P&G’s E-Commerce Play Should Help Operating Margins

PG: Procter & Gamble logo
Procter & Gamble

Procter & Gamble (NYSE:PG) is the world’s largest manufacturer of personal and home care products. In May P&G entered the e-commerce market by launching its eStore in the U.S. The eStore will exclusively sell  P&G products such as Tide detergent, Olay skin cream, Pampers diapers, Pantene hair care products and Always feminine items.

Until now, P&G products have only been available online via retail partner sites such as Amazon.com (NASDAQ:AMZN), Walmart.com (NYSE:WMT),  and Target.com (NYSE:TGT). Although P&G has been actively involved in digital marketing since the late 1990s, selling products on its own site is a new step for this venerable company.

We think the eStore could help P&G’s operating margins, creating a small potential upside to the $83.81 Trefis estimate for the company’s share value. Our analysis follows below.

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Impact on the stock

Management predicts that e-commerce will eventually contribute close to 10% of P&G’s total revenues, up from 1% in 2009. The bulk of this revenue will come from partner sites that sell a broad range of items in addition to P&G products. Given the breadth of P&G’s portfolio, however, we expect the eStore to eventually generate about 30% of P&G’s revenues from online sales.

We believe that the eStore venture could yield a 3.06% upside to our  $83.81 estimate for P&G’s stock price. We don’t expect the eStore to boost P&G’s total sales volume, as online sales will mainly cannibalize P&G’s brick-and-mortar retail channel. And P&G is unlikely to engage in online price competition with its retail partners, given the company’s long history of building mutually profitable sales relationships.

But we do expect higher EBITDA margins on the portion of P&G’s online revenue that comes from the eStore. This is because retailers such as Walmart, Carrefour and Target extract a margin of about 25% from P&G and other manufacturers of personal and home care products.

You can drag the trend-line in the chart below to create your own EBITDA margin forecast for P&G’s detergent and household cleaning division and see how it impacts the company’s share value.

Why e-commerce makes sense for P&G

In the U.S. alone, online retail sales are expected to total $335 billion by 2012, up from $175 billion in 2007, according to Forrester Research. Retail e-commerce sales are growing at a compounded annual growth rate of 14%.

P&G’s broad product range allows it to create a single online destination where consumers can satisfy most of their household and personal product needs. The eStore will also help P&G understand consumer behavior and produce e-commerce innovations that will help both P&G and its retail partners.

Importantly, the eStore should help P&G penetrate emerging markets. P&G has set a goal of acquiring one billion new customers by 2015. Much of this growth is expected to come from Asian and African markets where distribution is often a major challenge. But as Internet use rises in geographies such as rural India, e-commerce could help P&G reach these underserved markets.

You can see the complete $83.81 Trefis Price estimate for Procter & Gamble’s stock here.