Question

are there any major differences between P & G and European based rivals? What conclusion can you draw from this?

Answer 1

There is a lot of difference between P& G and its European Rivals. The review of P&G as below in itself portrays the difference. P&G is a leader in the market.

Procter & Gamble: Global Giant in Household, Personal Products

The Procter & Gamble Company, or P&G (PG), is the largest household and personal products company in the world. The company was established in 1837 by founders William Procter and James Gamble. P&G, along with its subsidiaries, manufactures and sells consumer packaged goods. The company is geographically diversified and sells its products in more than 180 countries and territories.

P&G operates through five segments:

1. Fabric Care and Home Care – includes brands such as Ariel, Tide, and Downy
2. Baby, Feminine and Family Care – includes brands such as Pampers and Always
3. Beauty – includes brands such as Olay, Pantene, and Head & Shoulders
4. Grooming – includes brands such as Gillette
5. Health Care – includes brands such as Oral-B

The above chart shows that most of P&G’s revenue is consistently generated within North America.

CEEMEA in the above chart stands for Central and Eastern Europe, Middle East, and Africa.

Top consumer staples stock

Procter & Gamble figures first among the 39 holdings of the Consumer Staples Select Sector SPDR ETF (XLP) with ~12.3%¹ of the portfolio weight. ETFs including the iShares Core S&P 500 ETF (IVV) and the SPDR Dow Jones Industrial Average ETF (DIA) provide exposure to P&G. IVV and DIA invest ~1.2% and ~2.9% of their respective portfolios in P&G.

Largest market cap in the sector

The consumer staples sector is highly competitive. P&G competes against a wide range of global and local companies. Yet P&G’s market cap is $215.2 billion, the largest in the consumer staples sector.

Here are some of the domestic and international players operating in the same lines of business as P&G, and their market caps:

• Unilever (ADR) (UL) – $126.2 billion
• Colgate-Palmolive (CL) – $60.2 billion
• Estee Lauder (EL) – $33.4 billion

1. All figures like the ETF portfolio weights and the market caps are as of June 27, 2015

Competitive analysis

The Procter & Gamble Company, or P&G (PG), is the largest manufacturer and seller of household products in the world. Olay, Pantene, Head & Shoulders, Gillette, and Pampers are some of its major brands. Given that the consumer staples (XLP) sector is highly competitive, P&G faces local as well global competition from various players worldwide.

1.      P&G’s Stock Performance Versus Peers –Closing PricesProcter & Gamble Co (PG)Kimberly-Clark Corp (KMB)Estee Lauder Companies Inc (EL)Colgate-Palmolive Co (CL)Clorox Co (CLX)20122013201420150%+ 50%+ 100%+ 150%Source: BATS Exchange

Porter’s five forces

In examining Porter’s five competitive forces at work at P&G, we find that three are horizontal in nature:

1. competitive intensity among rivals
2. new entrants to P&G’s product categories
3. ease of product substitution

and two are vertical:

1. customer bargaining power
2. supplier bargaining power

Horizontal forces

P&G offers a wide range of products, and so it’s hard for a new company to compete with a similar product portfolio. Peers Unilever (UL) and Estee Lauder (EL) invest large amounts of capital on comprehensive research for their beauty brands. Using this research, the companies develop complete marketing strategies to promote particular products as special and distinct. In this way, UL and EL are able to compete with P&G in specific areas of the company’s giant portfolio.

P&G’s focus has always been on quality and innovation. Many local and international brands, including Colgate-Palmolive (CL), offer substitutes, such as Colgate, for Oral-B.

Connect and develop

In 2001, P&G adopted a collaborative innovation strategy called “Connect and Develop.” The idea was and is to allow P&G to identify and create worldwide partnerships with universities and institutes, sole inventors, emerging companies, small and medium enterprises, multinational corporations, and competitors. Through these partnerships, P&G develops a better understanding of consumer demands and their product responses.

For example, the P&G and CircleUp partnership was created to mutually benefit both P&G and startup firms. P&G gains exposure to new technology that might match its innovation needs. At the same time, startups gain valuable funding to pursue new technological developments.

Vertical forces

Due to the massive scope of P&G’s business, it relies on relationships with third parties to perform certain functions—suppliers, distributors, contractors, joint venture partners, or external business partners, among others.

