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PG AT A GLANCE

P/E ► 15.6 AVG EV/EBITDA ► 10.9 AVG ROA ► 10.5% AVG ROE ► 20.4% AVG Debt to Equity ► 1.07 AVG Current Ratio ► 0.855 VERY LOW Interest Coverage Ratio ► 12.4 AVG

 

 

 

 

 

 

Procter & Gamble (NYSE:PG) is the world's largest producer of household and personal products by revenue, with its products reaching 4 billion people worldwide.^[1] P&G's product line includes 24 brands across beauty, healthcare, and food including Tide detergent, Pampers diapers, and Gillette razors, that generate over $1 billion in revenue annually, with the company's total revenue topping $83 billion in 2008.^[2] In 2005, P&G expanded its portfolio to include razors and blades as well as batteries with its acquisition of the Gillette Company.^[3] The company's 2010 first quarter net income fell 1% to $3.31 billion ($1.03 per share) as higher prices offset lower sales volumes and foreign exchange effects, beating analyst expectations of $0.97 per share. Revenue fell 6% to $19.81 billion, though organic sales (which exclude fluctuations from acquisitions and exchange rates) rose 2%. ^[4]

One of the key areas of growth for the company is in emerging markets worldwide. Sales in developing nations have increased steadily from 20% of total revenue in 2002 to 30% in 2008.^[5] P&G already owns large and growing market share in countries including China and Russia. P&G has created products such as Downy Single Rinse, low-water volume detergent, and Naturella, a low-income feminine protection product, specifically for developing nations. ^[6] In light of the global economic downturn, P&G has announced it will focus its growth strategy on emerging markets, opening almost all of its 20 new manufacturing facilities outside its established markets. ^[7]

Procter & Gamble attempts to maintain its competitive edge by focusing on product innovation. To this end, P&G spends almost twice as much on research and development spending ($2.2 billion in 2008) as its closest competitor. ^[8] (Its biggest competitor, Unilever, spent about $1.3 billion USD in 2008.) ^{[9] [10]} Through its "Connect + Develop" initiative, P&G looks to bring in new product ideas from outside the company. Connect + Develop has led to the development of 42% of new P&G products in recent years. ^{[11] [12]}

In 2008, Proctor and Gamble experienced weakening retail sales and overseas revenue due to a strengthening US dollar.^[13] The company expects total sales for 2009 to decrease by as much as 5% from foreign exchange. ^[13] In December 2008 the company announced it would be laying off 6-7% of its workforce in its pharmaceutical division to cut costs,^[14] which it then sold to Warner Chilcott Plc for $3.1 billion in cash.^[15] The company expects to book a 43 cent per share earnings boost in Q2 of fiscal 2010 as a result of the sale. ^[16]

In July 2009, CEO A.G. Lafley stepped down from his post after 29 years with Proctor & Gamble.^[17] He was succeeded by current COO Bob McDonald, who will have a base salary of $1.4 million.^[18] The company expects sales to be up 0 to 3% in fiscal 2010, ^[15] with sales back up in the fall of 2009, fed by price cuts, new products, and value-focused promotions. ^[1]

Company Overview

With over $83 billion in sales across the world in 2008 and 24 brands with $1 billion of sales each,^[19] P&G is a global giant for household and personal goods. P&G divides its business into three Global Business Units (GBUs) that develop and produce products and its Corporate group which handles the operation and administration of the company.

• Beauty (33% of sales, 37% of net income): The Beauty GBU includes all hair and skin products, medications, razors, electric shavers, and batteries. This business unit includes several product lines acquired when the P&G bought consumer products company Gillette in 2005. Proctor & Gamble's global market share in blades and razors is 70%, primarily centered around its Mach3, Fusion, Venus, and Gillette brands. ^[20] In June 2009, P&G further expanded its men's grooming business with the acquisition of the high-end shaving company "The Art of Shaving" and the men's skin care line Zirh. ^[21]

• Health and Well-Being (23% of sales, 25% of net income): The Health and Well-Being GBU provides oral care, feminine health, pharmaceuticals, snacks, coffee, and pet care products.^[22] In oral care, the company has the number two market share position at 20% globally. ^[22] In potato chips and coffee, the company holds a market share of approximately 10% and 33%, behind its Pringles and Folgers brands, respectively. ^[22]

