Procter and Gamble (P&G) was established in 1837 andis one of the biggest consumer good companies in the world with its market inabout 180 countries located all around the world. Originated in the UnitedStates of America, it has its current headquarters in Cincinnati, Ohio. It has its presence in 10 consumer product categoriessuch as beauty, baby, personal care, health, fabric, home etc.
It merchandisesthese product through retail, wholesale and e-commerce. The mission statement of Procter and Gamble states that thecompany wants to improve the lives of its end users by providing superiorquality products and wants to become the one-stop shop for major health andpersonal care market all around the globe. P&Ghas adopted a focused technique for growth. The company wants to focus on itscore competencies by narrowing down its business.
It has recently divested fromtheir pharmaceutical business to take better control of the existing and moreprofitable business. The divestment move will allow P&G to focus moreheavily on the core brands that generate 85% of the total accounted revenue. P&Ghas over 95,000 employees and an annual turnover of 65.29 billion USD (2016) Thisreport consists of the analysis of the company by various economic tools, macroand micro economic data. The study will be done on the company profile, itspace of growth, competitors, how the company is reaching is target customers,various supply and demand shifts, strong market share, as well as the presencein micro and macro environment in the origin country i.e. United States ofAmerica.
Fast-movingconsumer goods are those goods, which lay off the shelves very quickly; theseare the day-to-day use products that include durable as well as non-durableproducts. TheFMCG sector in USA is huge, with about a population of 323 million people inthe country there are about 40,000 full size stores that generate enoughrevenue to contribute positively to the country’s GDP. Procter and Gamble is one of the leading FMCGCompanies in the US, it owns 45% of the market share as on Q4 2017 in the country. MonopolisticCompetition is the most common type of market structure present in the economy.Due to its flexible variable, it is relatively easy and less cumbersome tostart a business in a monopolistic environment. Thereare a lot of similarities between the firms operation in MonopolisticCompetition in terms of types of products, functions of the product, shape,color, use etc. but it can be differentiation by few factors: Dominance:FMCG industry has thousands of firms selling products with little differentiationbut P has dominated the US market amongst all and has been the leadingbrands for all its consumer product categories.
Barrierto Entry- While the barriers of entry is high in an oligopolistic market, theFMCG industry barrier are not very high. MonopolisticCompetition has Super-normal profits (profits over and above the required tokeep the business running) in the short run which attracts new entrants(Equation for maximum profits MC=MR). But in the long run the demand curveshifts to the left reaching the long equilibrium. Itis also an Imperfect Competition. Monopolistic Competition is similar toperfect competition and only different in terms of product differentiation.Theabove graph shows the relationship between the inflation in the US economy from2008-2017 and the rate of the unemployment in Procter and Gamble Discoveredby AW Phillips, the Philips curve shows the inverse relationship betweeninflation and Unemployment in the economy.
Here, the inflation of the economyis taken and the unemployed in regard to Procter and Gamble is taken intoconsideration to plot a Philips Curve. Policymakers believe that the trade off between Unemployment and Inflation can be exploited.Out of 10, 7%inflation would mean 3% unemployment.
And 6% inflation would mean4% employment. IfAggregate Demand rises, it would lead to 1) Anincrease in labor, which would then lead to 2) Increasein wages due to the scarcity of workers and their increased power ofbargaining. 3) Ifwages increase, cost of production increases leading to a increase in higherprice of the product which falls back on the end consumer.
4) Theconsumer ends up paying the increased cost TheUS economy saw a Deflation (alsotermed as Great Depression) happened inthe year 2009; it was caused by the weakness of consumer demand. While some maythink that lower prices are good but it is an extremely destructive force thatcan hit the economy. Cutting down prices is the way for the company to cope upwith the decrease in demand, which also results in laying off people from thejob. P’s Strategy to overcome thecrisis P&Gdecide to make three critical choices looking at the Macroeconomic state of thecountry 1) Sincethere was a cash crunch in the economy, the company decided to push theirenergy towards cash and cost management, which was done by increasing theprices. 2) Tomaintain AA credit rating P&G temporarily reduced its share repurchases forthe year, they only repurchased $6 billion in stock and guaranteed a return ofmore than 100% to their shareholders through a combination of dividends andshare count reduction. 3) Shiftingthe focus on the businesses that have the maximum revenue generation, which isBeauty and personal care business, generation about 60% of the sales of thebusiness.