P&G maintains standard pricing with its suppliers. As a large customer, it enjoys significant bargaining power with its suppliers. Still, it should be noted that even P&G isn’t immune from broader market movements related to commodity prices.

Bargaining power

Consumer staple products typically have low demand elasticity. But the fast-moving consumer goods, or FMCG, industry is also subject to stiff competition, which tends to mitigate this fact.

Consumers can be price-sensitive, and it’s easy to switch between products, which tends to reduce P&G’s bargaining power. That said, prices are relatively more inelastic for products such as Gillette, Pampers, and Olay, where P&G is the market leader.

According to a Reuters report published June 24, Walmart (WMT), P&G’s biggest customer, wants to charge a fee to all vendors for stocking and warehousing, which would put pressure on suppliers. This warehousing fee would help Walmart fund the costs of growing its store footprint and other parts of the supply chain, while keeping product prices low. This is likely to have a significant impact, as lower product prices might affect the profitability of P&G and other suppliers.

Major ETFs that hold P&G in their portfolios include the SPDR S&P 500 ETF Trust (SPY) and the iShares Core High Dividend ETF (HDV), with 1.2% and 5.2%¹ of their respective portfolios invested in P&G.

1. All ETF portfolio weights are as of June 27, 2015

Overview

The Procter & Gamble Company, or P&G (PG), manufactures and sells consumer-based packaged products. The company has five reportable business segments:

1. Fabric Care and Home Care
2. Baby, Feminine and Family Care
3. Beauty
4. Grooming
5. Health Care

Each segment has its own set of global business units, or GBUs. GBUs are major product categories within the segments. For example, the Beauty segment’s GBUs are Beauty Care, Hair Care and Color, Prestige, and Salon Professional.

The above chart shows that the majority of P&G’s sales and earnings are derived from its Fabric Care and Home Care segment. Each segment includes various products and brands listed next.

P&G’s top brands

Fabric Care, Home Care and Personal Care include brands such as Ariel, Tide, Dawn, and Downy.

P&G’s Baby Care, Feminine Care and Family Care segment includes products such as Always, Bounty, Charmin, and Pampers. Pampers competes with Kimberly-Clark’s (KMB) Huggies brand in baby care.

The Beauty Care segment includes brands such as Head & Shoulders, Pantene, SK-II, and Olay. The beauty care segment competes with Unilever’s (UL) TRESemmé, Vaseline, Dove, and AXE brands.

Grooming is P&G’s fourth-largest segment in terms of revenue and operating profit. It includes shaving products such as blades and razors. Major brands in this segment are the Gillette franchise, Mach3, and Fusion.

P&G’s Health Care brand Oral-B competes with Colgate-Palmolive’s (CL) Colgate brand, and is the second-largest brand in oral care.

Under Personal Care, Vicks and Prilosec OTC are among the top ten brands in their categories.

Procter & Gamble: A Brand Marketing Pioneer

Advertising and research activities

The Procter & Gamble Company, or P&G (PG), is a multinational US-based FMCG (fast-moving consumer goods) company that operates five business segments. Major P&G brands, including Tide, Olay, Pampers, Crest, and Gillette, hold first or second position in most of the markets they compete in.

P&G management believes in effective sales, advertising, and marketing programs to cope with a rapidly changing and competitive environment. In fiscal 2014, P&G spent $2 billion on R&D (research and development) and $9.2 billion on advertising. Advertising spend includes worldwide television, print, radio, Internet, and in-store advertising. The chart below shows P&G’s expenditures on R&D and advertising.

Biggest advertiser

P&G is one of the world’s biggest advertisers. The company has defined many of the marketing strategies used globally. In the 1880s, it was the first company to begin advertising directly to consumers on a nationwide basis. It literally created the concept of the soap opera by sponsoring radio and television dramas targeting women.

P&G’s advertisements for Tide—the so-called “washing miracle”— Crest, and Pampers took the US by storm, stealing market share from then dominant Unilever’s (UL) ALL, Kimberly-Clark’s (KMB) Huggies, and Colgate-Palmolive’s (CL) Close-up.

Recent campaigns

The company recently signed celebrity Maritza Rodriguez, for Tide Pods, to demonstrate that washable garments can be fashionable. The company also established a major presence in sports sponsorship by acting as official sponsor of the US national team during the 2010 Winter Olympics.