• Household Care (46% of sales, 42% of net income): The Household Care GBU manufactures a wide range of products from snack food to laundry detergent to diapers. The company's baby care market share in 2008 was 29%. ^[23]

Procter & Gamble Co. was the world's top advertiser in 2007, spending almost $9.4 billion worldwide. The company outspent its largest competitor, Unilever, the second-highest advertiser, by almost two-to-one (Unilever spent $5.2 billion). ^[24]

Business Growth

Folgers Sale

On June 4, 2008, P&G sold its Folgers coffee unit to J.M. Smucker Co for $2.95 billion.^[25] 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. ^[25]

Gillette Acquisition

Procter & Gamble acquired Gillette in 2005 for over $50 billion in its largest acquisition to date. 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 and the remainder sourced from the Oral-B brand, which was moved into the Health & Well-Being 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.

Trends and Forces

Different product price points provide some insulation against recession

Household staples are somewhat protected from the US recession and global economic downturn. However, in a recession consumers often turn to cheaper private label or store brands instead of "brand name" products from P&G. To combat private label encroachment, P&G offers at least two product forms in many product categories. For example, the company has seen increases sales in Luvs from Pampers diapers and an increase in Gain detergent sales from Tide.^[26] In addition, P&G offers "Basic" versions of its Charmin toilet paper and Bounty paper towels.^[27] The company's broad offerings, combined with the necessity of household items, provide a degree of insulation against recession.

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. For example, the company's largest customer, Wal-Mart, accounted for 15% of net sales in 2006, 2007, and 2008. ^[28] Wal-Mart has exerted its power over other suppliers to their detriment in the past, such as forcing record companies to produce clean-label CDs and pulling adult magazines.^[29] A decision by Wal-Mart not to sell a particular P&G consumer product would prevent P&G from reaching its entire target market. In addition, many retailers have pushed their own higher margin private label brands in competition with P&G.

Rise of Private Labels

In the past decade, P&G has faced stiff competition from private label brands or "store brands" of large retailers such as Wal-Mart, Target, and supermarket chains. Private label products often sell at lower price points and earn higher margins because the retailers can control the cost of their production. For example, Wal-Mart offers 5,500 products through its "Great Value" brand, which has increasingly sold as consumers feel the recession squeeze on their disposable income.^[27] From 2003 to 2008, sales of Target's private label products rose an average of 15% annually. ^[27]

Large retailers are close to the consumers, have the point of sale data on consumer behavior and are in better position to understand consumer behavior. These strengths contribute to better private label product development, which directly compete with P&G products. Retailers also promote their own brands as they earn higher margins on them. P&G has addressed this issue by continuously investing in Research & Development and introducing new products as well as offering different versions of its own products at different price points. ^[27]

Developing Markets

PG 2008 Net sales by geographic region ^[5]

P&G has a well-established market presence in developed countries such as the United States and Western Europe and is looking to its presence in emerging markets. In 2008, 30% of total sales (approximately $25 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). ^[5]

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. In 2008, the company's distribution network reached 800 million people in China and 80% of the population in Russia.^[30] P&G has created products designed specifically to target developing nations. For example, in many countries consumers wash clothing by hand with limited amounts of water. In response, P&G has launched Downy Single Rinse in Mexico, China, Philippines, and 9 other countries. ^[6] While the average Mexican spends about $20 a year on P&G products, Chinese per-capita spending is only about $3 and India per-capita spending $1. ^[1] Increasing sales in China and India to the levels in Mexico would add $40 billion in sales to the company's overall revenue. ^[1]

Research & Development focuses both inside and outside the company

In 2008, P&G spent approximately $2.2 billion on Research & Development, nearly $1 billion more than its closest competitor, Unilever. ^[8]

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 42% of new products in the last several years were influenced by or originated from "Connect and Develop." ^[12]

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. The company has increased prices due to higher costs of oil and other raw materials. In its conference call, the company stated that it expected raw material costs to increase $3 billion in 2009.^[31] The company has raised prices on Cascade dishwashing detergent, Iams pet food, and Gillette razors to counter the increasing cost of oil in the first half of 2008. ^[31] 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

Competition

Procter & Gamble provides the broadest and biggest portfolio of products in the household and personal care industry with 24 billion-dollar brands. P&G generates 43% more revenue than its closest competitor, Unilever (UL), and possesses a higher operating margin (20.46%) than any of its competitors as well. The company invests more than $2 billion a year in R&D, nearly twice that of Unilever, and equal to the combined total of its other major competitors — Avon, Clorox Company (CLX), Colgate-Palmolive Company (CL), Energizer Holdings (ENR), Henkel, Kimberly-Clark (KMB), L'Oreal, and Reckitt Benckiser.^[32]

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.

