Procter and Gamble (P&G) was established in 1837 and
is one of the biggest consumer good companies in the world with its market in
about 180 countries located all around the world. Originated in the United
States of America, it has its current headquarters in Cincinnati, Ohio. It has its presence in 10 consumer product categories
such as beauty, baby, personal care, health, fabric, home etc. It merchandises
these product through retail, wholesale and e-commerce.
The mission statement of Procter and Gamble states that the
company wants to improve the lives of its end users by providing superior
quality products and wants to become the one-stop shop for major health and
personal care market all around the globe.
has adopted a focused technique for growth. The company wants to focus on its
core competencies by narrowing down its business. It has recently divested from
their pharmaceutical business to take better control of the existing and more
profitable business. The divestment move will allow P&G to focus more
heavily on the core brands that generate 85% of the total accounted revenue.
has over 95,000 employees and an annual turnover of 65.29 billion USD (2016)
report consists of the analysis of the company by various economic tools, macro
and micro economic data. The study will be done on the company profile, its
pace of growth, competitors, how the company is reaching is target customers,
various supply and demand shifts, strong market share, as well as the presence
in micro and macro environment in the origin country i.e. United States of
consumer goods are those goods, which lay off the shelves very quickly; these
are the day-to-day use products that include durable as well as non-durable
FMCG sector in USA is huge, with about a population of 323 million people in
the country there are about 40,000 full size stores that generate enough
revenue to contribute positively to the country’s GDP. Procter and Gamble is one of the leading FMCG
Companies in the US, it owns 45% of the market share as on Q4 2017 in the country.
Competition is the most common type of market structure present in the economy.
Due to its flexible variable, it is relatively easy and less cumbersome to
start a business in a monopolistic environment.
are a lot of similarities between the firms operation in Monopolistic
Competition in terms of types of products, functions of the product, shape,
color, use etc. but it can be differentiation by few factors:
FMCG industry has thousands of firms selling products with little differentiation
but P has dominated the US market amongst all and has been the leading
brands for all its consumer product categories.
to Entry- While the barriers of entry is high in an oligopolistic market, the
FMCG industry barrier are not very high.
Competition has Super-normal profits (profits over and above the required to
keep the business running) in the short run which attracts new entrants
(Equation for maximum profits MC=MR). But in the long run the demand curve
shifts to the left reaching the long equilibrium.
is also an Imperfect Competition. Monopolistic Competition is similar to
perfect competition and only different in terms of product differentiation.
above graph shows the relationship between the inflation in the US economy from
2008-2017 and the rate of the unemployment in Procter and Gamble
by AW Phillips, the Philips curve shows the inverse relationship between
inflation and Unemployment in the economy. Here, the inflation of the economy
is taken and the unemployed in regard to Procter and Gamble is taken into
consideration to plot a Philips Curve.
makers 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 mean
Aggregate Demand rises, it would lead to
increase in labor, which would then lead to
in wages due to the scarcity of workers and their increased power of
wages increase, cost of production increases leading to a increase in higher
price of the product which falls back on the end consumer.
consumer ends up paying the increased cost
US economy saw a Deflation (also
termed as Great Depression) happened in
the year 2009; it was caused by the weakness of consumer demand. While some may
think that lower prices are good but it is an extremely destructive force that
can hit the economy. Cutting down prices is the way for the company to cope up
with the decrease in demand, which also results in laying off people from the
P’s Strategy to overcome the
decide to make three critical choices looking at the Macroeconomic state of the
there was a cash crunch in the economy, the company decided to push their
energy towards cash and cost management, which was done by increasing the
maintain AA credit rating P&G temporarily reduced its share repurchases for
the year, they only repurchased $6 billion in stock and guaranteed a return of
more than 100% to their shareholders through a combination of dividends and
share count reduction.
the focus on the businesses that have the maximum revenue generation, which is
Beauty and personal care business, generation about 60% of the sales of the
business. Also, investing heavily on consumer and market research to expand the
customer base and provide the right product to the target customer base.
the presence in developing markets
relation to the graph provided above, the profit took at deep hit in the year 2015 because of the weaker foreign
currencies versus U.S dollar Due to the large export business to the countries
like Brazil, China, Russia and Japan, the profits were negatively impacted. The
exchange rate changed drastically and had a negative 6-point impact on forex.
