Deeper Restructuring in Store for P&G Under McDonald?

Timing, Handling of Announcement of New CEO Raises Questions Among Investors

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BATAVIA, Ohio ( -- Today's appointment of Robert McDonald as CEO of Procter & Gamble Co. has long been anticipated, but the unexpected timing and unusual handling of the announcement is leading investors to question whether the company is leaning toward a deeper restructuring than anticipated even two weeks ago.

In a move effective July 1, P&G Chairman-CEO A.G. Lafley will stay on in a "full-time" role as chairman, and in a brief conference with analysts and investors today, Mr. Lafley said he would continue in that role "as long as the board and Bob can tolerate me." Mr. Lafley said in addition to chairing the board and setting the agenda, he'll work alongside Mr. McDonald in business strategy, innovation and talent review.

It's been customary for P&G to maintain a dual chairman and CEO structure for periods ranging from six months to a year or more in past transitions, and Mr. McDonald is taking the CEO post at an age -- 56 -- close to those of former CEOs Durk Jager and John Pepper in the past decade.

But Mr. Lafley, who will turn 62 on Saturday, had been expected by people close to the company, including analysts and investors who had met with him in the past few weeks without Mr. McDonald, to remain CEO at least another year or two. Adding to the confusion, P&G left employees and investors hanging for more than 36 hours after the initial Wall Street Journal report about the transition before it made its announcement. And when it finally did, P&G executives fielded no live questions from analysts and held a briefing of only about 20 minutes, unlike nine years ago when Mr. Lafley ascended to the post.

All that left investors wondering about the restructuring plan outlined as recently as May 28 by Mr. Lafley to use additional earnings flexibility to adjust pricing, step up marketing and innovation and launch more lower-priced products. At the time, the lack of detail in his broad outline and its similarity to those of major competitors left markets and analysts unconvinced the company was ready to turn a corner from a 5% volume decline last quarter. The shift to Mr. McDonald could signal that P&G needs to do something more drastic, including deeper restructuring than originally planned, said an analyst and another executive close to the company.

'Concerned about the timing'
"Many investors with whom we have spoken are concerned about the timing of the change," said Sanford C. Bernstein analyst Ali Dibadj in a note this morning. "We are as well. ... P&G's fundamentals are unlikely to improve soon, so Mr. McDonald may elect to invest additionally [in marketing, pricing or innovation] or reduce longer-term targets."

P&G executives did little today to support or dispel that theory. "Our strategies are working," Mr. McDonald said. "We have the right plans and leadership to deal with current economic realities." Chief Financial Officer Jon Moeller said: "We've announced our plan for the next year. Beyond that, we're not currently making any changes. We obviously have to see when and to what level market growth resumes."

Should he need to get tougher, Mr. McDonald could have the license and experience to restructure the company more deeply and more readily than Mr. Lafley. First, unlike Mr. Lafley, he's made no public commitment to try to avoid another "big bang" restructuring similar to those P&G launched in the 1990s. Second, as an executive who -- possibly even more than Mr. Lafley -- inspires affection and loyalty throughout P&G, Mr. McDonald may be better suited to leading employees on a tough march. And as head of global operations after the Gillette deal, he led an effort that reduced head count by thousands.

As widely liked as Mr. Lafley is, he hasn't always kept his sardonic wit under wraps internally or externally, and he's disappointed some P&G employees in recent years in some ways, such as his handling of the company's coffee business. It was originally planned to be spun off as new company but instead suddenly was sold to J.M. Smucker Co. That left a host of employees recruited to the business from within and outside P&G looking for new work in a hurry.

Mr. McDonald, a Boy Scout in his youth, is seen by many as continuing to be one as an adult, though several people close to the company credit him as being shrewder and tougher than he appears.

Lafley's legacy
Mr. Lafley's legacy has been to more than double P&G's size to $83.5 billion last year, though sales are likely to slip for the fiscal year that ends this month. Much of that growth came through major acquisitions such as Clairol in 2001, Wella in 2003 and the company's biggest ever, Gillette, in 2005. Mr. Lafley finished and accelerated a wrenching restructuring started under Mr. Jager and vowed by the end of 2002 that P&G would avoid extraordinary restructurings in the future in favor of ongoing, smaller ones.

Mr. Lafley built a company that was much more a beauty and developing-market player while largely taking it out of the food-and-beverage business.

From 2003 to 2007, his formula helped P&G beat most and sometimes all of its global rivals. And while he took over a company in distress, he also benefited from such tailwinds as a weak dollar and a strong innovation pipeline left behind by Mr. Jager, including such then-recent brands as Febreze and Swiffer.

While Mr. Lafley has done much to build P&G's brand as an innovator, focusing on design as never before and on the growing number of P&G products built with input from outside suppliers or inventors, the company has underperformed most of its global peers in organic sales growth since 2007.

Mr. Moeller recently has pointed to differences in the product and geographic mixes of P&G competitors -- which rely more on food and developing markets than P&G in some cases. But in several cases, such as home care with Reckitt and Unilever and personal care with Unilever and Colgate-Palmolive Co. -- P&G has been outperformed lately in unit-to-unit comparisons.

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