*2008 financials available for CLX, PG. All others are 2007.

**L'Oreal and Unilever are European companies. Currency conversions based on dollar/euro exchange rates for Dec 2007 as reported by FRBNY,^[43] provided for reference only.

References

1. ↑ ^{1.0 1.1 1.2 1.3} Associated Press "Procter & Gamble unveils growth outlook"
2. ↑ ^{2.0 2.1} PG 2008 Annual Report, "P&G at a Glance," page 84
3. ↑ CNN Money, "P&G to buy Gillette in a $57B stock deal"
4. ↑ Wall Street Journal, "Procter & Gamble, Colgate Report Better-Than-Expected Profits"
5. ↑ ^{5.0 5.1 5.2} PG 2008 10-K, Item 1 "Business," page 4
6. ↑ ^{6.0 6.1} PG 2008 Annual Report, page 9
7. ↑ Financial Times, "P&G to shift 'centre of gravity' with growth in emerging markets"
8. ↑ ^{8.0 8.1} PG 2008 Annual Report, Note 1, "Summary of Significant Accounting Policies," page 60
9. ↑
10. ↑
11. ↑ PG, "Connect + Develop"
12. ↑ ^{12.0 12.1} Fast Company ranks Proctor & Gamble 11th most innovative
13. ↑ ^{13.0 13.1} Morningstar Analyst Report, PG
14. ↑ The Western Star
15. ↑ ^{15.0 15.1} Reuters Key Developments PG
16. ↑ MSN Money Procter & Gamble finalizes drug biz sale
17. ↑ CNN Money "A tough job for P&G's new CEO"
18. ↑ CNN Money "P&G's Lafley Had Salary Of $1.8 Million, Bonus of $3.1 Million In FY09"
19. ↑ ^{19.0 19.1} PG 2008 Annual Report, Note 12, "Segment Information," page 75
20. ↑ PG 2008 Annual Report, "Overview," page 40
21. ↑ Forbes
22. ↑ ^{22.0 22.1 22.2} PG 2008 10-K, Item 7 "Management's Discussion," page 40
23. ↑ PG 2008 Annual Report, "Management's Discussion," page 48
24. ↑ Business Courier, "Procter & Gamble largest worldwide advertiser," 8 Dec 2008
25. ↑ ^{25.0 25.1} Yahoo Finance, "J.M. Smucker to buy Folgers from P&G," 4 June 2008
26. ↑ Morningstar Analyst Report,"PG," 12 Dec 2008
27. ↑ ^{27.0 27.1 27.2 27.3} Reuters, "US Consumer Companies, Retailers Revisit Cheap Brands"
28. ↑ PG 2008 Annual Report, Note 12, "Segment Information," page 74
29. ↑ The Motley Fool, "A Wal-Mart Monopoly?"
30. ↑ PG 2008 Annual Report, page 8
31. ↑ ^{31.0 31.1} Bloomberg "P&G Profit Beats Estimate as Prices Rise
32. ↑ PG 2008 Annual Report, page 6
33. ↑ Unilever 2007 Annual Report, "Financial Review," page 23
34. ↑ Unilever 2007 Annual Report, "Notes to the Consolidated Accounts," page 81
35. ↑ Google Finance, "CLX"
36. ↑ Clorox 2008 Annual Report, "Consolidated Statements of Earnings," page 22
37. ↑ Google Finance KMB
38. ↑ Kimberly-Clark 2007 Annual Report, Item 1 "Business," page 3
39. ↑ Google Finance "Colgate"
40. ↑ Colgate 2007 Annual Report,
41. ↑ L'Oreal 2007 Annual Report, Chapter 2 "Management Report," page 58
42. ↑ L'Oreal 2007 Annual Report, Chapter 1 "Consolidated Financial Statements," page 114
43. ↑ FRED "US Dollar/Euro Monthly Exchange Rate"