BATAVIA, Ohio (AdAge.com) -- Analyst conferences are rarely exciting, but when P&G Chairman-CEO A.G. Lafley appears at one this week, some believe the near-term future of package-goods marketing -- and the long-term future of Procter & Gamble -- may hang in the balance.
|Tide by the numbers|
19%Percentage of Tide consumers who say they've traded down to value brands because of recession
81%Percent of those Tide consumers who indicate they're likely to keep buying value brands after economy improves.
2.4Percentage point loss of liquid detergent dollar share for Tide in 12 weeks ended April 18 in food, drug and non-Walmart mass outlets
42.7%Tide's market share in liquid detergent
Source: Consumer Edge Research
Few people are expecting big across-the-board price cuts from P&G, a la Marlboro 16 years ago. But P&G faces a similar, if perhaps less dire, situation as the Marlboro Man did then: Volume is down a surprising 5% last quarter globally, and value brands or private labels are hurting some of its highly profitable franchises, including dollar share losses of two to three points in recent quarters in P&G's dominant U.S. laundry business.
Mr. Lafley is set to speak at the Sanford C. Bernstein conference in New York on May 28, and analysts believe the company will issue earnings guidance for its 2010 fiscal year (starting July 1) then, or slightly before. Heavy betting is that P&G will not only break from its usual pledge to grow earnings by double digits -- a promise it has made for nearly a decade now -- but actually signal considerably lower earnings next year, largely because it wants to beef up marketing spending and other investments toward long-term growth in the next decade.
Consensus estimates by analysts already are that earnings per share will come in at $3.98 next year, down nearly 5%. In a report issued last week, Consumer Edge Research projected P&G will likely take guidance down even further, to $3.76, and possibly as low as $3.60 or $3.50, largely to boost global marketing spending as much as $750 million to $800 million next year, with a possibility it will hike spending by $1.5 billion or more. That would largely reverse cuts or slowdowns in marketing in recent quarters, including the largest, $440 million, last quarter.
'Nipping it in the bud'
Similarly, Deutsche Bank analyst Bill Schmitz, after a meeting with Mr. Lafley and other management, reduced earnings estimates to $3.78 on May 12, expecting to hear of a more aggressive marketing posture from P&G by the end of the month.
"For the first time in a long time, management talked about gaining volume and value share," he said of the meetings. But he said P&G appears to be losing share in 60% of its U.S. categories recently, as well as in some developing markets, Japan and Western Europe. "Share losses are a slippery slope," Mr. Schmitz said. "And we believe management understands nipping it in the bud now is a lot less expensive than trying to take it back later."
A P&G spokesman said in an e-mail statement the company's guidance remains unchanged from its last earnings report April 30 (when it provided no guidance for 2010). "We will continue to invest behind our brands and our innovation pipeline as these are two of the fundamentals that drive our business," he said, "the other fundamentals being staying close to the consumer and strict cash and cost discipline."
Consumer Edge CEO Bill Pecoriello expects much of P&G's stepped-up spending to go into developing markets, which P&G executives already have said will provide much of its future growth as it looks to increase sales from around $80 billion now to more than $175 billion in the next 15 years.
But he said P&G also has pressing needs in the U.S. that will require increased marketing support, particularly in the laundry category. In a survey Consumer Edge commissioned of 1,000 consumers, it found 19% of Tide's core users have traded down, at least at times, to value brands during the recession. Of them, 81% said they'll probably stick with value brands after the recession.
While P&G long ago shifted its focus toward its now bigger and once-faster-growing beauty business, laundry generally and Tide specifically in the U.S. are still too big and profitable for P&G to risk those kinds of long-term losses, Mr. Pecoriello said. He expects P&G to launch a value brand of its own next year in response. His research indicates a Tide Basic, similar to Bounty and Charmin Basic, would draw too much of its sales from the mother ship to be feasible, but repositioning Cheer as a value brand looks more promising.
It's not only value brands that are likely to require P&G's attention next year, though. Executives at rival Clorox Co. have said they're testing a Clorox GreenWorks detergent, though they declined to comment on national launch plans. Mr. Pecoriello believes that, too, could launch next year, and his consumer testing showed it could at least initially get a high-single-digit market share, largely at the expense of Tide.
That would also require substantial defensive spending by P&G. And he expects the company to launch either a Tide detergent or laundry additive to combat the success of Church & Dwight Co.'s OxiClean next year, too.
All this added attention from P&G won't stop at laundry, either. Mr. Pecoriello and other analysts expect a U.S. restage of Pantene, the flagship of the company's $9 billion global hair-care business, next year.
While recent initiatives such as a "Salon Secret" campaign comparing Pantene favorably to salon brands started reversing share losses late last year, Pantene still faces widespread reductions in product lineups and shelf space by major retailers. A restage has been in the works since last year, including a new design shop, WPP's Landor Associates, that is expected to launch sometime later this year or early next.
Duracell, too, has been losing share, and one analyst believes it will get a major product launch starting later this year that could serve as a final exam as P&G decides whether to keep the brand.
Other wild cards include how much P&G will put into restructuring its business, already including a management streamlining for its beauty and grooming business, or whether it might still make its double-digit earnings numbers by selling one of its big brands that long have been considered divestiture candidates, such as Pringles or Braun.
Oddly, though, Wall Street expectations that P&G will pull back on earnings and sales guidance for next year has been sending its stock up in recent weeks, because they signal a more aggressive posture for the long term. Were Mr. Lafley next week to reaffirm a commitment to double-digit earnings growth he's delivered for nearly a decade, some analysts believe the short-term focus could actually disappoint investors and hurt the stock.
So the betting now by most analysts is that Mr. Lafley has given up on a once-cherished "deliver the decade" goal of delivering a full 10 years of double-digit earnings growth in favor of handing off a stronger P&G in the next decade to his ultimate successor, widely expected to be Chief Operating Officer Bob McDonald. Exactly how P&G signals its response to competitive pressures next week will be closely watched, too.
However much P&G devotes to price cuts -- permanent or temporary -- will determine how much is left over both for it, and competitors, to spend on advertising and other brand marketing in the year or years ahead.
"We think they're really going to take a look toward the long-term, where they're going to need to grow," Mr. Pecoriello said. "The idea that [earnings projections] have to come down is widely accepted. The question is where are they going to spend it."