P&G Admits the Error of its Ways

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For the second time in less than two months Procter & Gamble (NYSE: PG), the world's biggest consumer goods maker, cut its earnings and revenue forecasts for the company. The reduced forecasts were a result of slower growth both in the United States and Europe as rising unemployment restricts consumer spending. 

This is particularly true in Europe, as other food and consumer products firms have recently revealed lowered forecasts. The world's biggest yogurt maker, France's Danone ADR (NASDAQOTH: DANOY.PK), said economic woes in southern Europe and especially Spain would weigh heavily on its 2012 results. And the chief financial officer of global foods and consumer products powerhouse Unilever NV ADR (NYSE: UN), Jean-Marc Huet, said last week that Europe is “difficult for everybody.' 

However, Procter & Gamble also blamed itself. The company said that it was its all-in focus on rapid expansion in emerging markets that was the cause of much of its problems. It went on to say that this expansion would now proceed at “a more balanced pace.” This is an about-face from the previous strategy put forth by CEO Bob McDonald to expand the company's product categories and markets to reach 5 billion consumers by 2015. 

This shift in strategy also is in stark contrast to those strategies in place at its rivals such as Unilever and Colgate-Palmolive (NYSE: CL) which continue trying to expand aggressively into all emerging markets around the globe. Both Unilever and Colgate derive more than 50 percent of their sales from developing markets while P&G gets less than 40 percent from these markets. 

P&G instead will concentrate its focus on the ten most important emerging markets and not enter new ones while at the same try to revive sales in its moribund domestic market. The 10 markets where P&G will remain are Brazil, China, India, Russia, South Africa, Turkey, Poland, Indonesia, Mexico and Nigeria. In effect, it will try to better execute in its “core” markets. The company will also focus its efforts on improving performance on its key 40 brands in these markets.

The focus on the 40 core brands (21 generate over a $billion in sales and 19 generate over $500 million in sales) does make some sense since these products in these countries generate about 50 percent of P&G's sales and 70 percent of its profits. Although a question may arise about the company's innovation and ability to bring new products to the market. Will the next Tide be developed and see the light of day? 

A bigger question should arise in investors' minds about the company's shift away from developing markets. The move away from these fast-growing markets and their consumers makes little sense. P&G already lags badly both Colgate and Unilever in its exposure to the emerging world, perhaps explaining at least partly its relative under-performance to these companies. Over the past five years, its stock has under-performed the stocks of Unilever and Colgate-Palmolive by more than 50 percent. 

The company's strategy should be aimed at getting its costs down as P&G trails its peers in both operating and net margins. Management has aimed for about $10 billion in cost reductions over the next four years. But it needs to do more as it has a huge target to swing its ax at – a $70 billion cost base! Until management focuses more on that and less on cutting its own throat in emerging markets, Procter & Gamble is a stock best avoided. 

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