can Procter & Gamble do to compete against other brands including private label? the company has to produce products in either new form factors, or with unique features not offered in store brands. A good example of a recent development is, the companies Tide Pods creation. This new innovation allows the consumer to throw these pods in with their laundry, without having to mess with liquid laundry detergent or a measuring cup. The solution is faster for the consumer, less messy, and not coincidentally, more profitable for Procter & Gamble. For point of comparison, the company sells Tide liquid in the aforementioned example, for roughly $.19 per load of laundry, versus Tide Pods cost roughly $.25 per load of laundry. This is a prime example where the company benefits from higher profits, and the consumer benefits from it being a better solution.

The challenge facing Procter & Gamble going forward, is to not to rest on its laurels, and assume that consumers will buy their brands just because of the brand-name. Consumers have become smarter shoppers because they've been forced to, this will not change for quite a while, as the memory of economic hardships remains fresh in people's memory. This is the primary reason that the challenges facing Procter & Gamble today, are different than the challenges that were present in year 2000. The bottom line for the company is, produce innovative products that lead to a better experience, or see sales stagnate as consumers choose other brands at a cheaper price point.

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