P&G’s Q2’17 Earnings Review: Premium Innovations And Promotional Activity To Drive The Growth

Procter & Gamble (NYSE:PG) released its Q2’17 earnings on January 20th. The company continued to outperform analyst expectations owing to it cost savings program and premiumization. This is the second consecutive quarter where P&G’s net sales have remained relatively flat instead of falling, despite the foreign exchange headwind of 2%. The organic sales of the company grew by 2% due to the growth in its two biggest markets, i.e the U.S. and China. With a good start to FY’17, P&G has raised its full year organic sales growth guidance from 2%, to a range of 2-3%.

We believe the following factors will determine the company’s growth prospects going forward:

1. Promotion among youngsters and new entrants in the market
2. Innovations in the premium category

See our complete analysis for Procter & Gamble

P&G Is Safeguarding The New Generation’s Allegiance To The Brand

In an attempt to keep increasing its loyal customer base, P&G is successfully targeting the youngsters and other potential new customers by distributing free promotional product samples to them, right from the beginning when they are expected to start spending on these products.  For instance, P&G will distribute Gillette’s Flexball razors to 2 million young men on their 18th birthdays this fiscal year. In a similar trial and sampling initiative, P&G was able to reach 20 million young girls in developing nations by educating them about sanitary pads. Apart from this, the company plans to give away 30 million laundry detergent samples with the new washing machines in this fiscal year.
Although such initiatives increase the promotional costs, they are likely to yield much more in the long term when these new entrants convert into permanent customer base of the company.

Innovations In Premium Category Has Started To Yield Positive Results

P&G has benefited from its premium categories, especially in the beauty division whose 3% organic growth was led by premium SK-II brand. Apart from this, grooming and the oral care segments reaped the benefits from premium innovations in the shaving appliances and Oral-B toothpastes respectively. In the fabric and home care division, sales of higher end detergents crossed the $2 billion mark in the quarter.

The trend is likely to continue for P&G for the rest of fiscal 2017 as some of the largest markets like skin & hair care are being forecast to grow faster than the mass market. In the Q2 earnings call P&G’s management announced that, rather than focusing only on promotional activity, it will continue to launch and invest in new innovations throughout the fiscal year. A similar strategy of Premiumization is being adopted by Unilever, which has bought around 10 premium brands in the last two years (See: Unilever’s Acquisition Spree In 2015 And 2016 Could Help Boost Its Revenues and Profits).

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