Procter & Gamble Company (PG)

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See all Bulls Reasons Bulls: Reasons To Buy Business Overview: 100% agree Business Overview: Procter and Gamble is a global consumer products brand with market leadership in several segments ranging from beauty to household products. As a leading Consumer Products organization, Procter and Gamble continues to impress with solid growth from core... read more View or Edit Reason 2 votes 100% agree Strong brands and household products will remain in demand despite economic turmoil 0% agree Strong brands and household products will remain in demand despite economic turmoil Proctor and Gamble is known for its leading consumer household brands, including Tide laundry detergent, Crest toothpaste, Oral-B floss, Bounty paper towels, Head & Shoulders shampoo, and Duracell batteries. Demand for these items tend to be inelastic,... read more View or Edit Reason 0 votes 0% agree Low correlation to the market 0% agree Low correlation to the market Procter and Gamble is a defensive company with low correlation to the market due to the stable demand for its products, and therefore is less impacted by market downturns and/or geopolitical issues. Nevertheless due to its significant international presence... read more View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Struggling to gain market share in Latin America 0% agree Struggling to gain market share in Latin America P&G has been struggling to gain market share in Latin America, a key developing market that will be a major area of sales in several years as economies there further develop. View or Edit Reason 0 votes 0% agree Duracell batteries will drag down P&G's overall profits 0% agree Duracell batteries will drag down P&G's overall profits As part of the Gillette acquisition P&G acquired the Duracell line of batteries, which are low-margin products that will drag down P&G's overall profits. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion What about adding a strategy of why a person might invest in this company? One of the reasons wh... more [Dismiss] [Done] See All Suggestions

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Procter & Gamble (NYSE:PG) is the world's leading company in the household and personal products (HPP) industry. P&G's product line boasts over 23 brands that generated over $1 billion in revenue each last year, with the company's total revenue topping $76 billion. As of the end of 2006, P&G held approximately 58% of the United States HPP market, with its next nearest competitors being Kimberly-Clark (KMB) and Colgate-Palmolive Company (CL), holding 14% and 10% of the market respectively. P&G provides products across several categories, including beauty and health products, baby care products, home care products, food snacks and many others. The company produces renowned brands such as Crest toothpaste and Tide laundry detergent, among many others. In 2005, P&G expanded its portfolio to include razors and blades as well as batteries with its acquisition of the Gillette Company.

One of the key areas of growth for the company is in emerging markets worldwide. In 2007, 27% of total revenue came from sales in developing nations, a figure that has increased steadily from 2002 when sales in developing nations accounted for only about 20% of total revenue. P&G already owns large and growing market share in countries including China and Russia. However, in Brazil and Mexico, estimated market share figures have slipped as P&G has struggled due to competition with local brands. Levers for P&G to sustain and increase its growth in these markets include tailoring products to regional needs and cultures as well as more pronounced advertising.

Procter & Gamble has an unmatched record of product innovation over its history. Though it has not always invented product categories, the company defined the success of household products such as disposable diapers, toothpaste with flouride, laundry detergent and Olestra, a fat substitute. To this end, P&G outspends most of its smaller rivals on research and development on the basis of both absolute dollars ($2.1 billion in 2006) as well as ratio to revenue (3%).

[edit] Company Overview

Procter & Gamble was founded in 1837 to produce candle and soap and has since become the world leader in providing consumers with branded household and personal products. With over $76 billion in sales across the world in 2006 and 23 brands with $1 billion of sales each, P&G is the dominant player in markets for most household and personal goods. P&G divides its business into three Global Business Units (GBUs) that develop and produce products and its Global Operations group which handles the management of the corporation. All of the products that P&G manufactures fall into one of the three GBUs and each GBU is subdivided into segments:

• Beauty and Health: The Beauty and Health GBU includes all beauty and personal hygiene products such as hair and skin products. The Beauty and Health GBU also includes medications and other health care products. The Beauty and Health GBU is logically divided into two segments: Beauty and Health Care.

• Household Care: The Household Care GBU is composed of a wide range of products from snack food to laundry detergent to diapers. The Household Care GBU is subdivided into three segments: Fabric Care and Home Care, Baby Care and Family Care, and Pet Health, Snacks, and Coffee.