Also, investing heavily on consumer and market research to expand thecustomer base and provide the right product to the target customer base. 4) Increasethe presence in developing markets Inrelation to the graph provided above, the profit took at deep hit in the year 2015 because of the weaker foreigncurrencies versus U.S dollar Due to the large export business to the countrieslike Brazil, China, Russia and Japan, the profits were negatively impacted. Theexchange rate changed drastically and had a negative 6-point impact on forex. Sales(net) slipped by 4% to 20.2 billion (project was 20.6 billion loss). Reasons for the steep fall in P&G’Sprofits in the year 2015-161) Why did the exchange rate take adeep hit?Inan attempt to have a strong currency, China devalued its currency by 2%, justwhen the dollar was taking a hike.
This was mainly done to make Yuan steadilyrise against trade-weighted partners. Looking at the dynamics of the globalcurrency, China wanted to make its exports cheaper in the world market. Due tothis the net earning of the company were negatively impacted by around 1.4billion dollars foreign exchange fluctuations. 2)The company reduced exports to Venezuela due a decrease in profit aftertax by $2.
4 billion. Due to the accounting policy change in Venezuela, thecompany had to incur a one time cost of $2.1 billion because of which they hadto take a hit in their top line in 2015. 3) Thecompany also had to incur an impairment charge of 2.1 billion dollars relatedto the battery segment; this charge was reported in their discontinuedoperations. Priceelasticity of Demand (Gillette) Priceelasticity cannot be accessed for a company; it can only be done for a product.
In the case of P, out of the line of 100’s of products, a large portionof revenue comes from the men’s razor brand Gillette. Gilletterazor, the company had to reduce its razor prices by 20% in order to regain itsmarket share. Itis essential for businesses to understand the demand for their product line andhow it changes with the changing price, it is also an essential marketingstrategy. Priceelasticity of demand (Ped) measures the responsiveness of demand for a productafter a change in the price of the product. Accordingto Financial Times, Gillette razor reduced its price by 20% to recover from thelosses and to recoup the market share from the startup competitors Dollar Shaveclub. Elasticity of 0.3 meansthat the demand for razors is inelastic as a 20% decrease in price will onlylead to increase in quantity of 6%.
But it’s observed that the elasticity ofrazors was not that low a couple of years back. With no barriers to entrylots of new companies have entered the segment, these companies are offeringssimilar products at lower price points, which has lead to the erosion of marketshare for Gillette. The company no longer has the power to dictate the price inthe market. Due to this stiff competition the company has been forced to reduceprices. The company will have totake a hit on its margins to gain back its dominance in the market.
Gillette inthe same year has also introduced a new range of cheap razors priced below $10.These moves should help the company bounce back in the coming years. Thecompany has reduced its prices across razor range. Gillette’s market share inrazors has been decreasing from the past six years. In 2015 its market share reached 59%, adecrease of almost 11% from 2010. It currently stands at 54%; the company saw adecrease in quantity sold of about 6 percentage points. Its sales in 2015 was148 million, in 2017 it reached 139 million.
In order to reach the same amount ofsales in 2015, the company has reduced its overall razor range by almost 20%,implying a price elasticity of 0.3 CompetitionAnalysis in terms on net revenue, P is one the biggest consumer industrygiant in USA. It has the highest net revenue among its peers/ competitors.
The company operates in 180 countries and isamongst the top FMCG brands in the rest of the world. It has a line of about 10consumer good products. Others like Colgate and Unilever have limited consumerproduct segments.
And, P is the market leader in almost all the consumersegments in comparison to its competitors. TheFMCG Sector is United States is extremely brutal. To maintain the leading position in thatcompetitive environment is tough. P aims to deliver superior qualityproducts for the end consumers to be fully satisfied.
In the current globalmarket P is the best conglomerate in the consumer industry. P hasbeen outperforming its peers on a regular basis. It’s the biggest player in theUnited States in terms of Market Cap. Itsmarket cap is almost equal to the combined market cap of Colgate Palmolive,Reckitt Benckiser, Estee Lauder and Kimberly Clark.
The net income ofP&G is almost thrice of Unilever, the closest peer of the company in termsof competition. The Price/Sales of the company stands at 3.8, which is in line with theindustry. P&G’s Price/BV is the lowest in the industryindicating that the other stocks are comparatively overvalued in the market.Companies like Kimberly Clark and Estee Lauder are valued at almost 160 timesand 10 times their book value. The company has one of thehighest dividend yields in theindustry. They have continued to give their stakeholders good returns both interms of capital gains and dividend. The company has the lowest debt equity ratio in the industry.
The industry average is almost100% with Colgate Palmolive being an outlier with high amount of treasurystock. P sits in a comfortable position with a debt to equity ratio of0.4, which also implies a high interestcoverage ratio, indicating that the company is in a very good position toservice its debt. The company is continuously churning out the unprofitablebrands. Therefore the company does not have to take debt to turnaround theseoperations. The company also has thesecond highest Earning per share (EPS)in the industry. The stock is currently priced at $90 per share.
