Procter&Gamble – Serving the Consumer

Procter&Gamble (P&G) (NYSE–PG)

is one of US largest transnational companies, a leader in production of consumer goods. Its market capitalization exceeds GDP of many countries. It serves consumers in over 180 countries. In addition, P&G is the world's largest advertiser as the company's advertising costs exceed $8 bn. It is headquartered in Cincinnati, Ohio. The official site and financial statements are at the company's site

History of the company

P&G was founded in 1837 by William Procter, a candlemaker, and James Gamble, a soapmaker, based on a small family business in Cincinnati, Ohio. Its sales and staff reached $1 mln. and 80 people, respectively, as early as in 1859. During the US Civil War the company got significant orders for candle and soap deliveries to the Northerners' army. In 1887 P&G launched a program admitting its staff as shareholders.

P&G's success and development were encouraged by a well-chosen area of activity - production of consumer goods and advertising campaigns based on consumer market research data. Soap production was followed by introduction of a safety razor, washing powder, toothpaste. In 1933 Ma Perkins, a radio soap opera sponsored by washing powder Oxydol from P&G, was aired throughout the US. Radio show fans become loyal buyers of P&G goods in shops.

The company today

Today's market capitalization and the total annual turnover of the company is $173 bn. and over $70 bn., respectively. The company employs over 127,000 people.

Its main business involves production of goods with supreme consumer qualities in 5 major categories: cosmetics, perfumes and personal hygiene items; household care products; health care products; family products and child care products; as well as pet food. The company's widely known trademarks include Pampers, Tide, Ariel, Pantene, Always, Mach3, Pringles, Lenor, Oral-B, Duracell, Olay, Head&Shoulders, Wella, Gillette, Braun and many other brands that have won trust of consumers worldwide.

The company's business has expanded to all continents. The chart below represents the total share of sales for each region and the share of sales in developed and developing markets.

P&G is recognized as a leading global company.

So, Fortune assigned it to the 6th place in Global Most Admired Companies, 2nd - Top Companies for Leaders, 1st - Most Admired; Barron's - 3td place in World’s Most Respected Companies List; Bloomberg Businessweek - 12the place in World’s Most Innovative Companies; Dow Jones Sustainability Indexes put it among Global 100 most sustainable corporations in the world in 2000-2010, 13th place in Global's list of 100 most sustainable corporations in the world. It has been recognized by many other agencies and journals.

P&G's main competition includes global producers of household chemicals and personal hygiene items:

• Colgate-Palmolive — toothpaste and toothbrushes (Colgate, Elmex), soap and shower gel (Palmolive), deodorants (Mennen, Lady Speed Stick), pet food (Hill’s), household chemicals (Ajax);

• Unilever — shampoo (Clear, Sunsilk), toothpaste (Signal), deodorants (Rexona, Axe), soap and shower gel (Dove);

• L’Oreal — shampoo (Fructis, Elseve), skin care (L’Oreal Paris), cosmetics (Maybelline), deodorants (Garnier), hairdressing (Studio Line), hair dye (L’Oreal Paris);

• Schwarzkopf/Henkel — hairdressing (Taft, got2b), hair dye (Palette), shampoo (Schauma, Gliss Kur), deodorants, shower gel, soap (Fa), skin care (Diademine);

• Henkel — washing powder (Persil, Losk, Deni, Pemos), linen conditioners (Laska, Vernel), washing-up (Pemolux, Pril), household chemicals (Bref);

• Reckitt Benckiser — whiteners and home cleaning (Vanish, Cillit, Harpic), cough remedies (Strepsils), depilation (Veet);

• Kimberly-Clark — woman's hygiene (Kotex), disposable diapers (Huggies), toilet paper (Cottonelle).

Goal, ethical values and principles

Its goal is to produce goods and services of top quality and consumer value that improve consumers' lives worldwide. In turn, consumers help the company win leading positions in terms of sales, ensure that its business prospers to promote better well-being of its staff and shareholders as well as communities where the company operates.

Principles:

•             We Show Respect for All Individuals;

•             The Interests of The Company and The Individual Are Inseparable;

•             We Are Strategically Focused in Our Work;

•             Innovation Is The Cornerstone of Our Success;

•             We Are Externally Focused;

•             We Value Personal Mastery;

•             We Seek to Be The Best;

•             Mutual Interdependency Is a Way of Life.