(net) slipped by 4% to 20.2 billion (project was 20.6 billion loss).
Reasons for the steep fall in P&G’S
profits in the year 2015-16
1) Why did the exchange rate take a
an attempt to have a strong currency, China devalued its currency by 2%, just
when the dollar was taking a hike. This was mainly done to make Yuan steadily
rise against trade-weighted partners. Looking at the dynamics of the global
currency, China wanted to make its exports cheaper in the world market. Due to
this the net earning of the company were negatively impacted by around 1.4
billion dollars foreign exchange fluctuations.
The company reduced exports to Venezuela due a decrease in profit after
tax by $2.4 billion. Due to the accounting policy change in Venezuela, the
company had to incur a one time cost of $2.1 billion because of which they had
to take a hit in their top line in 2015.
company also had to incur an impairment charge of 2.1 billion dollars related
to the battery segment; this charge was reported in their discontinued
elasticity of Demand (Gillette)
elasticity 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 portion
of revenue comes from the men’s razor brand Gillette.
razor, the company had to reduce its razor prices by 20% in order to regain its
is essential for businesses to understand the demand for their product line and
how it changes with the changing price, it is also an essential marketing
elasticity of demand (Ped) measures the responsiveness of demand for a product
after a change in the price of the product.
to Financial Times, Gillette razor reduced its price by 20% to recover from the
losses and to recoup the market share from the startup competitors Dollar Shave
Elasticity of 0.3 means
that the demand for razors is inelastic as a 20% decrease in price will only
lead to increase in quantity of 6%. But it’s observed that the elasticity of
razors was not that low a couple of years back.
With no barriers to entry
lots of new companies have entered the segment, these companies are offerings
similar products at lower price points, which has lead to the erosion of market
share for Gillette. The company no longer has the power to dictate the price in
the market. Due to this stiff competition the company has been forced to reduce
The company will have to
take a hit on its margins to gain back its dominance in the market. Gillette in
the 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. The
company has reduced its prices across razor range.
Gillette’s market share in
razors has been decreasing from the past six years. In 2015 its market share reached 59%, a
decrease of almost 11% from 2010. It currently stands at 54%; the company saw a
decrease in quantity sold of about 6 percentage points. Its sales in 2015 was
148 million, in 2017 it reached 139 million. In order to reach the same amount of
sales in 2015, the company has reduced its overall razor range by almost 20%,
implying a price elasticity of 0.3
Analysis in terms on net revenue, P is one the biggest consumer industry
giant in USA. It has the highest net revenue among its peers/ competitors. The company operates in 180 countries and is
amongst the top FMCG brands in the rest of the world. It has a line of about 10
consumer good products. Others like Colgate and Unilever have limited consumer
product segments. And, P is the market leader in almost all the consumer
segments in comparison to its competitors.
FMCG Sector is United States is extremely brutal. To maintain the leading position in that
competitive environment is tough. P aims to deliver superior quality
products for the end consumers to be fully satisfied.
In the current global
market P is the best conglomerate in the consumer industry. P has
been outperforming its peers on a regular basis. It’s the biggest player in the
United States in terms of Market Cap. Its
market cap is almost equal to the combined market cap of Colgate Palmolive,
Reckitt Benckiser, Estee Lauder and Kimberly Clark. The net income of
P&G is almost thrice of Unilever, the closest peer of the company in terms
The Price/Sales of the company stands at 3.8, which is in line with the
P&G’s Price/BV is the lowest in the industry
indicating that the other stocks are comparatively overvalued in the market.
Companies like Kimberly Clark and Estee Lauder are valued at almost 160 times
and 10 times their book value.
The company has one of the
highest dividend yields in the
industry. They have continued to give their stakeholders good returns both in
terms of capital gains and dividend.
The company has the lowest debt equity ratio in the industry.
