P&G Expects Brand Consolidation to be Over by Summer

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Procter & Gamble

Global consumer products powerhouse Procter & Gamble (NYSE: PG) announced during the Consumer Analyst Group of New York conference call that it expects to be through with selling brands by this summer. [1] The company also provided additional details during the call regarding the impact of the brand consolidation strategy on sales and profits.

We have a price estimate of $83 for Procter & Gamble, which is slightly lower than its current market price.

See our complete analysis of P&G here

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Extent of Brand Shedding to be Slightly Higher than Originally Planned

CFO Jon Moeller stated that the company is on track to sell 100 under-performing brands by the end of this summer. Of these, 35 brands have already been divested or are identified for divestment. P&G expects sale of at least a majority of the remaining 65 brands to be finalized by the end of this summer. According to Moeller, revenues from the brands expected to be sold had been declining by mid-single digits for the last three years. These are low-margin businesses that have failed to gain traction, and hence will be put up on the block for sale.

P&G stated that the 60% brands set to be sold account for 14% of its total revenues. This is a variation from the original plan, according to which the brands to be sold account for 10% of the company’s total revenues. [2] Further, these brands account for just 6% of the company’s total before-tax profits. Therefore, the company will effectively get rid of brands that are exerting a drag on overall performance, without incurring a substantial setback on either the top line or the bottom line.

So far, P&G has already exited from the bleach and pet care businesses. Among the divestments that have been announced so far, Duracell leads the pack as the biggest brand to be sold off. The company has also sold off a few smaller fragrances brands like Naomi Campbell, skin care brands like DDF and Noxzema and soap brands like Camay and Zest. According to unconfirmed reports, P&G is also exploring the sale of Wella hair care unit and the Braun appliances brand. [3]

Future Concentrated on Core Strengths

Post consolidation, the company will own only 65 brands across 10 product categories. Geographical concentration is also expected to be higher, as the top 5 countries of each category will account for 54% to 98% of total global profit of that category. Further, P&G claims that it is a leader in 7 of the 10 product categories and is number two in the remaining three categories. This indicates that P&G has set its eyes on competing in only those categories in which it has a commanding market presence. Thus, instead of trying to improve upon its weaknesses, the company will attempt to focus on its strengths and compete from a position of power.

This strategy will result in faster revenue growth and higher margins, as P&G will no longer be burdened by poor-performing businesses. P&G will also be able to drive volume growth faster by capitalizing on the dominant market presence of the remaining brands. The large market share and high brand recall value will allow faster penetration of new products, thereby driving a sustainable volume growth. Lastly, the far lower total number of brands is likely to result in lower overhead expense as the existing complexity will give way to a simpler, leaner organization. This is likely to further boost P&G’s overall margins.

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Notes:
  1. P&G Consumer Analyst Group of New York Conference Call, February 19, 2015 []
  2. P&G 2014 Analyst Meeting Transcript, Seeking Alpha, November 14, 2014 []
  3. P&G exploring sale of $7 billion Wella hair care unit, Reuters, November 28, 2014 []