As Growth Slows, P&G to Roll Back More Prices; Marketing Budget Unaffected

Analysts Question Strategy, Raise Specter of 2000

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Procter & Gamble Co.said it will roll back prices on more categories -- including razor blades and toothpaste -- but executives promised not to cut marketing spending in the near term after organic sales growth slipped to 3% in the first quarter from 4% the previous quarter.

The company's slowed growth came as competitors that have reported saw their top-line growth accelerate to rates at least twice that of P&G's. Unilever yesterday reported that organic sales -- which exclude currency, acquisition and divestiture effects -- grew 8.2% in the first quarter. Colgate saw organic sales rise 6.5%, while L'Oreal and Kimberly-Clark Corp. posted 6.4% and 6% increases, respectively. Each company posted improvements of one to three percentage points from the previous period, despite continued sluggish market growth in the U.S. and Western Europe.

P&G beat analyst expectations for earnings per share by a penny, at 82 cents, but also pulled down earnings guidance for the full fiscal year ending June 30, revising expectations downward for the second straight quarter. P&G expects net income of $3.82 to $3.88 a share, vs. prior expectations of $3.93 to $4.03.

It all led to a 4% midday drop in P&G's share price and a contentious earnings conference call in which analysts questioned the marketing strategy and whether the company needs to bring in outside managers. Some also wondered if P&G faces a stumble similar to the one it had in 2000, which resulted in two quarterly earnings misses and the exit of former Chairman-CEO Durk Jager.

New price controls in Venezuela chopped about 3 cents off P&G's earnings per share and a percentage point off its organic sales growth. P&G's competitors didn't cite problems in Venezuela, but Chief Financial Officer Jon Moeller said on the call that the company has a billion-dollar business there and chose to immediately comply with the new regulations, unlike some companies.

Overall, P&G lost 0.2 points of market share globally last quarter, Mr. Moeller said, "so this isn't a big cliff-type event." But the company lost 0.6 points in North America and is responding by lowering prices or stepping up promotional spending where competitors have failed to follow price hikes, he said.

P&G gained or held share across 45% of its global business, Mr. Moeller said. Had it simply held share in the six category-country combinations where it's rolling back prices, the number would have been 55%, he added.

P&G is rolling back prices or stepping up price promotion in U.S. powdered laundry and automatic-dishwasher detergent, U.K. and Mexico laundry products, and U.S. oral care and razor blades.

But analysts questioned P&G's marketing strategy and innovation, and Chairman-CEO Bob McDonald acknowledged that P&G needs to do better on the latter, particularly in beauty care. In that category, rivals have chipped away at its brands' leading positions in hair and skin care in the U.S.

Tide Pods is one area of successful innovation, Mr. McDonald said. Despite delays in the rollout, which allowed competitors to launch their own products, Tide Pods has had 67% of the dollar share of the emerging unit-dose laundry category since the February launch, he said.

Overall shipments are 30% ahead of plan, Mr. McDonald said, and the company still expects unit-dose detergent to eventually capture 30% of the roughly $6 billion U.S. detergent market.

Mr. Moeller said that P&G hadn't cut marketing significantly last quarter and that it would still increase advertising spend for the full year about in line with the anticipated 4% full-year organic sales increase.

P&G is ramping up spending behind its corporate and individual brand Olympics-related campaigns this quarter and next, which Mr. McDonald expects to add $500 million in incremental sales.

Longer term, Mr. Moeller said, P&G expects to get $1 billion of its $10 billion in five-year cost savings by holding growth in marketing spending 0.1 to 0.2 percentage points below sales growth. But he said "many of the savings will be in nonadvertising marketing costs."

Analysts had some criticism of P&G's marketing efforts, regardless of costs. Deutsche Bank analyst Bill Schmitz said P&G is losing market share despite having ramped up advertising spending as a share of sales in recent years -- the first time he can recall that happening. Wells Fargo analyst Tim Conder wondered whether P&G has "too broad a marketing focus on the feel-good vs. the key core brands."

Mr. McDonald said the best way to answer that question is "to deliver the results, and that 's what we're focused on."

Citigroup analyst Wendy Nicholson asked whether P&G risks a "replay of 2000 when the core business stinks and you're making huge changes" in the organization. "Where is the ... taking responsibility for the weak numbers as opposed to saying 'Not our fault?' " she added.

"Well, Wendy, let me be clear," Mr. McDonald said. "It is my fault. I am the CEO of the company. I do take responsibility. I do take accountability, and every manager in the Procter & Gamble Co. that was on the call would say the same thing. We do hold people accountable for results."

Mr. McDonald added that he believes P&G will get the right leaders and programs in place to deliver. "I personally don't think that this restructuring program will get in the way of doing that ," he said. "In fact, if anything, I think we will enable it."

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