P&G Boosted by Basics

Consumer Necessities Help Company Turn in Positive Quarterly Results

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BATAVIA, Ohio (AdAge.com) -- Procter & Gamble Co. made its numbers last quarter, and that should be no surprise. How it did so, however, is a little more interesting, with less glamorous businesses such as diapers, paper towels and coffee pulling up results dragged down by beauty.
Some of P&G's least glamorous businesses, including the baby and tissue-towel businesses, saved the day, with organic sales up 9%.
Some of P&G's least glamorous businesses, including the baby and tissue-towel businesses, saved the day, with organic sales up 9%.

Retailers and consumers appear to be accepting past price hikes readily, said Chief Financial Officer Clayton Daley. And the company is announcing a host of new ones, ranging from 4.5% on Always and Tampax to 7% on dishwashing liquids and mouthwash, 8% on Swiffer products and 11% on Oral B power toothbrushes and replacement heads.

New and improved and more costly
The price hikes are sticking in part because P&G is linking them to new products and improvements, said Chairman-CEO A.G. Lafley. The company also is maintaining marketing spending, up 9% last quarter in line with overall sales growth, despite increases in raw material costs. He predicted a more diversified media mix for P&G going forward, though data doesn't show much change yet.

In part to pay for increased marketing despite rising material costs, P&G held overhead growth to only 6% last quarter.

In all, P&G's organic sales, excluding acquisitions, divestitures and currency effects, rose 5% to $20.9 billion, rising at or slightly below rates of competitors such as L'Oreal and Kimberly-Clark Corp. and well behind the growth of Colgate-Palmolive Co. and Reckitt Benckiser. Earnings per share rose 11%, with a 6% increase in earnings before taxes boosted by a lower tax rate and a 3% reduction in shares outstanding.

Beauty fades
The beauty business, one of the apples of Mr. Lafley's eye since he took charge eight years ago, turned in its weakest performance in years, with organic sales up only 3%.

The beauty results were "below our going-in expectations," Chief Financial Officer Clayton Daley said. "The shortfall was driven mainly by slower market growth and prestige channels and by softness in North American Pantene."

Saving the day for P&G were some of the company's least glamorous businesses. They included the baby and tissue-towel businesses, with organic sales up 9%, and the snack, coffee and pet business, with organic growth of 11%.

Even the fabric and home-care business, which has been one of the leading engines of P&G sales growth the past two years, had only company-average 5% organic sales growth last quarter, some of that driven by forward buying from retailers ahead of price hikes on Cascade dish soap.

Looking sharp
The grooming business, led by Gillette razors, saw organic sales up 6%, an improvement on the fiscal-year results to date of only 4%, as the launch of the five-bladed Venus Embrace system lifted the brand's share in the U.S.

Beauty overall lagged despite an apparent step up in ad spending last quarter. Brands such as Olay, Pantene, Clairol, Head & Shoulders and Cover Girl saw monthly outlays increase 48% to 154% over a year ago in January, according to TNS Media Intelligence data from Sanford C. Bernstein.

In a presentation to investors in February, the P&G executives said beauty was among the businesses that would be allowed to grow overhead the fastest in years to come in order to capitalize on superior growth prospects.

Meanwhile, the food, beverage and family-care businesses that pulled up company results last quarter are ones P&G has been trying to diversify away from. P&G sold its European tissue and towel businesses last year and plans to split or spin off its coffee business, led by Folgers, this summer.

In citing how consumers are willing to pay more for premium products despite the economy, Mr. Lafley noted one of the soon-to-be-divested coffee brands: Dunkin' Donuts coffee, on track for annual sales of up to $200 million in its first year, he said. He also noted consumers' willingness to pay almost double the cost of a regular stick of deodorant for "clinical strength" products.

Relief on Wall Street
Overall, Wall Street appeared more relieved that P&G made its numbers with room to spare than how its results lined up with long-term strategy. Following rumors last week among investors that P&G would turn in disappointing results, the company's stock rose 3.4% to $68.15 in early-morning trading when numbers came in positive.

Mr. Lafley didn't elaborate on how the company's spending increases played out globally or by category when asked, but clearly much of it came in beauty categories where P&G was locked in bruising combat against such foes as L'Oreal and Unilever.

"When we have competitors out there basically giving away buy one and get one free for months, that obviously reduces the value of the consumption that's going on in the market," Mr. Lafley said. "And then when we feel we have to selectively match, that sort of compounds issue. ... There is a country in the world right now where there is a major launch by our competitor going on, and they're spending five times what we're spending, in that market."

Both of those competitive practices are unsustainable, he said, though P&G long has maintained similar or greater media-spending edges on rivals in such categories as tissue-towel, feminine care, oral care, shaving and laundry in the U.S.

Mr. Lafley said P&G would be seeing "a lot more diversification in our media programs," pointing to feminine care as an example where "the vast majority of the media that we run ... is what we would call alternative media."

TNS data indicates Always and Tampax spent more on print than TV last year (53% of their $114 million combined outlay on print vs. 44% on TV and 2.6% on the internet).

Overall, however, P&G still spent at around its long-term norms across all brands in the U.S., with TV spending making up 68% of its $3.5 billion outlay, print 29% and the internet 2.2%. Print gained about 2 percentage points, TV lost about 1 percentage point and the internet crossed the 2% threshold for the first time in P&G's measured mix.
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