The companysuffered the highest decline in revenue when compared to its peers. But thisfall was because the company had decided to sell off its unprofitable andnon-core brands. The company’s market share in razors and diapers has fallendown but the company has already initiated a turnaround strategy .
The companyhas divested stake in its underperforming brands like Gucci, Hugo Boss, D&Gand Lacoste. The company is now focusing on increasing its market share withthe already established brands like Tide, Pampers and Gillette. The company isalso bringing in innovation by introducing new products.
On using discounted cashflow, we have arrived at an intrinsic value that is more than double of itscurrent price. The company continues to be a strong bet for both its currentand potential investors. P&G is going through aportfolio transformation, which will only further improve the financials of thecompany in the long run. In terms of social welfare the P&G has continuedto help the society with initiatives like Children’s Safe Drinking Program andPampers Preemie. The company has deliveredmore than 12 billion liters of clean water. These are just two of the manyprograms undertaken by the company to give back to the society.
P hascontinued to grow by delivering good numbers on a consistent basis and it hasdone so in a manner where it is not harming the society but only helping it.US GDP Growth has seen a rollercoaster ride due to the 2008crisis. On plotting the graph we see that US GDP Growth has a directrelationship with the revenue growth of P. When we calculate R Square,with P revenue growth as the dependent variable we get a value of 0.48.This implies that the US GDP Growth can explain 50% of the variation in therevenue growth of P. In years of deflation the company also saw a decrease in revenuegrowth and vice versa.
With a R square of 50%, US GDP growth can be used an indicatorto see in which direction the sales growth of P will go.Lookingat FMCG Sector in USA, P’s past and current position in the market andthe overall US economy, certain things about the said company can be predictedand external prospects can be drawn. The company is investing more in organicproducts for the ever so health conscious consumers. Takinga quick look at the stock prices, the price index of P&G in the last 10 monthsis 1.03186, which is calculated by current share price and share price 10months ago.
A ratio, which is above 1, indicates a future increase in priceover the coming weeks. Withthe rapid growth of digitalization, the company can increase its sales throughtie-ups with e commerce giants like Amazon. Talkingabout the food products, Tesco and Wal-Mart are already booming the sales tothreefold with P&G products. P&Gis one of the top 50 companies on S&P 500 in terms of dividenddistribution. The company has continued to increase its dividend yield year andintends to do so going forward. Thecompany has churned its product portfolio, discontinuing or selling the unprofitablebrands of the company. This has impacted the revenue growth of the company butgoing forward the company will reap the benefits of this strategy as it is nowfocused on increasing its market share with brands where it already has strongtailwinds like Tide, Pampers, Gillette and Olay. P&Gsells products in more than 180 nations.
In its divestment strategy the companysold off its be battery brand Duracell to Berkshire Hathaway for $4.7 billionand it also sold 43 beauty brands to Coty Inc. for $12.5 billion. From a brandportfolio of 170, P&G has brought it down to 65. Fromthe money that P&G received from its asset sales, a large portion was usedfor share buyback.
The companies when they feel that their stock is undervaluedgenerally go for a buyback, which was justified with the DCF calculation. Evenwith the sales decrease, the margins of the company have continued to increaseand with the scale at which the company operates, margins are expected toexpand even further. P&G has the 3rd highest margins in its peergroup and has the lowest tax rate among the industry. P&G’sexpansion in under developed economies and emerging markets like India andChina will also support the company going forward. The company also has several competitiveadvantages. P has several brands generating revenue in excess of $1billion in annual sales.
The core brands of the company hold leadershippositions in their sectors. To retain its position the company has spentheavily on advertising. In 2017 the company has spent $7.1 billion onadvertising. The company also invests heavily on R, which will help thecompany maintain its leadership position in the market. P has arecession-resistant business model, which is why the company only saw a suddenfall in stock price after the 2008 crisis; there was no major change to thetopline and bottom line of the company.
Pis a very strong company. It is highly profitable, has strong brands and hugeglobal growth opportunities and one can only expect it to grow further goingforward.Thefocus of the FMCG companies will now shift towards the developing economiesover the coming decade.
The sector will also see some major demographic changesgoing forwards across all segments.Theaverage age across the world population is going up by the day. UN projectsthat out the total world population, people aged 65 and above are expected todouble to around 1 billion over the next 20 years. This trend is expected tospread across the developing nations as well. China’s and India’s over 65population is expected to go up by 16% and 8.
5% respectively over the next 20years. Goingforward FMCG companies will need to find innovative ways to meet the needs ofaging consumers.