It continues to promote its brands using various strategies. For example, Gillette, Pantene, and Pampers came together to provide free makeovers, hairstyles, and fresh shaves to top draft prospects and their families during the 2015 National Football League draft.

On May 15, 2015 the company introduced a program called the “Make a Power Move.” This program was established to boost the working woman’s confidence. Covergirl, Olay, and Pantene teamed up with Levo and style experts to offer beauty and career advice for professionals.

What Drives Procter & Gamble’s Growth?

Continued growth via successful innovations

The Procter & Gamble Company, or P&G (PG), is a global leader in the FMCG (fast-moving consumer goods) industry. It provides branded goods of superior quality and value to its customers around the world. P&G’s business model relies on the continued growth and success of existing brands and products, as well as the creation of new products and innovation in existing brands.

The above chart gives an overall organic growth history of P&G and its five segments.

Consumer demand and low elasticity

The consumer is king. Rising populations, changing consumer behaviour, trends, and habits have led to growth in the consumer staples sector (XLP). Rising household incomes have not only affected the willingness of consumers to spend on prestigious brands but have also led to a highly competitive global market.

Consumer spending cycles tend to swing with the economy. But the consumer staples sector tends to move in a more structured pattern. Staples tend to have low price elasticity of demand. This means that the demand for these products doesn’t change so much as their prices go up or down. Yet there are plenty of substitutes for the products themselves.

Indeed, P&G operates in a highly competitive environment. Peers Unilever (UL), Kimberly-Clark (KMB), and Colgate-Palmolive (CL) have thrived by adopting new technologies and processes and by adding innovative products and brands in both developed and developing markets.

There are also many options to shop for lower prices among suppliers. This gives staples suppliers little room to raise prices or increase demand for their products.

Rising prices

Rising commodity costs and currency fluctuations have negatively affected the company’s margins recently. P&G manages these cost pressures through right-pricing actions, hedging currency risks, as well as by improving productivity.

The emerging markets of Asia, Eastern Europe, and Latin America offer ample growth opportunities for the consumer staples sector.

How Innovation is Helping Procter & Gamble Develop Premium Brands

At P&G, innovation is key

The Procter & Gamble Company, or P&G (PG), is one of the leading manufacturers and sellers of household products. Olay, Crest, Pampers, and Tide are some of P&G’s products that compete globally and locally.

P&G continuously tries to innovate, and this helps the company win over consumers worldwide, across price tiers and preferences. Some of the peers P&G is battling for market share with include Unilever (UL), Estee Lauder (EL), Kimberly-Clark (KMB), and Colgate-Palmolive (CL).

Innovation programs

In 2001, P&G established an innovation strategy program called “Connect and Develop.” This program allows the company to partner with universities and institutes, sole inventors, emerging companies, small and medium enterprises, multinational corporations, and competitors from across ten countries. The program has allowed the company to better understand consumer behaviour. Here’s why:

• It facilitates innovation beyond the areas of P&G’s expertise.
• It offers innovative ideas that improve product quality in advance of commercial release.
• It reduces risks by transforming potential competitors into collaborators. For example, a collaboration between Clorox’s sales and marketing team and P&G’s research and development team maximized value creation.
• It expedites the monetization process.

Febreze—P&G’s latest billion dollar brand—can thank Connect and Develop for much of its success. Olay, Regenerist, Oral-B, Pulsonic Toothbrush, and Pringles—now divested—have all been through the P&G Connect and Develop program.

Pricing power

Recent innovations in laundry detergents have brought significant pricing advantages to P&G:

1. Tide Pods is priced at a 20% premium to liquid Tide and have come to represent more than 7% of the laundry category.
2. Gain Flings is priced at a 60% per use premium to Gain liquid detergent.

Combined, Tide Pods and Gain Flings now have more than a 10% value share of the US laundry category and over 80% of the unit dose segment.

P&G is currently introducing innovations to its feminine care products with Always Discreet. This is an attractive $7 billion category worldwide, and it’s growing at an annual rate of 7%

Procter & Gamble Supply Chain Initiatives Improve Productivity

The Procter & Gamble Company’s, or P&G’s (PG), supply chain network includes more than 130 manufacturing sites and more than 200 distribution centers. P&G’s supply chain, distribution, and inventory figures have been improving since CEO A.G. Lafley’s return.

