Mystery Solved: P&G Responsible for Competitors' Woes

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Procter & Gamble Co. today solved the mystery behind a series of disappointing top-line results from household and personal-care marketers, posting an upside surprise with 3% organic sales growth for last quarter despite retail scanner data that pointed to much flatter growth.

Jon Moeller
Jon Moeller Credit: Procter & Gamble Co.

In calls with media and analysts, Chief Financial Officer Jon Moeller pegged some of the divergence on P&G growing much faster and gaining share in e-commerce, which accounted for about a percentage point of sales growth in the U.S. and 5 points in China. E-commerce sales aren't tracked by easily available syndicated retail sales data.

Mr. Moeller also noted that analyst scanner data still rightly includes such brands as CoverGirl and Clairol spun off to Coty Oct. 1, but which were discontinued operations not counted in P&G's financial results. And P&G gained from shipments to fill the pipeline for a new distributor in Hong Kong – but that only affected numbers by around 0.1 percentage point globally.

In a sign that foreign-exchange pressure is abating, P&G's unadjusted sales were at least flat after several quarters of decline, and its reported net earnings grew 5% in absolute terms after an extended period of currency-fueled declines.

P&G also continued to boost ad spending faster than sales, as it has in the past year, and continued to cut marketing costs, both by unspecified amounts. And the company continued to invest in sampling too, which got a fairly impassioned defense from Mr. Moeller.

He said P&G had cut spending on promotion in the past because it doesn't deliver immediate results. But he said sampling can win consumers long term in categories with high brand loyalty even though short-term results are actually depressed, because people are using their samples rather than buying the product immediately. Sampling, he said, "is the area of spending that should be the last that we cut, because of its importance in building users for potentially a lifetime of consumption."

Overall, P&G's top-line beat wasn't that far off a consensus 2.4% prediction from analysts. But it followed top-line reports by rivals in the past week that have been weaker than expected, particularly in volume terms, from rivals that have been consistently beating P&G of late – including Unilever, RB (Reckitt Benckiser) and Kimberly-Clark Corp. The last yesterday reported flat organic sales growth, with Chairman-CEO Tom Falk citing in part aggressive pricing and promotion from P&G, particularly around deep discounts on adult incontinence products and strong execution of in-store promotions around the Summer Olympics.

P&G's organic sales and volume both grew 3% last quarter. But that masked more aggressive pricing in developed markets, where sales grew at 2%, only half the 4% increase in volume. P&G's volume actually grew slower in historically faster-growing developing markets, where it was up 2% on 6% higher sales, driven by price hikes to compensate for currencies declining against the dollar.

In question and answer, Bernstein Securities analyst Ali Dibadj raised the prospect of a price war, but Mr. Moeller said P&G's policy continues to be avoiding price promotion because it doesn't deliver sustainable long-term results. But he acknowledged that competitive response is among factors that could make P&G's top line growth bumpy through the remainder of the year.

"We will take moves, where warranted, to ensure that we're offering a competitive value proposition to consumers," he said. "We've made several of those moves in the last quarter. What moves happen in the future will be largely dependent on where others take us."

P&G's 3% fiscal first-quarter sales gain comes against an easy comparison to a 1% decline a year-ago, and P&G didn't adjust its full-year forecast of 2% growth. But the momentum in the U.S. has been particularly pronounced, from a 1% sales increase in P&G's fiscal first half last year and 2% in the second half up to 3% last quarter.

Despite every P&G business sector seeing at least 2% organic sales growth – a rarity in recent years – Mr. Moeller said P&G is still growing below the market in such categories as hair and baby care and U.S. grooming. The company has plans to address that, he said, including a restage of Herbal Essences early next year.

Mr. Moeller brushed aside the suggestion in another analyst question that P&G may need to make acquisitions akin to what rival Unilever has done in recent months with Dollar Shave Club and Seventh Generation. The Honest Co., selling environmentally friendly products largely direct to consumers, remains up for sale, according to published reports.

Mr. Moeller noted P&G has increased its offerings of environmentally sustainable products in recent years, including Tide Coldwater and Tide PurClean. And he said only 0.3% of P&G's sales are direct to consumers for good reason: Consumers prefer buying packaged goods from big retailers for convenience.

"How many people do you know," he said, "that want to satisfy their household shopping needs in a month or two by going to 40 different websites with 40 different passwords and 40 different packages that arrive at 40 different times?"

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