Revised P&G Estimates On Higher Market Share And Lower Margins

We have revised Procter & Gamble‘s (NYSE:PG) forecasts following results from the latest quarter. The company’s continuing under-performance vis-a-vis major competitors such as Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL) has increased the company’s focus on its new core strategy: focusing on its strongest brands and price reductions. We believe this will positively impact market shares for key divisions in the short-term. The company’s focus on mid-to -low priced product segments, however, is expected to negatively impact the company’s margins, again in the short term. The company’s divestment of its Snacks business, culminating with the sale of Pringles to Kellogg (NYSE:K) in the first half also led to structural changes in the way we present the company. The remaining ‘Pet Care’ business is too small to be reported as a separate segment and is now being included under ‘Fabric and Home Care’. This has led to the creation of a new division in our presentation of the company – ‘Fabric, Home and Pet Care’. ^[1]

See our full analysis for Procter & Gamble

Shake-up in pricing structure and increased focus on emerging economies

P&G’s current results are being weighed down significantly by the company’s reliance on premium-priced products in key segments such as Fabric Care and Grooming. The company is trying to correct this with large-scale changes in its pricing structure. Recovering market share in the short run through competitive pricing is one of the company’s key targets in the near future.

Moreover, the company’s increasing focus on developing markets is a key driver for future growth. These markets are intrinsically price-sensitive, especially when it comes to fast moving consumer goods (FMCGs). The company can ill-afford to let competitors gain a stranglehold over regions such as India and China. ^[2]

Increasing attention to core product lines

P&G is increasing its focus on improving volumes of its core brands through means such as innovative packaging and increased customer engagement. This strategy also implies that non-core, unprofitable brands will take a backseat from now on.

This fundamental change in strategy is likely to have both positive and negative effects:

1. Short-term improvement in market shares for some segments, a decline expected in others

Keeping the latest quarter results in mind, we have upgraded our estimated projection for market share in key segments. We believe the Grooming, Baby and Family Care and Healthcare segments will see increased market share in the near-future, buoyed primarily traction in developing economies and a recovery in market share in western regions. These segments posted the best results in the third quarter, showing marginal growth in organic sales. Family care and Feminine Care products in particular are expected to see strong growth in the future, driven by innovation and an improving product-mix.

The company’s new pricing policy is also aimed at driving its share in developing economies such as India where penetration of healthcare products is primarily being thwarted by high prices acting as the an entry barrier.

On the other hand, the company’s focus on core product segments will probably spell the end for the company’s Pet Nutrition products. Moreover, the recessionary environment in the west coupled with the company’s cutbacks on marketing spend will probably mean segments which depend on premium-priced products, primarily Fabric Care and Beauty, could see  market share decline in the future. These two segments posted disappointing results in the third quarter, with stagnating organic volumes.

2. Margins to suffer as pricing revision picks up, cost-saving programme improves long-term outlook

The revision in pricing structure and growth in price-sensitive emerging economies spells bad news for P&G’s profit margins, whose projections we have downgraded for the short-term across most segments.  On the other hand, the large-scale cost-saving plan undertaken by the company last year is expected to save the company up to USD 10 billion by 2016, lending long-term EBITDA margins greater stability over a longer period of time.

We currently have a Trefis price estimate of $70 for Procter & Gamble, which is 5% above the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. P&G Press Release, February 2012 [↩]
2. As Growth Slows, P&G to Roll Back More Prices; Marketing Budget Unaffected, April 2012, AdvertisingAge [↩]