Procter & Gamble Goes on a Diet
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The world's largest producer of consumer products, Procter & Gamble (NYSE: PG), is best known for popular products including Tide detergent, Crest toothpaste, Gillette razors, Pampers diapers and Head & Shoulders shampoo. But it is also known to investors as a stock that is little changed in the past five years, causing shareholders to pressure management to raise profitability.
The company is finally shaking things up a bit, announcing plans to cut 5,700 jobs (10% of the workforce) and slashing $10 billion in costs over the next four years. Its overhead costs -- which it is chopping by $3 billion -- as a percentage of sales is higher than its rivals. P&G said the overall restructuring should boost its operating profit margin by as much as 9.5 percentage points.
Procter & Gamble has problems. One of them is higher raw material costs. It has attempted to offset these rising costs by raising prices, but it had to reverse course when its rivals did not follow suit in the U.S. and Europe. Surprising to most observers, P&G has also had some operational issues. The company had to twice delay the launch of new Tide Pod detergent capsules, for example, because it could not make enough of them.
Another major problem facing Procter & Gamble is that it is too heavily weighted toward the slow-growing European and U.S. markets and lags behind its peers like Colgate-Palmolive (NYSE: CL) and Unilever ADR (NYSE: UN) in exposure to fast-growing emerging markets.
To be fair, Procter & Gamble does have a strong business in Eastern Europe but the proportion of its sales that come from the emerging world still is lower than Unilever and Colgate. Sales from emerging markets make up 37% of total revenues for P&G, up from 27% just five years ago. Emerging markets make up 55% of sales for Unilever and about 50% at Colgate.
P&G also has a good business in China, but there it is facing increasing competition from local rivals. For instance, in most parts of the globe the two leading companies in laundry detergent are Procter & Gamble and Unilever. But not so in China. According to research firm Euromonitor, both firms have less than a 10% share each. They lag far behind Chinese firms Nice Group and Guangzhou Liby Enterprise, which have a combined 35% share of the market.
Of course, Procter & Gamble is not going to give up on the Chinese market. That market is forecast to become the world's biggest grocery market within three years. The commitment to emerging markets was echoed by the company's CEO, Bob McDonald, recently when he said “We are shifting the footprint of the company to take advantage of the growth where the growth occurs.”
This makes sense since it is estimated there will be more than 2 billion people to be born in the emerging world over the next 40 years. And with competitors like Unilever targeting an emerging market sales component of 75% by 2020, P&G shareholders are probably telling Mr. McDonald “Better late than never.”
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