P&G outpacing Unilever in five-year battle

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Four years ago, rivals Procter & Gamble Co. and Unilever, facing surprisingly similar problems, launched ambitious five-year restructuring plans to fix them. But results are turning out radically different for the two.

P&G, whose "Organization 2005" concluded a year early in June 2003, last week announced its best quarter of top-line growth in 166 years. P&G blew past its long-term 4% to 6% sales growth target with sales climbing 13% to $12.2 billion-up 7% even without the considerable help from the recent Wella acquisition and currency exchange.

In stark contrast, Unilever last week was fending off pointed questions about its third-consecutive quarter of top-line disappointment as some analysts wondered aloud whether its "Path to Growth" may end up a blind alley.

Unilever's third-quarter sales were flat at $11.6 billion, up 2.3% excluding divestitures and 3.2% for the leading brands Unilever plans to still have by the end of next year. By any of the measures, results were well below the 5% to 6% growth Unilever promised by 2004-judgment day for Path to Growth. Unilever expects sales of its leading brands to be up by less than 3% globally this year after two years of growth above 5%.

Much of Unilever's recent troubles stem from a 28% third-quarter plunge in combined sales of Slim-Fast diet products and prestige fragrance, categories where P&G isn't a major factor. But it's also clearly taking some hits from P&G.

Forthcoming with most figures on a conference call last week, Howard Green, senior VP-investor relations, was curt when asked about price cuts for Unilever Home and Personal Care in North America, where it competes most directly with P&G. "What is happening in that market at the moment is not helpful to overall market value, and I think the less we actually talk about it the better," he said.

Unilever financial reports and executives close to the company indicate North American HPC sales are flat to down single digits through the first nine months of 2003, well below plan, despite strong showings from Axe and Dove. A Unilever spokeswoman declined to comment.

But it's not just Unilever feeling the pain. Many of the scrappy rivals that were eating P&G's lunch four years ago now are serving up share, at least a la carte, to the 800-pound gorilla.

Colgate-Palmolive Co., Kimberly-Clark Corp., Georgia-Pacific Corp. and Playtex Products each devoted time during their recent quarterly conference to explaining why their sales and market shares are off in areas where they battle P&G. Complaining obliquely or directly about P&G's aggressive pricing, promotion or ad spending has been a recurring theme.

too much price talk

"There's probably been too much discussion about pricing and promotion, because I really don't think that's been a major or even an important minor contributor to our success in the past couple of years," Chairman-CEO A.G. Lafley said in an earnings call last week. "We tend to be priced above our competition [and] promote less than our competition." He said he believes there's still plenty of cost-cutting room for P&G to aggressively support its marketing plans.

Pricing aside, P&G increased global ad spending 15.9% in fiscal 2003 to $4.4 billion, twice the pace of its 7.8% sales growth. At 10.1% of sales, P&G's ad spending last year hit its highest rate since 1998. Ad spending rose another $200 million globally in the first quarter of fiscal 2004, ended Sept. 30.

Unilever, following cuts in third- and fourth-quarter plans, won't progress in its goal to raise marketing spending as a percent of sales in 2003, the company acknowledged last week. It will need to hike spending by more than $300 million globally next year to meet its Path to Growth goals to raise ad spending as a percent of sales.

Asked whether pulling back on ad support in recent quarters will hurt Unilever long-term, Mr. Green said: "We've got the support behind our key brands and key innovations [and] the metrics we have got indicate we have been maintaining share of voice." Ad spending is still up absolutely and as a percent of sales over 2001, while some spending originally planned in 2003 has shifted into price-cutting promotions, he said.

Attacking profitable segments where competitors were once virtually unchallenged, such as Unilever's value-priced Suave or Kimberly-Clark's Pull-Ups, "is what Procter is doing best right now," said Deutsche Bank Securities analyst Andrew Shore. "They're just going after everybody, and nothing is sacred."

A weakening dollar has helped P&G in the past year, too, turning tables on European competitors who benefited from a strong dollar through most of the past decade. Besides P&G, U.S.-based beauty players Estee Lauder and Avon Products also reported unusually strong double-digit sales growth last quarter.

But that still doesn't explain why many U.S.-based P&G rivals are hurting, said one analyst. "P&G has taken its considerable restructuring savings and plowed them back into either price [reductions] promotions or advertising," he said. "Their competitors basically have a choice between issuing [earnings disappointments] or losing market share."

While both Unilever and Procter have restructured, P&G made bigger changes, analysts said. P&G shifted to global management of its brands and businesses, coupled with new market development organizations for tailoring programs to local markets. Unilever mainly focused on shedding low-growth, low-profit brands while concentrating on bigger, faster-growing ones.

But executives close to Unilever said it also has quietly shifted to a more centralized and global management structure in the past 18 to 24 months by giving more power to global directors on such brands as Dove. The shift from local categories to global brands may be hurting overall top-line results in the short-term, said one executive close to the company.

"Procter has better brands, better management and better categories," Mr. Shore said. Unilever "seems like they're getting the personal-care part of the company OK in most of the regions, if not the U.S. But they have an albatross around their neck, and it's called food."

Executives close to Unilever maintain senior managers in recent years have become more open to the idea of breaking it up into its food and HPC components should Path to Growth fail-though none believes the program is failing.

Unilever Co-Chairman Niall FitzGerald said in a conference last month that the follow-up strategic plan to be announced next year won't involve major restructuring. Members of Unilever's executive committee were meeting with outside directors Oct. 29 to discuss the new plan to take Unilever to 2010, Mr. Green said last week on a conference call. A Unilever spokeswoman declined to comment on breakup speculation.

a lot of change

"A lot has changed since 1999," Prudential Securities analyst John McMillin said on last week's Unilever conference call, citing "tougher retail customers" and more aggressive marketing by Altria Group's Kraft Foods and P&G. "You seem to have an unrealistic [5%-6% sales growth] target that I think is working to hurt you," he told Mr. Green.

"The inference in your comments is that somehow Path to Growth has failed," Mr. Green said, arguing that delivering on earnings targets and pushing margins up nearly three percentage points in the past three years indicate the program is working. "Yes, we've had a stumble in 2003," he said. "But we're not yet at the end of the program and I would ask people to actually judge us at the end of 2004."

While P&G has the upper hand now, Mr. Shore doesn't know how long that will last. "They're fighting battles in every category, every geography," he said. "Will they ultimately spread themselves too thin? At some point, all those who have fallen come back and fight, and probably simultaneously."%

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