P&G Worth $70 As It Slows Emerging Markets Expansion

PG: Procter & Gamble logo
Procter & Gamble

Procter & Gamble (NYSE:PG) will slow down its expansion across the emerging markets in order to refocus resources on stabilizing its market share growth and operating margin performance in its core markets. Emerging markets expansion, amid weakening demand from developed markets, was a key priority of CEO Bob McDonald, but has now been put on hold in light of declined earnings and market share last quarter.

See our complete analysis for Procter & Gamble’s stock

Overextended Itself With Fast Paced Expansion In Emerging Markets

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Even though expanding geographical and product footprint across emerging markets is critical for the growth of consumer giants, a high commodity cost environment, expansion costs and supply chain shortages made P&G’s fast-paced expansion more difficult than previously expected.

P&G accelerated its emerging market expansion over the past few years to make up for the sluggish demand from developed markets. But the strategy came under the scanner after the company saw continuous operating margin decline and loss of market share in its core and most profitable markets, while its competitors like Unilever fared better amid the same challenging market conditions.

Apart from the high input cost environment, the margins have been adversely affected by disproportionate growth in developing markets and mid-tier products, which have lower than segment average selling prices (ASPs) and lower demand for premium-priced products, leading to an adverse product mix and a downward pressure on margins. Even though P&G continued to increase prices every quarter to offset the pressure on its gross margins, the company-wide EBITDA margins fell from 26.5% in 2009 to 23.9% in 2010 and 22.3% in 2011.

Emerging markets currently account for about 37% of P&G’s annual sales, up from 20% in 2000. P&G had set a target of acquiring one billion new customers by 2014-15 through expansion to new markets and plans to add around 20 manufacturing facilities in emerging markets such as Brazil, China and Eastern Europe by 2015. But in the current scenario, it is likely to proceed with a more measured approach.

Brakes On Further Expansion Till Core Markets Stabilize

P&G has now decided to focus on the health and competitiveness of its core and most profitable businesses, starting with its top 40 country-product categories (out of a total 1,000 categories) that account for more than half of the company’s sales. The next step is to strengthen its position in its 10 largest emerging markets including China, India, Indonesia, Brazil and Russia.

It will, however, not exit from any country-product category already entered. Also, any further expansions are likely to be more measured, with focus on ‘self-funded’ expansions. Apart from more careful expansion expenditure, the company also plans to undertake a massive and ambitious $10 billion cost-cutting program by fiscal 2016 to push up its operating margins.

We currently have a $70 Trefis price estimate of P&G’s stock, 10% ahead of the current market price.

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