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PG Has Room to Grow

By Tom Branna, Editorial Director | December 20, 2010

Despite a bumpy ride in the U.S. and Western Europe, chairman Bob MacDonald sees gains ahead via innovation and emerging markets.

The Tide may not be rising as fast as it once was, but Procter & Gamble chairman Bob MacDonald and his team are confident that there are plenty of growth opportunities for the world’s biggest consumer products company. In a meeting with analysts last week, P&G executives shared their vision of the future, which includes reaching more consumers in emerging markets and swaying shoppers in established areas with innovative products.
 
That growth plan all starts with a clear purpose, that MacDonald explained has remained the same since he became chairman 18 months ago.
 
“We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and in generations to come,” he told analysts. “As a result, consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders and the communities in which we live and work to prosper.”
 
The meeting with analysts followed the release of P&G’s fiscal 2011 first quarter results, which included a 6.8% decline in earnings. Sales during the period rose 2% to $20.1 billion.
 
 
There's more to P&G than Tide.
MacDonald admitted that P&G’s purpose and promise is one that is shared by many companies. However, what sets P&G’s purpose apart, he insisted, are two points:
• It has been handed down from generation to generation for 173 years. Its purpose has been remarkably consistent; and
 
• The purpose is pervasive. It guides and inspires P&G in every aspect of the business.
 
“Our purpose is more than a noble idea, it is a game-changing growth strategy,” insisted MacDonald. “And a competitive advantage if we leverage it fully.”
 
P&G currently serves 4.2 billion consumers, up from 4 billion a year ago, but management says the company is on-track to serve 5 billion consumers by 2015.
 
To get there, P&G is expanding into higher and lower price tiers and filling category white spaces. For example, Olay was launched in 15 markets over the past 12 months, most recently Brazil in November.
 
In fact, the U.S. share of total business within Procter & Gamble's portfolio declined from 41% in 2009 to 38% in 2010.
 
And while P&G currently plays in 938 category/country combinations today, the goal is to play in approximately 250 more by 2016. These moves should help boost consumer purchases per year from 40 billion to 60 billion during that time. The company’s long-term growth objective is to increase organic sales 1-2% above global market growth, boost EPS from high-single-digits to low-double-digits and increase free cash flow productivity to more than 90% of net earnings.
 
During the meeting with analysts, P&G executives confirmed guidance of 4-6% growth for fiscal 2010/11 (with global market value growth of 3-4%) and EPS of $3.91 to $4.01 (with core EPS growth of 7-9%).
 
How will the company reach these goals at a time when developed markets show slow or no growth?

Via a three-prong strategy that includes:
 
• Innovating to win with consumers;
 
• Integrating to operate as one company; and
 
• Simplifying to increase productivity and drive down cost.
 
Battles Won
 
During the presentation, P&G executives reviewed some of the successful innovations that the company has rolled out in recent years. For example, back in 2000, P&G modernized the $750 million brand by dropping the words “Oil of” from the name. The name change was followed by the expansion of the brand with products such as Total Effects, White Radiance, Daily Facials, Regenerist,Pro-X and, most recently, Men Solutions. Together, these moves have pushed Olay’s sales above $3 billion.
 
P&G executives maintain that the same types of innovations have helped the company win the U.S. oral care wars with Colgate-Palmolive during the past decade. Back in 1997, Colgate took the lead with the introduction of Colgate Total. But thanks to innovations such as Crest Whitestrips (2000), Crest Vivid White (2004), Crest Pro-Health Rinse (2005), Scope Outlast (2009) and Crest 3D White (2010), Crest has gained market share and now holds a 37% share of the segment, compared to 31% for Colgate, according to P&G.
 
Fusion is one of P&G's newest breakthroughs.
Obviously, innovation matters, and P&G executives insist it remains a core strength of the nearly $80 billion company. Now the company is determined to accelerate gains with disruptive innovation that’s being fostered by its Connect + Develop strategy, a plan that enabled P&G to land on five of the top 10 spots in SymphonyIRI’s New Product Pacesetters List for 2009. In fact, 125 P&G products have appeared on Top 25 Pacesetter lists during the past 15 years.
 
A Change in R&D Strategy
 
To stay on these lists, back in 2008 the P&G team realized that it was spending too much time on small innovations. They rebuilt their structure to include fast and agile learning capabilities, and changed the corporate strategy and review processes. At the same time, the global R&D footprint was changed. Now, P&G’s R&D landscape includes three sites in the U.S., two in Latin America, three in Europe, one in the Middle East, one in Africa, one in India, one in China, one in Japan and, most recently, a site in Singapore that opened in September. The Live Well Collaborative Singapore research center will tap into the Baby Boomer market in Asia, which is estimated to spend $1.5 trillion per year by 2015.
 
“Innovation has never been more important to P&G,” said Bruce Brown, chief technology officer. “It’s an inherent part of our focus of winning with consumers.”
 
Some of these innovations include improving existing products such as Tide Actilift or transformational innovation such as Crest Pro Health, said Brown. At the same time, P&G researchers have developed disruptive innovations such as Swiffer.
 
“We are committed t o innovation and we invest in it,” said Brown, noting that P&G spends more than $2 billion a year on R&D, which is greater than 50% more than the company’s nearest competitor.
 
MacDonald insisted that P&G’s R&D program is the strongest it’s been in his 30 years with the company.
 
“Promotions may win quarters,” he told the audience. “But innovation wins decades.”
 
Maybe so. But Wall Street has a way of punishing companies that miss their mark. And with more than a few analysts questioning the valuations of CPG companies, downgrades may be coming in the near future.
 
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