Supply chain initiative

In an effort to partially digitize its supply chain, P&G has introduced an automated re-ordering system. It maintains a count of inventory in stores and relays the information to its suppliers. P&G factory computers are linked via a satellite communication system. This helps speed up the delivery of products to Walmart’s (WMT) distribution centers or to other stores.

Sales to Walmart and its affiliate stores account for ~14% of P&G’s total revenue.

P&G’s inventory turnover metric improved to 6.1x in 3Q15¹ from 5.7x in 3Q14. Meanwhile, Colgate-Palmolive (CL) and Kimberly-Clark (KMB) have seen inventory turnover ratios fall as a result of negative currency effects. Estee Lauder’s (EL) inventory count remains in a range similar to what it was last year. Clorox’s (CLX) inventory turnover ratio is 7.2x, the highest of its peers, indicating higher sales in 3Q15. Innovations such as Clorox’s disinfecting wipes and toilet cleaners resulted in higher shipments.

Other changes in the supply chain network

Sales distribution has been better organized since CEO A.G. Lafley’s return. Here’s why:

• sales distribution of products is better organized across similar geographies
• network duplication has been cut, saving money
• overlapping roles within global business units and ground operations responsible for local sales and distribution have been eliminated
• e-commerce initiatives such as pgshop.com for direct-to-consumer sales have been introduced

P&G makes up ~2.9%² of the SPDR Dow Jones Industrial Average ETF Trust (DIA).

Ongoing initiatives

P&G puts a premium on responsiveness. Its distribution goal is to deliver products with just one day of transit to 80% of retailers. To achieve this, P&G is building six mega-distribution centers in strategic locations across North America. These facilities are designed to receive and cross-dock products from all of P&G’s business units, making for speedy and efficient delivery of mixed truckloads. For more information on cross-docking, read Analyzing Walmart – The World’s Largest Retailer.

Also, P&G is adopting a demand-driven replacement model based on point of sale, or POS, information from its retail customers. To speed up response time, P&G suppliers are creating “supplier villages” next to its plants. This will allow an uninterrupted thread of POS data to the supplier base and on through the distribution network.

Procter & Gamble: Successes, Weaknesses along the Road to Success

Strengths

The Procter & Gamble Company, or P&G (PG), is a multibillion dollar consumer staples entity. The company markets over 300 brands in more than 180 countries. These are the company’s key strengths:

1. strong focus on research and development – The company spent $2 billion on research and development in 2014, 2013, and 2012.
2. leading market position – P&G is a global market leader in some categories, largely on the success of brands such as Olay, Pantene, Head & Shoulders, Pampers, Gillette, and Tide.
3. diversified and strong brand portfolio – P&G participates in more than 22 global product categories with more than 100 brands. Its strong brand portfolio enables the company to compete effectively.

Weaknesses

Instances of product recalls such as the Sweep+Vac by Swiffer Vacuum Cleaner, which was recalled in 2005 after complaints of overheating, affect the firm’s brand image. This can negatively affect customer loyalty and brand equity.

Also, its dependence on Walmart (WMT), P&G’s largest customer, is a weakness. Having said that, when there’s higher traffic to Walmart, it can also work as a strength and reflect well on P&G’s sales.

According to a Reuters report, Walmart is planning to raise supplier fees. This might impact the profitability of P&G and other suppliers, such as food suppliers. For more on this subject, read Walmart’s Impact on Food Price Deflation.

P&G has little control over Walmart’s results. Sales to Walmart stores represented approximately 14% of P&G’s total revenues in the years 2014, 2013, and 2012.

Walmart, Target, Costco, and other supermarket chains are all important customers for P&G. Their stocking and costing decisions will have a trickle-down effect on PG. No other customer represents more than 10% of P&G’s net sales.

Opportunities

P&G aims to harness opportunities in developing countries like China, India, and Russia to enhance its market share as well as stabilize its top-line growth. The company will focus on core segments including the Fabric Care and Home Care segment and the Baby, Feminine and Family Care segment, which are structurally attractive to consumers. These also include some of P&G’s strongest brands.

Threats

P&G faces stiff competition in terms of advertising and promotion from Dove (UL), Huggies (KMB), and Colgate-Palmolive (CL). Substitution and duplication of products and brands in the local market present challenges to P&G’s top brands. Global economic conditions including commodity price or currency fluctuations and the regulatory environment may also adversely affect the firm’s revenue and market share.