The Procter & Gamble Company (NYSE:PG), one of the world’s largest consumer products companies, operates under six segments: Beauty, Grooming, Health Care, Snacks & Pet Care, Fabric & Home Care, and Baby &Family Care. The company owns a wide range of brands including Pampers, Tide, Bounty, Charmin, Gillette, Duracell, Oral B, Crest, Olay, Pantene, Head & Shoulders, Iams, Ariel, Gain, Always, Downy, and Dawn.
Procter & Gamble Company (NYSE:PG) is the forerunner and one of the highest quality companies in the FMCG segment. The company has very well diversified product portfolio, leading market shares and a strong foothold in the emerging markets. P&G’s group-leading sales and marketing capabilities should fuel mid-tier sales growth in the medium term. The company also aims at cost cutting, which should provide it with the funds to implement its strategy of expansion in the emerging markets and also posting up side in the stock.
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In its latest earnings results, the core earnings per share of the company came in at $1.06, an increase by 5%. The organic sales increased by 3% in the same quarter. Operating profit of the company decreased by 11%.
Procter and Gamble is the market leader in U.S. liquid laundry category having approximately 60% market share. The company is expanding further to capture a larger market share. P&G launched Tide Pods to achieve this. The United States detergent market is approximately $7billion (retail), and the share of new Tide pods has reached 6% of the market just 9 months after launch.
Tide Pods is moving towards contributing approximately half a billion in sales, and there is a strong surge in the trial rates. The discontinuing innovation of P&G is the key in creating value for customers. They get the right amount of detergent, and one easy step to achieve outstanding cleaning brightening in the stain removal results.
Also in October to December quarter, the company is expecting organic sales growth in the range of 1% to 3%, sequentially better than the zero to 2% guidance for July-September period.
Compared to close rivals like Colgate-Palmolive Company (NYSE:CL) and Johnson & Johnson (NYSE:JNJ), P&G has performed sub-par, with disappointments on both growth and earnings front. This is the main factors as to why P&G’s stock has a comparatively poor run.
P&G owns some of the best brands in the world, known for trust and quality. This allows the company to charge a premium for its products in most countries. In countries like India and China, P&G is well ahead of local competitors, owning to the quality appeal of its products. Since, regulations are not as high in such countries, the fear of adulteration and bad quality is also quite high. This means global companies like Unilever plc (NYSE:UL) (LON:ULVR), PepsiCo, Inc. (NYSE:PEP) can afford to price goods of the same quality at much higher prices.
Tapping emerging markets
The fast developing markets are now generating the sales of $32 billion, which represents 38% of sales, approximately 30% of profits and 44% of its unit volume. According to the forecasts, 95% of the population is anticipated from developing market, and there would be approximately 1.5 billion new middle class consumers in the emerging markets, in 2020.
Procter & Gamble Company (NYSE:PG) is targeting its topmost 10 developing markets. The sales in these markets have surged over average 14% over the past 10 years. According to P&G estimates, nine out of ten markets should be profitable in 2013 and the pretax income growth is expected across these markets. In the BRIC region, the sales has grown at a 20% CAGR over the past decade, including CAGR of 27%, 25%, 23% and 17% in India, Russia, Brazil and China respectively.
PG should make a tight grip and expand its market portfolio in the developing markets. It is expected to focus on the biggest opportunities. It is estimated that Proctor and Gamble will enter 20 new country/category combinations in the coming fiscal year.
Companies such as The Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP), and Unilever plc (NYSE:UL) (LON:ULVR) were more aggressive in their approach to emerging markets, now PG must play catch up.
The main focus of P&G has been enhancing its “discontinuous innovation” efforts. The discontinuous innovation implies making superseded current products by creating new brands and new categories to replace them.
Procter & Gamble Company (NYSE:PG) have a full line of products and segments, which will experience strong innovation in the coming four years. According to P&G some of its product will be a breakthrough and redefining.
Some of the products which P&G highlighted in different segments were Illumina color from Wella professional, Olay total effect CC cream, Pantene beautiful lengths, Gucci Floral garden, Escada delicate notes. Apart from these products PG has launched a line of oral healthcare products. There are wide ranges of products which will debut in 2013.
Dividends and share buyback
In the financial year 2012, Procter and Gamble returned $10 billion to the shareholders; out of which $6 billion were in the form of Dividends and remaining $4 billion were buybacks. The management further expects shareholder return of $10+ billion in the fiscal year 2013. The management enhanced its buyback program from $4 billion in FY13 to $4 billion to $ 6 billion.
Procter & Gamble Company (NYSE:PG) increased its dividend per share by 7% in the fiscal year 2012, this marks as the 56th consecutive dividend increase. Till date P&G has paid dividends for consecutively 122 years. Further dividend increase in expected in April 2013.
Procter & Gamble is massive and it will be difficult to fully monetize its line of brands and innovative products. The company had a competitive advantage over its peers in the emerging markets but still failed to execute up to the mark in these markets.
The pricing strategy of the company has been unstable, which has invited competition locally and also internationally. The cost structure of the company is distended, and the management has not correctly instilled a stable and effective expense cutting culture and has been sluggish to react.
Recently P&G, decided on cutting more non-manufacturing jobs through 2016. The company also maintains its prior decision of trimming 5,700 non manufacturing jobs by the end of current fiscal year. Management is seeking to save around $10 billion, and it is intending to achieve this through reducing the cost of production and streamlining manufacturing.
The company achieved significant cut in the cost of raw material, transportation and warehousing. P&G is also on track to achieve efficiency in the market spending, especially of non media expenditures and is reinvesting these savings to strengthen and develop market plan.
Procter & Gamble is going through the face of a transition and trying to achieve an economy of scale by cutting its cost and downsizing its staff. Investors should adopt the wait and watch strategy for this stock.