How P&G Gains Market Share in Tough Times

The recent downturn forced leading consumer goods companies such as Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL), Kimberly-Clark (NYSE:KMB) and Unilever (NYSE:UL) to discount prices and spend on marketing and promotions to maintain market share. Though some macro concerns still linger, the global economic recovery is on more solid footing than in the recent past. Emerging markets, new product innovations and acquisitions are some of the areas where these companies have thrown their weight around, and below we look at different tactics employed to maintain or gain market share during volatile times like we have seen.

Our price estimate for P&G is $68.40, which is just slightly ahead of the current market price.

Continue Investing in Innovation

While the cash-starved players have no choice but to squeeze R&D budgets, the bigger ones could continue investing in product innovation and delight the consumer with improved products. This allows the larger players to gain market share and capture greater gains when spending returns, a tactic used by in the past by McDonalds (NYSE:MCD) and Wal-Mart (NYSE:WMT).

P&G frequently ranks as one of the most innovative and admired companies in the U.S. and spent around $2 billion in R&D during the last fiscal year ending June 2010. ^{[1] [2]} This spending will help it develop new products and improve existing ones to meet customers’ needs.

Continue Investing in Promotions a Little Longer

As consumer demand picks up, the smaller players retract promotions to restore margins. The bigger players could, however, leverage their positions into sustaining lower margins for some more time by extending the promotions over the next few quarters. This could particularly help players that enjoy scale benefits owing to their size and help them gain market share.

Go Easy on Working Capital

Businesses are normally advised to rein in the capital required to manage the day-to-day and short-term expenses that go into working capital. Any decline in working capital releases cash, and this can help mitigate pressure on operating margins. The players with healthy cash balances can extend relaxed credit terms to the retailers, for instance, by offering more flexible receivables and payable terms.

This entices the sellers to stock up a manufacturer’s products over competitors’. While this leads to a rise in receivables, it provides the manufacturer with preferential shelf space, which favors market share gains. Hence, a moderate increase in account receivables and days sales outstanding (DSO) is welcome in the current macroeconomic environment. (DSO measures the average number of days a company takes to collect revenues after a sale has been made)

Buying Out Competition

There are plenty of businesses that have a good product with promising growth prospects but with balance sheets left crippled by the recession and are hence available at a bargain. The players with a healthy cash balance could leverage the low interest environment to acquire such businesses. Unilever recently acquired Alberto-Culver as well as Sara Lee’s personal care and European fabric care businesses in the recent past. See Unilever’s Alberto Culver Acquisition Adds Shine to Stock? and Unilever’s European Expansion Lifts Stock.

See analysis for Procter & Gamble |Unilever | Colgate-Palmolive | Kimberly-Clark

1. World’s Most Admired Companies, CNNMoney online, May 2011 [↩]
2. Tough Times Spur Shifts in Corporate R&D Spending, Bloomberg Businessweek, August 9’ 2010 [↩]