P&G's Slowing Sales Growth Fuels Calls for Divestitures

But Unlike Rival Unilever, Restructuring Plans Remain Vague

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BATAVIA, Ohio (AdAge.com) -- Procter & Gamble Co. delivered the goods by hitting its top-line growth target and beating analyst earnings projections by a penny last quarter, but it isn't yet delivering big divestitures of slower-growing brands some analysts have been expecting.
P&G CFO Clayton Daley
P&G CFO Clayton Daley Credit: P&G

But P&G also did little to dampen speculation it may divest slower-growing billion-dollar behemoths such as Duracell, Pringles and Folgers as it reported results today for its fiscal fourth quarter, ended June 30. Chief Financial Officer Clayton Daley on a conference call said P&G is "more likely to be a seller than a net buyer" of brands in the "next couple of years," and that internal reviews that could result in divestitures will wrap up by September.

Building a 'war chest'
P&G executives also indicated they were delivering cautious guidance for fiscal 2008, which began July 1, in part so they could hold back what Chairman-CEO A.G. Lafley termed a "war chest" to spend behind marketing and innovation as needed to defend against increasingly aggressive competitors whose efforts have been fueled by restructuring savings.

P&G's slowing organic sales growth has become a focus for investors in recent quarters, and the 5% sales growth P&G delivered in its fiscal fourth quarter -- excluding currency, acquisition and divestiture effects -- won't likely dispel the concerns. The growth was well within P&G's 4%-6% guidance, but down from levels of 8% or above that were routine before P&G bought Gillette in 2005, which the company said would accelerate its top-line growth.

P&G didn't announce any divestitures today, but did discuss possibilities for them down the road. P&G said it would accelerate share repurchases to as much as $10 billion annually, and proceeds from divestitures would help fuel bigger share repurchases, Mr. Daley said. But P&G's stock fell 1% in early-morning trading.

Rival pleases market
Rival Unilever fared much better on its results yesterday, with its stock up 3% in the U.S. and 4% in the U.K., as it exceeded the market's top-line expectations with a similar 5% organic growth increase. But it also pleased the market with news of an accelerated restructuring program to cut 20,000 jobs, mainly in Europe, by 2010 and divestiture of slower-growing businesses with sales of up to $2.7 billion, including its North American laundry business.

Unilever's business is much more heavily weighted toward slower-growing geography in Western Europe and categories in food than P&G's. Mr. Lafley had his own explanations for why P&G's growth wasn't higher. He said the lingering effects of recalls earlier this year of the SK-II beauty brand in China and South Korea and the pet-food recall in the U.S. for caused P&G's organic growth to be "rounded down to 5%."

P&G said it would boost its own restructuring program to a cost of $300 million to $400 million, without specifying the headcount, but that's nowhere near the estimated $1.3 billion Unilever will spend annually on its restructuring.

P&G did appear to lay to rest speculation that its pet-food business could go on the divestiture block. Mr. Daley said, "We never sell a business because they had a bad year." Mr. Lafley delivered strong endorsement of the prospects for Iams and Eukanuba and the pet category as a whole.

Ad spending up 'double digits'
Ad spending for just-concluded fiscal 2007 was up "double digits," Mr. Daley said, though Mr. Lafley said P&G also has stepped up spending on event marketing, public relations and online marketing beyond traditional media.

He said trade and consumer promotion spending, which is reported as a reduction of net sales, and advertising spending (reported mainly as an expense) both are running in the $9 billion to $10 billion range globally.

He said P&G is implementing a new system to evaluate and improve the efficiency of its trade spending, while also looking to keep using marketing-mix modeling and buying power to keep getting more efficient in media spending.

For both trade and consumer marketing "we would like to be in a position where we are spending a little bit less as a percent of net sales and getting a lot more," Mr. Lafley said. "We buy more efficiently, and frankly we should be executing more effectively."

P&G has broken its brands into three categories. High-growth-potential brands make up 50% of the business and are set to receive more overhead spending, including marketing, from the company. The second category is made up of brands that are those seeking "zero overhead growth." And then there are those seeking to cut spending as a share of sales -- this third category of brands represents less than 20% of the business.

Growth categories
Overall, the fabric and home-care business led growth for P&G as it has for much of the past year, with organic sales up 7%. Organic sales in the high-focus beauty business were up 5%.

And organic sales rose a robust 13% in blades and razors, helped by higher prices and mix due to Gillette Fusion and Venus Breeze launches, but P&G didn't break out how much of the gain came from comparison to a year-ago period when the company lost sales as it consolidated distributors overseas. Mr. Lafley did say the razor business is gaining share globally and that the growth of Fusion is more than making up for its cannibalization of the Mach 3 brand.
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