P&G will axe '90 to 100 brands' from product lineup

Procter & Gamble, the maker of Pampers diapers, Crest toothpaste and Tide detergent, will shed many of  its well-known brands in the coming years in order to cut costs. Which Procter & Gamble brands are on the chopping block? 

|
Mario Anzuoni/Reuters/File
Tide laundry detergent, a product distributed by Procter & Gamble, is pictured on sale at a Ralph's grocery store in Pasadena, Calif. Procter & Gamble Co, the world's largest household products maker, reported a better-than-expected quarterly profit as its cost cutting efforts paid off and organic sales rose in its home care business, August 1, 2014.

What's wrong in Cincinnati?

It's been one year since A.G. Lafley rejoined Procter & Gamble—swooping in to replace Bob McDonald—four years after Lafley retired from the job.

Lafley famously helped turn around the company when he joined in 2000 by focusing on innovation and later buying Gillette, and his return to the helm was expected to restore growth at the world's largest consumer products company.

A year later, investors are still waiting.

The maker of Pampers diapers, Crest toothpaste and Tide detergent, just reported earnings excluding items of 95 cents per share, compared with Wall Street's prediction of 91 cents a share, according to a consensus estimate from Thomson Reuters. It also announced a 37 percent jump in quarterly profits, owing in part to cost cuts.

While profits have been exceeding expectations, due largely to cost-cutting efforts, revenue has missed the mark the last three quarters, including in this latest quarter.

Read MoreP&G's quarterly profit jumps 37 percent on cost cuts

Investors welcomed Friday's news, largely because of plans to sell or discontinue products, and sent shares up more than 3 percent in trading. But prior to earnings, shares were down 5 percent this year, underperforming both the Dow Jones Industrial Average and the S&P 500 Household Product Index. Over the last year, it's the Dow's second-worst performer.

Many are asking whether P&G's troubles are theirs alone or challenges the industry is facing. The answer is it's both.

Read MoreProcter & Gamble cuts outlook on emerging market currency impact

There is no question consumer products companies are facing major headwinds, including a sluggish recovery in consumer spending in developed markets like the U.S. and uncertainty on growth in emerging markets, along with sharp swings in foreign exchange rates, which cut into overseas earnings.

Earnings in the sector have been disappointing across the board.Thursday, L'Oreal, the world's largest cosmetics company, missed estimates saying it was "held back by a sluggish American market."Colgate-Palmolive sales missed its estimates, with North American sales up only 1 percent in the quarter. Kimberly-Clark, which makes Huggies and Kleenex, cut its outlook last week.

Unilever, the company behind Lipton tea, Dove soap, and Ben &Jerry's ice cream, missed sales estimates as well. CEO Paul Polman said, "We have experienced a further slowdown in the emerging countries, while developed markets are not yet picking up."

Read MoreProcter & Gamble provides protection in down markets: Pro

Clearly, the industry is struggling and has yet to participate in the broader economic and recovery in consumer spending.

Something else wrong?

Despite the tough macro environment, analysts who cover P&G say, many of the problems the company is facing are self-inflicted.

Since Lafley's return, none of the main categories—baby, feminine & family care; global beauty; global fabric and home care; and global health and grooming—are firing on all cylinders.

He has pursued deep cost cuts to boost productivity and profits, cut a $2.9 billion deal to sell off pet food business, launched a review of factory operations and operations and focused on innovation, rolling out new products like Gillette's Fusion ProGlide razor. And he is still pursuing a sale of the pet-care business in Europe.

Now, the company says it will keep only 70 to 80 brands and divest or discontinue the rest—some 90 to 100 brands—over the next 12 to 24 months to help narrow its focus and cut even more costs.

"After a year in, many things internally have changed, but the results haven't," said Ali Dibadj, an analyst at Sanford C. Bernstein. "Changing a big company is slow, but this feels like something else might be wrong."

Looking back at last year, Lafley "could have underestimated the toughness of the global consumer environment, reinvestment needed to halt share losses where consumers have turned to value, how much better competitors have become and how quickly the development of retail is undermining the advantage scale provides when distributing in China, and Russia," said Consumer Edge Research analysts in a note published ahead of earnings.

Analysts said there are also fundamental issues that make it harder for P&G to grow in this environment, including the company's lack of local manufacturing presence, which has saved competitors like Unilever money on labor and production costs and has pressured P&G's margins. Some products sold in Brazil, for instance, are made in Europe, according to analysts.

Another issue: The corporate structure where decisions are made, and business is reported, is done so by category—i.e. beauty or grooming—instead of geographically focused by region, which is how Colgate operates. P&G's structure may result in a misunderstanding of local consumer markets and tastes and an inability to be nimble regarding changes and decisions on brands and execution, particularly important for the localized beauty market.

The company also might have to rethink pricing.

"I think P&G is at too high of a price in categories that are becoming commoditized. Do you really care about which laundry detergent you use to pay 2x for Tide? Also, the categories themselves are slowing because of that (i.e., trading down) and thus competition is on the rise," Dibadj said.

John Faucher, who covers the stock at JPMorgan, said P&G has room to lower prices, especially as the brands have lost their premium value to competitors over the years, cut costs further, and innovate with new products.

But there's been market chatter about P&G breaking up and spinning off the individual businesses to unlock value and bring a sharper focus on execution and growth for each category.

Nik Modi of RBC Capital Markets said earlier this week, that he wants to know specifically how P&G plans to cope with troubles in the beauty business, and "if they can't, I would like them to address whether they would ever spin off the business."

Read MoreWhere are tomorrow's consumers? Not where you expect

Despite the challenges and the to-do list, Wall Street analysts are fairly optimistic.

Faucher has a "buy" rating on the basis that "the concerns on top line and gross margins have weighed on the stock, in our view. We see upside versus the group as margin and EPS performance improves in 2015."

Beyond steering the company back to growth, the other task for Lafley in taking the top job was to choose a successor, as he had never intended on staying for the long run.

So far, no hints of where the company or he is in the selection process, but perhaps P&G should break with its long-standing and deeply imbedded practice of hiring within, to bring in some fresh ideas. Because the task at hand is steering a diversified, global juggernaut—121,000 employees large, that traces its roots back to 1837—back to growth.

"If this legendary CEO can't fix the business over the next year, I think it means it is unfixable in its current form and the problems need to broken up into smaller ones...i.e., a break up," Dibadj said.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to P&G will axe '90 to 100 brands' from product lineup
Read this article in
https://www.csmonitor.com/Business/Latest-News-Wires/2014/0801/P-G-will-axe-90-to-100-brands-from-product-lineup
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe