P&G to Slash $10 Billion in Costs Over Five Years

CEO Bob McDonald: Company Will Shift Money to Digital, Reduce Headcount and Use More Multibrand Promotions

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Chairman-CEO Bob McDonald told analysts today that Procter & Gamble Co. will cut costs totaling more than $10 billion over the next five years, including $1 billion in external marketing spending and a reduction of more than 5,700 jobs in non-manufacturing areas including marketing.

Bob McDonald
Bob McDonald

The marketing savings will come from a combination of having fewer marketing executives and spending more efficiently, including using more lower-cost digital marketing channels to reach consumers one-to-one; and more multibrand group marketing initiatives such as its program around the 2012 Summer Olympics that spans 30 brands, Mr. McDonald said.

The cost-cutting aims to streamline P&G to compete amid slow growth in developed markets and aggressive expansion in developing markets, such as expanding its toothpaste brands, including Oral-B and Crest, to just about every country in the world except Japan, Korea and Pakistan, by 2015.

The 5,700-employee headcount reduction includes more than 4,000 next year in addition to the 1,600 previously announced for the current fiscal year ending June 30, Mr. McDonald said at the Consumer Analysts Group of New York meeting in Boca Raton, Fla. He said the program would include eliminating redundant roles among the company's regional market-development organizations and the regional groups within its global business units.

Each year, business units will be permitted to let overall overhead costs rise no more than 2% and be required to reduce headcount 1% to 2%, he said, including at least some involuntary separations. P&G has already identified positions to be eliminated, but based on its employee-rating system, some higher-rated employees may move into remaining jobs, said Chief Financial Officer Jon Moeller.

And even as the company cuts jobs, it will continue hiring in high-growth countries such as China, Mr. Moeller said. Of the overall cuts in five years, $8 billion will come from absolute cuts while $2 billion will come from holding spending increases below the rate of sales growth.

Regarding marketing spending, Mr. McDonald said, the goal isn't to cut absolute outlays but does include growing spending slower than the rate of sales, which is an exception compared to recent years.

The cuts don't just focus on media or agency costs but on all areas of marketing. "We're not looking to make dramatic cuts in the support of our brands," Mr. McDonald said. He added, however, that "marketing costs are our third-biggest spend pool, behind people and materials."

Despite all that , P&G still expects 2012 marketing spending to be "roughly" in line with that of 2011, Mr. McDonald said. "We want to increase reach, frequency and the effectiveness of our advertising impressions to consumers. Even delivering a modest level of efficiency each year can amount to nearly a billion of savings vs. just letting these costs grow at the same rate of sales. We're very confident we can do this while building the number and quality of consumer impressions each year."

To cut costs without sacrificing impact, Mr. McDonald said P&G is using technology to shift spending from more traditional vehicles like TV to digital and mobile advertising and more efficiently target consumers, "allowing us to build one-on-one personal relationships with every consumer." He also expects to use more multibrand efforts to spread spending more efficiently among brands. He cited the kickoff of P&G's Summer Olympics program in January, which he said delivered more than 2.5 billion impressions in traditional and social media the first month alone and produced a bigger overall impact than the brands could have had by spending individually.

To illustrate the growth of P&G's marketing spending in recent years, Mr. McDonald showed a chart of all-inclusive marketing costs that pegged outlays at around 16.5% of sales last year, or around $13.7 billion vs. only $9.3 billion in reported advertising spending, which incorporates only media and agency costs.

By that broader measure, P&G's marketing as a percent of sales grew about a point from 15.5% in 2006 to 16.5% last year, more than rebounding from a deep recession-related dip in 2009.

Growth of these all-in marketing costs came faster than reported ad spending alone, which grew to 11.3% of sales last year from 10.9% in 2006. The broader figure includes such areas as sampling, direct mail, events, professional programs, sales aids and display materials. It does not cover off-price trade promotions with retailers or the redemption value of coupons, which are treated as reductions of net sales, or salaries of P&G marketing executives.

Overall, the cost-cutting program P&G outlined was two to three times deeper than analysts expected, with some going into the presentation expecting cost cuts of about $3 billion over five years and no more than $5 billion.

In a research note, Deutsche Bank analyst Bill Schmitz said the cost-cutting program would deliver in the next five years about double what P&G has had in the past five, without a major increase in restructuring costs along the lines of P&G programs in decades past.

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