Ethic values:

•             Integrity;

•             Leadership;

•             Ownership;

•             Passion for Winning;

•             Trust.

Corporate structure

P&G's organizational structure is an important element of development. It does not follow many traditional models which result in business inefficiency when duplicated.

Today the company has three main areas of activity:

•             P&G Beauty & Grooming;

•             P&G Household Care;

•             P&G Health & Well-Being.

The company includes 4 functional departments.

1.            Global Business Units (GBUs) focus solely on consumers, brands and competitors around the world. They are responsible for the innovation pipeline, profitability and shareholder returns from their businesses.

2.            Market Development Organizations (MDOs) are charged with knowing consumers and retailers in each market where P&G competes and integrating the innovations flowing from the GBUs into business plans that work in each country.

3.            Global Business Services (GBS) utilizes P&G talent and expert partners to provide best-in-class business support services at the lowest possible costs to leverage P&G’s scale for a winning advantage.

4.            Lean Corporate Functions (CF) ensure ongoing functional innovation and capability improvement.

In 2008 Global Business Services introduced Video Collaboration Studios which integrates over 80 offices around the world into one information space. The immersive environment created by VCS allows employees to connect face to face from any part of the world—as if they were in the same room. These studios greatly reduce the need for travel—saving money, time, and reducing P&G’s carbon footprint.

The chart below represents the model of development of the company's global market organization

The company’s business

P&G Beauty & Grooming

This business makes personal hygiene products and cosmetics under 40 globally known trademarks. These include Olay, a woman's skin care brand. The aroma market includes Dolce & Gabbana, Gucci and Hugo Boss. Man's personal hygiene items include deodorants, face cream and shaving tools, skin care and cleaning items branded Gillette. Braun sells electronics and small household appliances. This area is mainly focused on devices for electric removal of hair such as electric shavers and epilators where they take up about 30% in the market of man's shavers and 50% in the market of woman's epilators.

P&G Household Care

This segment included a variety of household care items such as washing substances, additives, fabric and accessories. Household care products include washing-up liquids, washing and cleaning substances. Air fresheners, accumulators, toilet paper etc. There are 24 brands, including famous Ariel, Bounty, Comet, Dash, Duracell, Tide etc.

P&G Health & Well-Being

In the health care market P&G operates 18 brands in different areas such as gynecology, diseases of the gastrointestinal tract, urology, express diagnostics, diseases of respiratory organs, production of items for oral care, water filtration etc.

The chart below represents sales of each business segment as compared to the company overall.

The company’s strategy

P&G is focused on a strategy intended to ensure long-term prospects and increasing shareholder returns to a level of the top third of earnings of its competitors.

The company's long-term financial goals include:

•             Increasing sales from 1% to 2% faster than market growth in categories and regions where the company competes;

•             Growing earnings per share (EPS);

•             Generating free cashflows in the business by 90% or more.

To reach these goals, the company is focused on:

• Increasing the number of consumers. When innovations are implemented in production, the product portfolio expands vertically. Innovations are aimed at enhancing consumer value by increasing performance.

• Introduction to new markets. The company actively expands its presence in developing markets and increases its sales focused on affordability and understanding of brands.

• A wider range of products. This results from introduction of related categories of goods and improvement of existing ones to meet each consumer's needs.

In total, P&G competes in 38 categories of goods worldwide but is not present in all markets in all these categories. This represents huge growth opportunities.

The company’s statements

In the annual statement submitted by the company, the Chairman of the Management Board, President, Chief Executive Officer Robert McDonald positively assessed results of its operations in 2010.

The company adjusted its growth strategy to meet the company's goals. The business was primarily focused on innovating main brands, implementing in sectors that fall behind and boosting growth where it is in place. This was encouraged by staff motivation and incentive policy which positively affects creativity, loyalty and high performance in the company.

In 2010 the company maintained its growth targets related to shareholder value and sector leadership. Sales added 3% as expected by the company; its basic earnings per share grew by 6%, or about a double annual growth rate; adjusted free cashflow was 125% of net earnings or much higher than the target figure.

