P&G’s R&D Results Need a Lift

For a company that boasts more than 1,000 doctors, Procter & Gamble’s research and development efforts look a little sick, according to industry analysts in a recent Bloomberg article. To be specific, P&G has more than 1,000 Ph.D.s among the 8,000 employees at its 26 innovation facilities around the world. Spending on research and development in fiscal 2012 ended June 30 was $2.03billion, or 2.4% of sales, the same as the prior year and down from 3%of sales in 2006.

Despite all that firepower, P&G hasn’t created a blockbuster in years. It’s newest innovations, including Swiffer cleaning devices, Crest Whitestrips, and Febreze odor fresheners, were launched more than a decade ago.

That explains, in part, why P&G is trading at a 22% discount to the 31-company Bloomberg Industries Global Household Products Index, near the five-year low of a 25% discount reached in July. Another reason for the decline is competition from low-priced competitors. A 150-oz. container of liquid Tide detergent is $18 at Target; not bad, but still 20% more than the retailer’s house brand. As rising commodity prices have increased the cost of most basic household products, cash-strapped customers may still be willing to pay more for true innovations but not necessarily for product extensions and embellishments.

The new consumer sentiment has created a challenge for P&G, which has lowered profit forecasts three times since Jan.1. Now, the company is trying to cut $10billion in costs by 2016 and reverse market-share declines in such key categories as U.S. detergents.

To boost return on R&D, the company earlier this year assembled a team of researchers, marketing managers and senior executivesto chart a bolder innovation course. The group spent 10weeks analyzing P&G’s new-product pipeline and selecting the most promising ideas for development. Most won’t be ready for at least another year.

P&G CEO Bob McDonald, acknowledged the company’s R&D has been “inadequate” in some product categories and regions, and has centralized 20-30% of P&G’s research efforts. He also named Jorge Mesquita, already chief of its pet care and snacks businesses, as head of P&G’s new business creation and innovation unit and gave him responsibility for coordinating product rollouts.