|The Tide Washes Out P&G|
|April 30, 2012 by Donald Riker, PhD|
P&G announces very weak 3rd quarter results to Wall Street; stock drops 5% in two days, 15% off all time peak, and flat with its pre-pullback 2007 and post-pullback 2010 levels. Essentially P&G has been dead money for over five years.
P&G reported sales growth of 2% driven mostly by higher pricing and reduced by foreign exchange and declines in developed markets. Worse, earnings for the quarter declined a amazing 14% and margins declined 150bp. Organic growth was 3% for the quarter and expected to be 4% for the fiscal year. Costs of goods increased 5% over same quarter last year and 9% in the first three quarters y/y. CEO McDonald seemed to point to the input cost of commodities for the lackluster performance never mind that SG&A cost rose 4% in both these periods and P&G's effective tax rate rose nearly 6%! over the nine month comparison. Analysts were in unusual form as they mocked P&G. CEO McDonald responded with Obama-like truisms: I am CEO and take full responsibility......really?
P&G's problems, just look at a 10-year stock price chart, go back two decades and two CEO's. The drivers are cultural and strategic. Although they do not suffer the intellectual corruption of J&J or Avon they shout cultural change. Lots has happened in those decades. P&G has: 1) acquired companies and brands to grow a stable of billion dollar brands; 2) outsourced key internal functions; 3) shifted from developed to emerging markets; 4) moved from traditional advertising to digital and social advertising; 5) cycled through headcount expansions/contractions without lasting reductions; and, 6) questioned its marketing efficiency. P&G has done a fantastic job of going from a handful of billion dollar brands to now 26 through acquisition, globalization, and organic growth. Ironically, however, this portfolio of 26 megabrands is becoming a straight jacket as growing 26 megabrands through remaining white space, line extension, and price hikes will get more and more difficult whether through share growth, which has slipped, or by growing the category pie. The efficiency of a 110,000 person work force working a $80 billion portfolio of 26 brands is at issue. At P&G it often takes several people to screw in a light bulb and often only after testing the consumer to death. Yet none of these systemic issues quite explains a P&L that is out of control with significant increases in tax rates, SG&A, gross margin, and A&P.
The Board could use some fresh outside thinking from ex-P&G'ers, retirees, outside advisers, and entrepreneurial CEO's. P&G is best when it faces a process driven task such as Procterizing an acquisition target, or growing into white space. Perhaps a large company acquisition that increases its exposure to high growth categories is warranted. Such a company could be in beauty care, technology, or new channels of distribution. Avon comes to mind, as does Amazon-like distribution holders. P&G has used the Band-Aid of price hikes to get along for at least one year while ceding market share to lower priced competition, including store brands. This will not work. P&G needs strong and determined cost cutting, new growth on large-scale product platforms, and a radical change in its corporate strategy and perhaps its team.
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