This year the company managed to regain its share in the global market it lost during years of the crisis. Its market share grew in 14 out of 17 surveyed countries. In 2010 the number of consumers grew by 200 million people to 4.2 billion. The company plans to have 5 billion consumers by 2015. The average consumption of products by one consumer added 70% in 2010 as compared to 60% in 2009.

Based on these results, the company paid out about $5.5 bn. in dividends and bought out shares worth $6 bn., which increased shareholder returns by 6%. This also created additional potential to increase capital value.

The company has invested about $2 bn. in research and development for a fourth year in a row. This is 50% more than its closest competitor and more that most competitors taken together.

Below is a comparative table of the company's results for a period of a few years.

A look into the future

There are a few promising areas now which the management believes will boost profitability in 2011.

Male Grooming

Male Grooming items branded Fusion and, since recently, Gillette Fusion ProGlide have been growing for 18 quarters in a row. Consumer testing shows that men prefer Fusion ProGlide line to Gillette Fusion at a ratio of 2:1. In the medium range, they launched a new razor, Mach3, specially designed for fuller satisfaction of countries with a developing market economy. As a result, Mach3 sold at record high levels in Argentina, Brazil and India. In February a full range of Gillette goods was launched in Brazil. Currently it is expanding to a number of Latin American countries. In March a test skin care Gillette line was represented in China.

Fabric Care

The company increases its portfolio of washing powders branded Tide and Ariel, and Bounce Dryer Bar in the Enhancer category. It also expands geographically. In Western Europe it introduced an innovative premium-level product - Ariel Excel Gel - a new gel that consumers prefer at a majority of 2:1. In Japan it represented a new brand of Sarasa at a price of 15% premium from the medium category intended for consumers that would like to use a washing powder which not only cleans but also provides a natural and soft color.

Ace was introduced in Columbia during the September quarter and Tide Naturals in India during the December quarter. Tide Naturals is priced 30% less than usual Tide which allowed reaching a much wider range of Indian households. Ace became P&G's twenty third brand valued at a billion dollars.

Oral Care

The promotion campaign selling toothpaste and Oral-B toothbrush in Brazil continues exceeding expectations. Building on this success, the company started the second wave of market expansion. The Oral-B toothpaste promotion launched in Belgium and the Netherlands also goes well.

The Crest Pro-Health promotion powerfully started in China expanding deliveries to China in the last quarter of the financial year. The Crest Pro-Health formula applies to other markets worldwide.

In March Crest 3D White was launched in North America. 3D White is a new plan made up of toothpaste, a brush, rinse and professional Whitestrips effects which both whiten and protect teeth making them healthy.

A look into the future

Many of the most important novelties springboarded in North America between March and June 2010. They will affect 2011 financial year more than last year's innovations.

More specific examples include:

•             Introduction of Pampers with Dry Max will continue into 2011 throughout Western Europe;

•             Gillette Fusion ProGlide will sell in more than 40 countries for two years to come;

•             New Pantene models will be implemented globally during the next two years;

•             Ambi Pur will expand together with Febreze franchise after Ambi Pur closes in early July. Currently it covers 84 countries;

•             Oral Care introduces a new clinical line for treatment of two most widely spread oral diseases - gingivitis and periodontitis. Crest Clinical Sensitivity toothpaste is intended to ensure teeth are as solid as possible. Its sales in North America start in August.

Technical analysis of the company’s shares

In the global chart, the share price is within a rising sloping channel. A movement up or down from the maximum level of volume (ТК Volume Profile) can give a hint and further direction.

A similar situation is developing in the medium-term chart, too. The share price is around the maximum accumulation of volume and Profile TRO) as well as 200 and 50 moving averages. The break of a protective pivot down opens the path to the area of the 61% Fibonacci retracement. If the price stabilizes above the moving average, this opens the path to the upper boundary of the sloping channel. When the boundary of the sloping channel is broken upwards, this opens the way for the share's upward movement.

Analysts of the Land Association of US and Canada Traders have a positive opinion of Procter&Gamble share given the company's steady position in the market and attractive dividends and recommend holding it in the investor's portfolio.