US-based consumer goods giant Procter & Gamble’s (NYSE:PG) 2012 story has largely been a disappointment for investors. The company’s historic focus on high price points and premium-range products greatly undermined P&G’s dominance in developed markets over the year. P&G’s performance during the period January-June 2012, was marked by declining market shares across key segments and losing market share in businesses representing 70% of total sales in the April-June quarter.
However, the company intervened towards the latter half of 2012 by becoming more aggressive with pricing and packaging in order to win back consumers. As a result, in the July-September quarter, the company gained or maintained existing market shares in businesses representing 45% of total sales. However, volumes remained weak across business segments with net sales declining by 4%.
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We expect the company to improve upon its October-December quarter result. Investors should note that the company’s fiscal year ends in June, therefore the upcoming results would mark the company’s Q2 results for fiscal year 2013.
Growth Expected in Emerging Markets
The company’s muted recovery in the last quarter was largely achieved because of a renewed focus on emerging markets. Some key introductions included the roll out of oral care products (under the Oral-B banner) in Latin America, OTC medication in Poland and Russia and hand soaps across several nations in Africa. Such efforts were rewarded when the company posted a 7% increase in organic sales from emerging markets in the last quarter. With the company targeting an overall 8-9% growth from emerging markets over FY 13, investors have reason to expect slightly improved numbers from these markets in the upcoming quarter results.
The key concern here is that competitors such as Unilever, Colgate-Palmolive and Kimberly-Clark are eyeing the same geographies for their own sales share growth. As a result, pricing is expected to get extremely competitive, putting more pressure on P&G’s margins. However, investors should also remember that P&G has historically sported margins well above those of close competitors such as Unilever and a trade-off in the company’s short-term margins to expand its footprint in emerging markets wouldn’t necessarily be a bad thing.
Some of the key divisions that we’ll be looking at when analyzing P&G’s emerging markets performance in Q2 13 are baby care and healthcare.
The baby care division (consisting largely of the company’s Pampers range of diapers) holds special interest because P&G has been strongly focusing on improving its diaper sales in developing countries. With a booming population of infants and increased purchasing power among the population, the demand for baby care products is increasing rapidly in emerging regions. The company has set up large scale manufacturing operations for diapers in countries like China and is scaling up its sales channels in other South Asian regions.
The healthcare division’s results will also be important considering that P&G has been investing in a range of oral care and OTC medication solutions in regions such as Latin America and Asia. With a bulked-up product portfolio, we should see some significant traction in P&G’s emerging markets sales in this division.
Lower Demand And Higher Competition In Developed Markets
In stark contrast to P&G’s improving performance in emerging markets, the company continues to see a meaningful slowdown in sales from developed markets. Since the company earns a majority of its revenues (nearly 65%) from developed markets, unlike Unilever or Colgate-Palmolive, the general economic slowdown in these regions is having an adverse impact on its volumes. In the July-September quarter, the company reported net sales decline in all five of its major operating segments due to flagging sales in developed markets.
One of the key business divisions in which P&G has been slowly losing its grip in developed markets is beauty products in which the company’s portfolio is highly geared towards the premium segment. In the July-September quarter, the division registered sales decline of 7% compared to the same quarter the previous year. The surge of competitors, with Unilever leading the way, are eroding P&G’s market share in all sub-product segments from skin creams to hair care. We expect the company to continue to face challenges here.
A brighter spot on P&G’s map is the performance of its fabric care division. The company’s renovated packaging of its Tide detergent into Tide Pods seems to have gone down well in western markets, but whether or not that alone is enough to salvage the company’s sales, remains to be seen.
Most other segments are likely to be under pressure as well unless the growth in emerging markets can compensate for developed ones. However, we believe that this will be challenging and expect growth to stagnate until proven otherwise. Meanwhile, pricing pressures from competition and commodity costs pressures will make it harder for P&G to grow earnings without meaningful volume growth in the coming quarters.
We currently have a Trefis price estimate of $70 for Procter & Gamble, which is in line with the current market price.