P&G Cuts Agencies 40% in First Wave of Consolidation Drive
Procter & Gamble Co. will likely keep marketing spending flat as a share of sales this fiscal year, but global media spending will still rise as the company keeps plowing savings from agency and production costs into media.
Such cuts helped P&G beat analyst forecasts for core earnings per share – excluding a host of restructuring costs – even as it fell well short of projections for the top line last quarter. Organic sales growth was "rounded down" to flat vs. consensus analyst projections for 2% growth for the quarter ended June 30.
One area where P&G is meeting targets is marketing savings. For the just-concluded fiscal year, the company cut the number of agencies it works with by 40% globally, trimming agency and production spending by around 15%, or $300 million, with "more savings ahead of us" in year two," said Chief Financial Officer Jon Moeller, "most of which will be reinvested in stronger advertising programs."
Agency spending plunged 50% in Brazil, Mr. Moeller said on an earnings conference call this morning. In U.S. haircare, P&G reduced the number of consumer and shopper marketing agencies by a third and slashed spending on them by 20%. In another global beauty category he didn't name, Mr. Moeller said P&G cut spending on digital marketing services by 75% by consolidating with one shop.
Responding later to an analyst question on whether P&G had delayed any spending or investments because of the profit hit it has taken from weaker foreign currencies, Chairman-CEO A.G. Lafley said he's seeing increases of as much as 10% to 20% in some brand media budgets.
"It's hard for you to see our investments in communication and media because most of it's being funded by reallocation," Mr. Lafley said, pointing to the savings on agency and production costs moved into media. "We're simply shutting down the unproductive non-working dollars and we're converting it to working, and we're getting a heck of a lot more out of our digital, mobile, search and social programs."
That said, both analysts and the market were unimpressed with the results so far, sending P&G's stock down as much as 4% in early morning trading.
Despite having culled about 100 of the company's worst-performing brands the past year via divestitures -- largely yet to be completed but still accounted for as discontinued operations -- P&G is still only projecting modest organic sales growth of flat to "up low-single-digits" for the fiscal year begun July 1. That compares to 1% growth last year, which would have been 2% without the brands P&G is exiting.
Russia was a big part of P&G's sales shortfall last quarter. As P&G raised prices to restore profitability amid a falling ruble, sales in the country plunged 57% in June, Mr. Moeller said on a call with media this morning. Russia alone pulled P&G global organic sales down a percentage point last quarter.
A strong reversal of fortune for the grooming business, one of those led by incoming CEO David Taylor since 2013, was another major factor. Grooming organic sales fell 7% in the past quarter – enough to take another 0.7 percentage points off company organic sales growth. That pulled grooming's 3% growth the first nine months down to 1% for the full fiscal year.
Such factors as men shaving less in the U.S., online competition and retailer destocking were to blame, Mr. Moeller said. The business was also up against a strong year-ago quarter, where sales rose 6% on the launch of Fusion ProGlide with FlexBall technology.
Gillette is looking to get its mojo back with an improved cartridge launching in January, Mr. Lafley said. Though P&G declined to provide details, trademark filings suggest it will be a Fusion ProShield cartridge offering improved comfort. The company is also preparing to roll out "hard packs" of cartridges that will eliminate the need for retailers to put the pricey products behind locked doors to prevent theft, he said.
Meanwhile, that leaner lineup of U.S. haircare agencies has a big task on its hands -- defending Pantene's tenuous nearly three-decade-long hold on market leadership.
In Unilever's conference call last week, CEO Paul Polman said his company's Tresemme was within striking distance of leadership in U.S. daily haircare – including shampoo, conditioner and styling aids – as it moves into more premium products. IRI data for the 52 weeks ended July 12 show Pantene with $638 million in sales, up 3.9%, vs. Tresemme with $603 million, up 6.5%.
Pantene, meanwhile, is preparing a summer launch of "once-in-a-decade new shampoo and conditioner product innovations" built on proprietary technology, Mr. Lafley said. Even without that boost, but aided by "3 Minute Miracle" styling products, he said Pantene's 4% sales growth last quarter meant "modest market-share growth in the U.S. for the first time in several years."