• Gillette GBU: The Gillette GBU is composed of several of the product lines that Procter & Gamble acquired when the company bought consumer products company Gillett in 2005. These include razors, electric shavers, and batteries. The Gillette GBU is divided into two segments: Blades and Razors and Duracell and Braun.

Note: Total segment revenue and total segment net earnings are greater than the total company revenue and total net earnings because the Global Operations group operates at a loss--it does not sell products, it only incurs expenses.

[edit] Business Growth

P&G reported a fiscal third quarter net income of $2.71 billion, up from $2.51 billion last year. Cost controls helped to offset the effect of increased prices of raw materials. Sales rose to $20.46 billion from $18.69 billion, which was driven by strong numbers in the developing markets and the weaker dollar.

The company has increased prices due to higher costs of oil and other raw materials. In its conference call, the company stated that it planned for raw material cost increases of $1.4 billion this year and $2.0 billion in 2009.

On June 4, P&G sold its Folgers coffee unit to J.M. Smucker Co for $2.95 billion. As part of the deal, P&G shareholders will receive a 53.5 percent stake in Smuckers and the company will assume $350 million of Folger's debt.

[edit] Trends and Forces

[edit] Retail Consolidation

The rise of a handful of powerful low-priced retailers has negatively impacted consumer products companies. A handful of big retailers have captured a large share of the market. For example, from 1999 to 2004, the top 10 food retailers in the US increased their share of food retail sales from 53.4% to 58.9%. These large retailers have shifted the balance of power within the supply chain. By focusing on high volume and low prices, they have shifted costs back up the supply chain. P&G has to tackle the challenge with innovation and product differentiation.

[edit] Rise of Private Labels

This challenge does not pertain specific to P&G but the whole Consumer Goods Industry. During the past decade, FMCG companies are facing stiff competition from Private Label Brands of the large retailers. Those retailers are close to the consumers, they have the point of sale data on consumer behavior and are in better position to understand consumer behavior. These strengths results in better private label product development which directly compete with products of FMCG companies. Retailers also promote private label brands as they earn higher margins on them. P&G has addressed to this issue by continuously investing in Research & Development and introducing new products that create brand equity among the consumers.

[edit] Developing Markets

As the world leader in the HPP industry, P&G has a longstanding, safe hold in established markets in developed countries, including the United States and most of Western Europe. The next step that P&G has been taking towards increasing global sales and market share is establishing a strong presence in the emerging markets of developing nations. In 2006, 26% of total revenue (approximately $17.7 billion) came from sales in developing nations, a figure that has increased steadily from 2002 when sales in developing nations accounted for only about 20% of total revenue (approximately $8 billion).

In developing and emerging markets in China, Brazil, Mexico and Russia, P&G has a considerable market share. In China and Russia, P&G's market share has been consistently increasing in the past five years as Procter & Gamble has put an increased emphasis on establishing its products in those markets. However, in Brazil and Mexico, estimated market share figures have slipped as P&G has struggled due to competition with local brands. P&G hopes to begin to win back market share in these regions and all emerging markets through enhanced advertising in order to secure a steady stream of revenue from these markets as they continue to grow into developed countries.

[edit] Gillette Acquisition

Procter & Gamble acquired Gillette in 2005 for over $50 billion. In 2004, the last full year before the acquisition, Gillete generated over $10 billion in sales, about $6 billion of which came from razors and Duracell and Braun products (the current Gillette GBU) and the remainder sourced from the Oral-B brand, which was moved into the Beauty and Health Care segment.

A key piece of the acquisition beyond Gillette's product lines was its distribution network and supply chain. Gillette's distribution network and supply chain in emerging markets had been extremely successful for Gillette and, once acquired, has worked to complement P&G's own distribution network.

[edit] New Product Development

[edit] Research & Development

One of the reasons that P&G is such a successful company and the leader in its industry is its commitment to innovation and the unique methods it uses to develop new products. In 2006, P&G spent approximately $2.1 billion (3% of total revenue) on Research & Development.

The two most important factors in P&G's innovation process are its practice of consumer demand research and its "Connect and Develop" R&D structure. First, when entering new markets, P&G sets up in-home visits with consumers in order to fully understand the needs and desires consumers have for household and personal products. This way, P&G gets directly to its customers and is able to cater to their needs. P&G also incorporates consumers' input into the R&D process through its "Connect and Develop" initiative. Through "Connect and Develop" P&G has an online interface set up where people can submit product ideas and provide input on topics that P&G places on the web-portal. P&G staff then sort through the ideas and work with the most promising ones. This process is not responsible for all of the R&D that P&G does, but approximately 40% of new products in the last several years were influenced by or originated from "Connect and Develop".

