In Part I of this series, I looked at the huge size of the hair care business and focused on Procter and Gamble (PG)’s decision to divest its less profitable beauty and hair care products. At first glance, chopping off one of their products resembles Coca Cola (KO) dropping regular (Classic) Coke and going to new Coke. In Part II, we focus on the strategic implications of P&G’s move.
The sell-off of these products has not yielded a stock price boost. Investors will note that P&G holds many of the world’s top brands and is the long-standing leader in marketing dollars spent. P&G’s website identifies 23 brands with annual sales of $1 billion to more than $10 billion, and 14 between $500 million and $1 billion. Of the eight analysts shown on Yahoo Finance (September 21), not including those who initiated coverage, five show P&G as downgrade, two upgrade. Most of the issues that explain the cut off of these less profitable products will seem clear to smart investors. One stands out and calls for comment.
P&G is the most reviewed, analyzed and picked apart company in the US. Everyone offers suggestions. When it works, everyone takes credit. The most popular Harvard Business School case study today is Google, Inc. Thousands of Masters of Business Administration students are rifling through Goggle’s SEC filings, annual reports and commentary from experts and bloggers. P&G has been around much longer than Google. A simple search turns up an array of intriguing titles from those with expert advice for the makers of Tide: Innovation Culture, Product Innovation or Strategic Innovation; The End of Marketing As we Know It; A Five Step Formula; International Strategy; Marketing Strategy; Growth and Productivity Strategy; Operations Strategy; Brand Strategy. Aficionados of strategic thinking will recognize that marketing is operations and operations is not strategy. Rather than not getting enough advice, P&G receives too much.
Unlike high technology, consumer products seldom reward product excellence with massive profit levels. P&G battles Colgate-Palmolive (CL), Estee Lauder (ELAA), Revlon (REV), Coty (COTY), Elizabeth Arden (RDEN), Inter Parfums Inc (IPAR) and various international companies. Revlon, for example, holds about $275 million in cash and turned in $236 million net profit last year. Colgate Palmolive generated $3.6 Billion operating profit and holds $1 billion in cash and short-term investments according to Yahoo Finance. By contrast, P&G’s $12 billion cash and short–term investments war chest as of June, 2015 looks pretty solid.
The sell off of the less profitable lines has been fully digested by the market since it has been on the slate for more than a year. Behind the sell off stands a long-term tightening of profits. During and after the recession, large companies stockpiled hordes of cash, offering protection against future business trouble and providing the means for expansion. Apple (AAPL), certainly an unusual company, holds approximately $30 Billion. It has actually expanded after the Iphone bubble. General Motors (GM), which enters the ring against Ford (F), Toyota (TM), Honda (HMC), Volkswagen (VLKAF) and many others that are now manufacturing more cheaply in the US, holds a $29 billion war chest. P&G’s smaller wallet makes them more sensitive to lower profits and puts more pressure on the company to maintain its mammoth size.
A few years ago, like its successful counterparts, P&G pursued acquisitions, purchasing Wella, the German hair care company, and many of the products it has just relinquished. Since then, the market has clammed up especially for US industrials. Investment funds are shifting toward bonds. No wonder the holder of 70% of global market share in blades and razors has turned from bull to bear, chopping off the underperformers and shoring up the mainstay lines – Tide, Pantene, Olay, Pampers, Gillette, Head & Shoulders.
The products that were sold off do not fit the P&G profile. Unlike Tide that is widely used and carries both a long history of marketing and a responsiveness to consumer issues that makes the product number one, the new COTY line of former P&G products connect with smaller markets and satisfy specialty needs.
A few years ago, Starbucks (SBUX) found itself under anesthetic as MBA students, professors and bloggers cut open their innards. (Rumor has it, its digestive track was full of frothy latte.) Experts advised Growth Strategy (one of the tiles above for P&G!) that would propel them to unmatched heights. Then they closed 600 stores and found that they had grown too rapidly and added too many products.
We can expect the soap opera king and topic of thousands of articles and essays to follow its recent consolidation with zest (sounds like a product line). Personal care is rising among the P&G family of products. According to IPWatchdog, P&G’s recent patent activity implies that a number of innovative hair care products are on the way. These include a new kind of hair dryer – more ergonomic -- and a post shampoo scalp treatment. P&G is also building a “Beauty Innovation Center.” While they define beauty broadly, they are clearly making a push for new products – frequently tweaks to existing, successful products.
Maybe the army of advisers will see a connection between Starbucks and P&G, the former owner of Folger’s. Starbucks may not have to worry, but a company that owned a leading coffee brand and is going back to its bread-and-butter product lines may prove a threat.
The myth proved to be quite resilient. Hair care remains a thriving business. Despite what appears bad news for the consumer household product king, hair care remains prosperous. Next month, we will look at more absorbing tales that make us think about our strongest-held assumptions.
Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.
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