P&G Speeds Up Cost-Cuts And Price-Cuts To Recover Market Share And Margins

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PG: Procter & Gamble logo
PG
Procter & Gamble

Procter & Gamble (NYSE:PG) outperformed market expectations last week with a 45% jump in earnings supported by a gain from selling its Pringles snacks business and hastened cost cuts than previously planned. Nonetheless, sales continued to decline with wider market share losses and leaner margins. But these market share losses showed signs of improvement as the consumers giant implemented price cuts for some of its major brands like Tide and Gillette. It plans to execute further such price cuts for other beauty and personal care products to recover lost market share from competitors like Unilever (NYSE:UL), Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL).

See our complete analysis for Procter & Gamble’s stock

Earnings Improve As Cost Cuts Speed Up

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P&G posted a 45% rise in Q4 earnings supported by a gain from selling Pringles, a favorable tax rate and hastened cost cuts than previously planned. Staying ahead of its non-manufacturing job cut targets, P&G cut 5% (~2,000 roles) of its non-manufacturing roles last quarter, ahead of its target of 1,600 for fiscal 2012.

With pricing constraints, weak demand in developed markets and not much optimism around the easing of the commodity cost environment, P&G has set a target of $10 billion in cost cuts, which includes $1 billion reduction in marketing costs and $3 billion in overhead expenses, to improve margins. The management is under increased pressure to speed up restructuring and cost cuts and see a sales turnaround post the purchase of $1.8 billion worth stake by activist investor Bill Ackman.

Price Cuts Help Market Share

Even though P&G’s market share losses from Q3 continued and in fact widened in Q4, the market share picked up after price cuts for major products like Tide and Gillette were rolled out. P&G began losing market share to competitors in several of its core markets this year after its attempt to manage high costs through short-term price increases backfired as the competitors did not follow suit and took away its market share. The latest price cuts mean that P&G will be giving back around $400 million — twice as much as previously estimated — of $3.5 billion in price increases it has taken over the past year.

The consumers giant is expected to further lower prices for the entry-level-priced versions of other products like Bounty paper towels and Charmin toilet paper as well as some beauty and health products to recover market share. P&G is keen on strengthening its presence in top 40 largest and most profitable country-product categories and top 10 emerging markets. The coming quarters will be crucial for P&G to stabilize market share as it has traditionally been difficult for fast-moving consumer goods brands to regain market share once lost and, particularly, if the price-cuts and promotions are not sustainable.

We have a revised $69 Trefis price estimate of P&G stock, 5% ahead of current market price.

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