'Recession-Proof' P&G Aims to Renegotiate Media Spending Globally

With Sales Growth Down and Market Share Flat, CPG Giant Looks to Cut Costs

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NEW YORK (AdAge.com) -- With its organic sales growth falling below its target this quarter for the first time in years, Procter & Gamble Co. is looking to get more aggressive in cost cutting, particularly on the media front, Chairman-CEO A.G. Lafley said at an analyst conference today.

Chairman-CEO A.G. Lafley said 'In tight economic times many companies pull back on advertising as a cost-cutting measure. This creates an opportunity for us to buy more media at a lower cost and increase our share of voice.'
Chairman-CEO A.G. Lafley said 'In tight economic times many companies pull back on advertising as a cost-cutting measure. This creates an opportunity for us to buy more media at a lower cost and increase our share of voice.'
"This media environment is a big 'O' opportunity for us, because we're the biggest advertiser in a lot of these countries, and we just go in and tear up the contract," Mr. Lafley said. "Whole industries have walked away [from media advertising]. So everything is getting renegotiated, and we want to be ahead of the curve."

Still wants 'share of voice'
Of P&G's brands and business units, Mr. Lafley said, "I don't know anybody who's not trying to take cost out faster." The goal, however, will be to "maintain share of voice" while cutting media costs, Mr. Lafley said. He had earlier pointed to Charmin increasing its share of voice in media while other toilet-paper competitors have cut back spending in recent years.

Earlier in the morning, Mr. Lafley had said: "In tight economic times many companies pull back on advertising as a cost-cutting measure. This creates an opportunity for us to buy more media at a lower cost and increase our share of voice."

In practice, TNS Media Intelligence data suggests P&G has been one of those companies in the U.S., having cut measured-media spending by double-digit rates the past two quarters vs. a year ago. But long term, and quite possibly in the current fiscal year, P&G expects to grow marketing spending at about the same pace as sales growth.

Incoming Chief Financial Officer Jon Moeller suggested P&G's organic sales growth will be about 3% for the quarter, below P&G's long-term target of 4% to 6%. Mr. Moeller noted that the overall value-growth rate for P&G's categories has slowed a "couple of points" globally to around 3%, and that P&G's market shares are running roughly even with what they were a year ago -- a slowdown from the company's claims of gaining share across most of its business in prior quarters.

A P&G spokeswoman said that organic sales growth will be below 4% to 6% but did not specify how much below.

P&G blamed about two thirds of its top-line shortfall on retailers slowing orders and reducing inventory levels, with the remaining third coming mainly from "pantry destocking" by consumers reducing their home inventory rather than trading down to private label or out of P&G categories all together. Private label is growing, as it has in all recessions, Mr. Lafley said, but he doesn't believe that's the primary driver.

This quarter's 3% is a significant slowdown from the 5% organic sales growth rate P&G has had for more than a year. But the company stood by its 4%-6% organic sales growth forecast for its full fiscal year ending June 30 as well as its earnings growth forecasts of 10% or better. P&G also expects to get growing relief from commodity price increases as the year continues, with an increase in such costs for the full year now projected at $2 billion, down from $3 billion only four months ago.

In wide-ranging discussions, P&G executives also described how they'll accelerate productivity without massive layoffs, such as better management of its 1 million truck fleet in the U.S., the nation's fourth-largest.

Considering drug divestiture
P&G also has pulled the plug for good on research and development for its prescription drug brands and will consider divesting them, including billion-dollar brand Actonel.

Mr. Lafley said P&G will continue to support new-product development in its consumer health-care business, which includes such brands as Vicks, Metamucil and Pepto Bismol. Rob Steele, vice chairman-global health and wellbeing, pointed to Vicks as one example of an over-the-counter product P&G plans to aggressively expand beyond its existing 15 countries, noting that it's already growing at an 8% annual rate outside the U.S.

He also pointed to P&G's Swiss Precision Diagnostics joint venture, which recently launched a digital ClearBlueEasy home-pregnancy test in Europe that it hopes to expand elsewhere, adding that the "real opportunity will be self-diagnostic categories that have yet to be completed."

But Mr. Lafley said the narrowing of focus to consumer health care is a function of how the market has changed since P&G was making big investments in new prescription drugs in the late 1990s and early this decade. "Pharmaceutical companies were trading at multiples 10 [percentage points] higher than consumer product companies," he said. "Today, pharmaceutical companies are trading at multiples below consumer-products companies."

Reasons for that, he said, include a tougher regulatory environment in the U.S. and "significant downward pricing pressure in the pharmaceutical market."

P&G stopped making investments in its own research into new drugs two years ago, shifting its focus instead to developing partnerships on new drugs with outside partners. But now P&G will stop seeking new pharmaceutical projects from outside, too.

In addition to Actonel, the pharmaceutical brands involved include Enablex, Asacol and Intrinsa. Actonel and Enablex are the only ones getting active consumer-advertising support, both handled by Omnicom Group's DDB Worldwide, New York. Intrinsa is a developmental drug designed to improve sex drive in post-menopausal women and handled by an array of Publicis Group marketing-services shops, but which, to Mr. Lafley's point, has been in limbo for several years after the Food and Drug Administration said more research is needed on the potential long-term impact on women's health.

Though P&G will consider divestitures, it will continue to provide marketing support for the brands, which Mr. Lafley said are highly profitable, with 90% gross margins. "It's a good profit, but it's not make or break on a company basis," he said, declining to specify how much contribution to profit the drug brands account for.

'Recession resistant'
Despite the decline in P&G's sales growth rate this quarter, Mr. Lafley said he still sees plenty of evidence the company remains "recession resistant" but "not recession proof."

Only 26% and 20% of consumers say they plan to cut spending on health and beauty or household cleaning products, respectively, because of the recession, Mr. Lafley said. That's a lower share than any category other than food staple (15%), including beverages, (at 27%).

Long-term data from Nielsen Bases indicates that consumer purchase intent and value perceptions of new products have been essentially unchanged through all recessions from 1980 to the present, he said. And while new-product success rates have declined since 1982, recession apparently had nothing to do with that according to the Bases data, which saw no change in the trend line during the recessions of the 1980s and early 1990s.

Consumer trade down to private label is increasing, as well as trade down to lower-priced brands such as P&G's Luvs and Gain, with sales up 14% and 12% respectively over the past year, Mr. Moeller said.

But P&G executives also said they see continued opportunity to trade consumers up, despite the economy, for example to P&G's priciest Olay skin-care range yet, ProX, priced at around $40 per product and promising to make aging skin "perform" with the same kind of elasticity and firmness as younger skin. "To anyone who has any doubts about the viability of ProX, we sold out the first 1,000 starter kits to our Olay Club members in just 17 minutes last week," said Ed Shirley, vice chairman-global beauty and grooming.

Mr. Lafley also appeared to put to rest long-standing rumors that he would retire before his mandatory retirement in 2012. "Rumors of my passing are greatly exaggerated," Mr. Lafley said. "We have a great team. I love what I'm doing. I have a cold today, but otherwise I feel pretty good. ... I think there's just a ton of upside and I want to be part of it."

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