The industry average is almost
100% with Colgate Palmolive being an outlier with high amount of treasury
stock. P sits in a comfortable position with a debt to equity ratio of
0.4, which also implies a high interest
coverage ratio, indicating that the company is in a very good position to
service its debt. The company is continuously churning out the unprofitable
brands. Therefore the company does not have to take debt to turnaround these
The company also has the
second highest Earning per share (EPS)
in the industry. The stock is currently priced at $90 per share. The company
suffered the highest decline in revenue when compared to its peers. But this
fall was because the company had decided to sell off its unprofitable and
non-core brands. The company’s market share in razors and diapers has fallen
down but the company has already initiated a turnaround strategy .The company
has divested stake in its underperforming brands like Gucci, Hugo Boss, D&G
and Lacoste. The company is now focusing on increasing its market share with
the already established brands like Tide, Pampers and Gillette. The company is
also bringing in innovation by introducing new products.
On using discounted cash
flow, we have arrived at an intrinsic value that is more than double of its
current price. The company continues to be a strong bet for both its current
and potential investors.
P&G is going through a
portfolio transformation, which will only further improve the financials of the
company in the long run. In terms of social welfare the P&G has continued
to help the society with initiatives like Children’s Safe Drinking Program and
The company has delivered
more than 12 billion liters of clean water. These are just two of the many
programs undertaken by the company to give back to the society. P has
continued to grow by delivering good numbers on a consistent basis and it has
done 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 2008
crisis. On plotting the graph we see that US GDP Growth has a direct
relationship 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 the
revenue growth of P.
In years of deflation the company also saw a decrease in revenue
growth and vice versa.
With a R square of 50%, US GDP growth can be used an indicator
to see in which direction the sales growth of P will go.
at FMCG Sector in USA, P’s past and current position in the market and
the overall US economy, certain things about the said company can be predicted
and external prospects can be drawn. The company is investing more in organic
products for the ever so health conscious consumers.
a quick look at the stock prices, the price index of P&G in the last 10
is 1.03186, which is calculated by current share price and share price 10
months ago. A ratio, which is above 1, indicates a future increase in price
over the coming weeks.
the rapid growth of digitalization, the company can increase its sales through
tie-ups with e commerce giants like Amazon.
about the food products, Tesco and Wal-Mart are already booming the sales to
threefold with P&G products.
is one of the top 50 companies on S&P 500 in terms of dividend
distribution. The company has continued to increase its dividend yield year and
intends to do so going forward.
company has churned its product portfolio, discontinuing or selling the unprofitable
brands of the company. This has impacted the revenue growth of the company but
going forward the company will reap the benefits of this strategy as it is now
focused on increasing its market share with brands where it already has strong
tailwinds like Tide, Pampers, Gillette and Olay.
sells products in more than 180 nations. In its divestment strategy the company
sold off its be battery brand Duracell to Berkshire Hathaway for $4.7 billion
and it also sold 43 beauty brands to Coty Inc. for $12.5 billion. From a brand
portfolio of 170, P&G has brought it down to 65.
the money that P&G received from its asset sales, a large portion was used
for share buyback. The companies when they feel that their stock is undervalued
generally go for a buyback, which was justified with the DCF calculation.
with the sales decrease, the margins of the company have continued to increase
and with the scale at which the company operates, margins are expected to
expand even further. P&G has the 3rd highest margins in its peer
group and has the lowest tax rate among the industry.
expansion in under developed economies and emerging markets like India and
China will also support the company going forward. The company also has several competitive
advantages. P has several brands generating revenue in excess of $1
billion in annual sales. The core brands of the company hold leadership
positions in their sectors. To retain its position the company has spent
heavily on advertising. In 2017 the company has spent $7.1 billion on
advertising. The company also invests heavily on R, which will help the
company maintain its leadership position in the market. P has a
recession-resistant business model, which is why the company only saw a sudden
fall in stock price after the 2008 crisis; there was no major change to the
topline and bottom line of the company.
is a very strong company. It is highly profitable, has strong brands and huge
global growth opportunities and one can only expect it to grow further going
focus of the FMCG companies will now shift towards the developing economies
over the coming decade. The sector will also see some major demographic changes
going forwards across all segments.
average age across the world population is going up by the day. UN projects
that out the total world population, people aged 65 and above are expected to
double to around 1 billion over the next 20 years. This trend is expected to
spread across the developing nations as well. China’s and India’s over 65
population is expected to go up by 16% and 8.5% respectively over the next 20
forward FMCG companies will need to find innovative ways to meet the needs of