leadership change at P&G to be well received by the market. A.G. is respected by the Street and has potential as a charismatic leader to breathe fresh life into the organization. He was instrumental in accelerating PG’s innovation efforts under his tenure by leaning on outside and consumer led research ideation as well as transforming the company from a household products organization into one that skews more heavily toward higher growth beauty and personal care through the acquisitions of Gillette and Wella (among others) and taking Olay upstream with the creation of a Mastige segment. A.G. first got his call to duty as CEO in June, 2000. After dismal performance pre-A.G. the stock outperformed the XLP by 15% in the first year of his tenure and by 89% over the entire course of his tenure. But, don’t forget performance was sliding when he left the firm and that he left it in the state that Bob McDonald (his former protégé) inherited. A.G.’s intense focus on good-better-best ultimately deserves part of the blame for the company’s creation of price umbrellas that gave competitors fertile hunting ground. And his acquisition spree created less value than initially expected by the Street. While change is welcome news for PG, we are hesitant to bake in too much optimism until we hear more of A.G.’s plans.
Citi
Was McDonald’s Leash Too Short or Too Long? — We have endorsed The Procter & Gamble Company (NYSE:PG)’s story and its stock over the last few years given our support for McDonald’s primary strategic focus—that Procter & Gamble was under-indexed in emerging markets relative to some of its big competitors (e.g., Unilever and CL) and that The Procter & Gamble Company needed to remedy that problem (given the outsized contribution to growth that emerging markets represent for FMCG companies). We have attributed Procter & Gamble’s sub-par revenue and EPS growth performance over the last few years to a combination of the following factors: (i) weak growth and profitability in developed markets, largely due to macro headwinds and (ii) higher-than- and longer-than-expected investment needs in emerging markets, largely due to stronger-than-expected competition.
We also believed The Procter & Gamble Company (NYSE:PG) suffered from poor execution globally (including not enough innovation and not enough investment spending). As a result of a combination of these factors, Procter & Gamble’s stock price performance has been lackluster, as it has underperformed the market since McDonald took over. While we had hoped that things would soon improve for Procter & Gamble (largely with the benefit of the company’s massive cost savings program coupled with an easing macro backdrop in Procter & Gamble’s higher-margin developed markets), it appears that maybe the company’s weaker-than-expected 3Q13 performance was the last straw for the Board in terms of its patience in waiting for a turnaround.
Will A.G. Rebase/Redirect/Restructure…or Re-employ? — The biggest question that we suspect will take some time to be answered is “how will A.G. change things?” First, we think it should be a foregone conclusion that he will lower growth expectations for FY14, as Procter & Gamble’s market share momentum is clearly not as good today as the company had expected it to be when it set its plan to return to its long term EPS target of high single-to-low double-digit EPS growth in FY14. Second, we expect A.G. will redirect some investment dollars to fewer, bigger priorities (as he did before, see below). Third, we expect A.G. to continue to push hard on the goal of generating meaningful restructuring savings (which are basically in full swing from what we can tell). Fourth, and most importantly, we hope A.G. pulls out his rolodex and perhaps brings back some other former Procter & Gamble executives who have left the company in recent years. Indeed, it is this last point, that senior management turnover has been at an exceptionally high level since McDonald took over, that has nagged at us the most consistently over the last few years.
While we’ve never quite understood why so many terrific people left Procter & Gamble in such a short period of time, we have known that it just didn’t feel right, and most importantly, we worry that some of this management upheaval and dissent has contributed to Procter & Gamble’s poor execution in recent years.
Lafley Was Terrific…but Let’s Not Be Too Romantic and Rewrite History — A.G. Lafley became The Procter & Gamble Company (NYSE:PG)’s CEO at a difficult time—after Durk Jager had held the post for only ~two years, during which time the company failed to meet its growth targets (and created a fracas in early 2000 when PG was thought to be interested in making one or more major acquisitions that would have redirected the strategy of the company). At that time, A.G. was a surprise choice for the job, but he clearly rose to the occasion and was widely lauded for bringing Procter & Gamble back to center, as he memorably simplified the company’s focus to its “top 10 brands, top 10 countries and top 10 customers.”
A recurring quote that we remember fondly from A.G. was that “everything yields to a process”—which we think was the hallmark of the early days of his tenure. More than anything, though, we think A.G. was incredibly wellliked internally at PG for being thoughtful, disciplined, focused, and fair. However, five years into his post as CEO, Procter & Gamble’s momentum slowed, as it seemed that innovation hit a dry patch, the strategy of acquiring big businesses had run its course (post Clairol in 2001, Wella in 2003 and Gillette in 2005) and Procter & Gamble’s relative lack of emerging market exposure was beginning to catch up with the company.
Indeed, if there was one unfortunate legacy that we think A.G. left behind, it was in our view that while The Procter & Gamble Company (NYSE:PG)’s acquisition of Gillette might have been strategically brilliant, we think many folks consider in hindsight that PG overpaid for the business, and as such, it took Procter & Gamble Company several years longer than expected to get out from under the shadow of hidden/masked earnings dilution. Therefore, while we were somewhat surprised that A.G. stepped down as CEO at age 62 and a year shy of seeing Procter & Gamble through his initial goal to “Deliver the Decade,” i.e., seeing the company through 2010 which would mark the completion of the strategic plan set out by PG in 2005, we felt that at the time, PG was ready for new blood and a fresh perspective in the CEO post.
Will A.G. Be the One to Put Lipstick on Procter & Gamble’s Beauty Business? — Recall, prior to his becoming CEO the first time around, a big part of A.G.’s background was in running The Procter & Gamble Company (NYSE:PG)’s beauty business—both in Japan and in the U.S.—and it was his experience in and focus on the beauty business that we believe contributed to PG making two large hair care acquisitions during his tenure, as well as the terrific success of the Olay and Pantene franchises. With PG in recent years having seen a sharp deceleration in the growth of this business (despite the fact that it is one of the company’s most global franchises), we think it will be a key area of focus for A.G. to get the beauty business (hair and skin mostly, color cosmetics and fragrances to a lesser degree) growing profitably once again.
