P&G to Divest Folgers Coffee Business

Bolstered by Strong Quarter, Packaged-Goods Giant Sticks With Price-Hike Plans

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BATAVIA, Ohio (AdAge.com) -- Procter & Gamble Co. will divest its slow-growing Folgers coffee business as a sacrifice to its long-term growth goals, but its sales in the U.S. were surprisingly strong last quarter despite slowing of the overall economy and its categories.
P&G says Folgers has been the leading U.S. retail coffee brand since 1987. But it will now divest the coffee brand.
P&G says Folgers has been the leading U.S. retail coffee brand since 1987. But it will now divest the coffee brand.

P&G today announced plans to divest Folgers (which includes the Dunkin' Donuts and Millstone brands) some time in the second half of 2008, preferably in "split off" in which shareholders could opt to exchange their P&G stock for shares of the new stand-alone company.

Billion-dollar brand
P&G's coffee business has annual sales of around $1.6 billion and includes several smaller brands in addition to billion-dollar-plus Folgers, most notably Millstone coffee and the recently launched Dunkin' Donuts brand marketed under license with the restaurant chain.

Publicis Groupe's Saatchi & Saatchi, New York, handles Folgers, which had $74 million in measured media support in 2006 and $14.7 million through the first half of 2007, according to TNS Media Intelligence.

Millstone, formerly handled by Saatchi's Team One unit in El Segundo, Calif., doesn't currently have an agency assignment as it's been "inactive" in the current fiscal year, a spokesman said. And Dunkin' Donuts retail coffee is handled by Interpublic Group of Cos.' Hill Holliday Connors Cosmopulos, Boston.

Aegis Group's Carat handles communications planning for the coffee business, and Publicis' Starcom MediaVest Group handles media buying.

Folgers has been the leading U.S. retail coffee brand since 1987, P&G said, with a 32.1% all-outlet market share in the fourth quarter based on the company's ACNielsen data. Premium-price Dunkin' Donuts appears to have gotten off to a strong start since its launch last year, with a fourth-quarter dollar share of 2.9%.

Total coffee biz not so hot
But sales of P&G's total coffee business rose only 2.1% last quarter, and operates at the lower end of retail coffee, with its dollar share four points below its volume share.

P&G in a statement said the deal would enhance its "ability to consistently deliver its annual financial goals" which include at least 4% organic sales growth.

Jay Woffington, CEO of WPP Group's digital agency Bridge Worldwide, Cincinnati, which has handled Folgers for several years and recently added the Dunkin' Donuts digital account, said he believes independent ownership will make Folgers "more focused and nimble."

Jamie Egasti, now president of P&G's Coffee & Snacks division, will be CEO of the independent Folgers Coffee Co. based in Cincinnati, with 1,250 employees split from P&G. He should "bring a lot of entrepreneurial zeal to this job," Mr. Woffington said. Mr. Egasti led much of the product development in fabric and home care for P&G in the 1990s.

Overall for its fiscal second quarter, P&G delivered organic sales growth of 5%, excluding impact of currency and divestitures, with total sales up 9% to $21.6 billion and net earnings up 14.1% to $6.3 billion. Despite the economic troubles in the U.S., P&G's U.S. sales rose at 6%, actually beating its organic growth rate in the rest of the world.

Pockets of weakness
Overall, the growth rate in P&G's categories slowed "about a percentage point" in the U.S. compared to prior quarters, said Chief Financial Officer Clayton Daley, amid slowing in the broader economy. And P&G had pockets of weakness that included U.S. home care, razors, color cosmetics, cough-cold remedies and Pantene hair care, but overall hit the middle of its 5%-6% organic sales growth target.

Mr. Daley said P&G's categories for the most part show no signs of consumers trading down to private label. Though scanner data reported by Information Resources Inc. and ACNielsen showed significant slowing in P&G's categories last quarter, particularly December, those numbers cover only 40% to 50% of the U.S. market and "the picture on an all-outlet basis is much more encouraging," he said.

Still, P&G's growth last quarter was more than double the 2%-3% growth on an all-outlet basis that Mr. Daley cited.

P&G is the latest of several competitors to report surprisingly strong top-line numbers for last quarter despite the U.S. slowdown. L'Oreal, Colgate-Palmolive Co., Kimberly-Clark Corp. and Alberto-Culver Co. have in the past week all reported fourth-quarter global organic sales growth at 6% to 10%, and Johnson & Johnson was up 4% in its consumer-products business.

Price hikes
The industry is starting to look like a Garrison Keillor world where all the children are mysteriously above average. One factor helping lift all boats, Sanford C. Bernstein analyst Ali Dibadj said in an e-mail, could be retailers increasing orders last quarter in advance of numerous price increases due to kick in starting in this quarter.

Those include several new ones announced by P&G today ranging from 6% to 8% for pet food, dish and power laundry detergent, and bar soap. Those are in addition to previously announced hikes taking effect in paper towels, toilet paper, diapers and body wash.

Of course, the increased orders could hurt sales down the road if inventories begin to build. But P&G executives showed confidence their price hikes would stick and that the economy won't hurt its sales.

"People are not reducing tooth-brushing incidence," P&G Chairman-CEO A.G. Lafley said. "They are not going to the bathroom less often. They are not shaving meaningfully less often, and there it's a style issue, it's not a consumption issue."

He added that P&G's shares for its top 15 or 20 businesses are rising among Hispanics and African Americans, "who tend to be on average lower-income rural Americans. If the [tax] rebates come ... in May, I think that will be a boost on the consumer spending side in the U.S.," Mr. Lafley said. "And frankly, we have just got a few months to get through to there."
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