[edit] Compacted Laundry Detergent

P&G is currently developing a new type of liquid laundry detergent--a compacted detergent possessing a concentration twice as potent as current liquid laundry detergents. By increasing the concentration of the detergent, P&G will be able to offer the same number of laundry cycles with half the detergent volume. There are several benefits of this enhanced concentration and resulting smaller packaging. P&G will be able to cut down on packaging materials costs as well as transport more containers per shipment. The new compacted laundry detergent is still currently under testing and development and is expected to be released in 2008.

[edit] Commodity Prices

A diversified consumer products manufacturer, P&G depends heavily on a wide basket of global commodities for manufacturing its goods, the prices for which have risen nearly 50% since 2002. Nearly half of the company's cost of goods is directly related to commodity goods. As the market leader, the company does benefit from pricing power and can moderate commodity inflation better than its competitors.

Some commodities of note:

• Coffee prices affect P&G's Folger's brand, which most suffered from the rising coffee prices as a result of Hurricane Katrina
• Rising paper pulp prices affects several of the company's tissue businesses, as well as many of its products' paper packaging
• Rising petroleum prices affect the fabric and home care businesses. For example, the absorbent materials in P&G's diapers are derived from petroleum products
• Natural gas is a key energy input into the manufacturing process of toilet and diaper goods, which are air dried

[edit] Competition

Procter & Gamble is the biggest of its competitors and boasts the broadest and biggest portfolio of products with 22 billion-dollar brands. There are a number of companies that P&G competes with in each of its product categories, including Clorox Company (CLX), Kimberly-Clark (KMB), Colgate-Palmolive Company (CL), Energizer Holdings (ENR), L'Oreal and others. However, P&G is by far ahead of its competitors in terms of revenue and possesses a significantly higher operating margin than any of its competitors as well.

Clorox is one of P&G's main competitors, specifically the two companies compete directly in the household products market, especially in household cleaning products. In 2006 Clorox's sales totaled to $4.6 billion, 45% of which came from sales of household products such as their trademark Clorox bleach products and other cleaning supplies like Pine-Sol. Although much of the two companies' product catalogs overlap, there are significant differences that prevent Clorox from being in complete, direct competition with P&G. For example, one of the largest sectors of P&G's business is beauty products, which are not part of Clorox's product offerings.

Kimberly-Clark competes with P&G in the household products market, particularly in tissues, paper towels, diapers, and feminine products. In 2006 K-C reported sales of $16.7 billion, 76% of which came from sales of diapers, wipes, feminine products, tissues, paper towels, toilet paper, and other related paper tissue products. Major K-C brands include Huggies diapers, Kotex feminine products, Scott paper towels and Kleenex tissues.

Colgate-Palmolive produces a product catalog that most overlaps with P&G's product lineup relative to other competitors. In 2006 C-P reported a total revenue of $12.2 billion. About 38% of Colgate-Palmolive's sales came from its Oral Care segment, which includes toothpaste, toothbrushes, mouth rinses and other oral hygiene products. Approximately 25% of C-P's 2006 revenue came from sales in the Home Care segment which offers products such as laundry detergent, cleaning products, bleaches and other related home care goods. Also, 23% of 2006 revenue came from the Personal Care segment which offers bar and liquid soap, shampoo, shaving products and other personal hygiene products.

L'Oreal competes with P&G in the beauty products market. In 2006, L'Oreal reported total revenue of $21.2 billion. L'Oreal's two biggest product categories are skincare and haircare products, which accounted for 24% and 23% of total revenue in 2006, respectively. L'Oreal, unlike diversified companies like P&G, is purely a beauty and cosmetics company with its product catalog centered around skincare, haircare, make-up, perfume and other beauty products. However, the beauty industry has much higher margins than certain markets that P&G is involved in, which leads to high profits for L'Oreal.

Note: Total revenue growth from P&G includes growth from the first full year after the Gillette acquisition. The organic revenue growth rate for Procter & Gamble in 2006 was approximately 7%.

[edit] References