How Procter & Gamble Found Itself in Everyone's Cupboard

By Greg McFarlane | April 24, 2014 AAA

Out of necessity, some giant corporations have narrow product lines. A bank, for instance, can package loans in only so many ways. Car manufacturers sell what are still ultimately just variants on 4 wheels and an internal combustion engine. And then there’s Cincinnati-based Procter & Gamble Co. (NYSE:PG), whose products are inexpensive and often disposable but myriad. With operations in all but about 20 countries worldwide, P&G’s brands are far too numerous to list in their entirety. They range from Duracell batteries to Pampers diapers, Scope mouthwash to Gillette razors, and from to Cover Girl cosmetics to dozens of everyday staples found in kitchens, bathrooms and pantries around the world. From a company that rose to fame with one simple but iconic product – Ivory soap, noteworthy in its day for being the first commercially prepared soap less dense than water – Procter & Gamble now has an extensive brand roster that can sate seemingly every human ablution, craving or need.

Making fabric softener and razor blades for billions of people across multiple continents requires an endlessly dynamic and progressive corporate culture. What generates billions in revenue in Japan might sit unsold in Burkina Faso, which is why Procter & Gamble employs thousands of international brand managers, selected from one of the most rigorous hiring processes in all of commerce.

For most of the world’s largest multinationals, systems for development are more important than who holds the chief executive officer position. With the right philosophy and execution in place, and a workforce that understands the company’s culture and mission, any sufficiently credentialed executive ought to be able to assume command without it hampering the company. One notable exception to this is P&G, which in the fall of 2013 brought back CEO emeritus A.G. Lafley, who had retired four years earlier. As successful as Procter & Gamble is, and has been since its founding during the Martin Van Buren Administration, it’s at least possible that the company is closing in on the real-world limits of its growth potential. Revenue figures did increase during each year of former CEO Bob McDonald’s tenure, but only incrementally and with corresponding declines in net income.

Even though the man whom Lafley succeeded (and preceded) had spent a third of a century with Procter & Gamble, the board of directors was dealing with an uncommon occurrence in the company’s history – years of stagnant revenue and static sales. In his second go-around Lafley immediately went to work disrupting the pattern by shopping the losers and focusing on the winners, i.e. Procter & Gamble’s most profitable brands and divisions.

Billion-dollar Brands

Procter & Gamble boasts more than 300 global brands, which generate more than $84 billion in annual sales. As a pronounced example of the business axiom known as the 80/20 rule, a mere 16% of those brands account for more than 90% of Procter & Gamble’s revenues and profit. The company singles out for particular accolades its 25 “billion-dollar brands,” which include such supermarket shelf luminaries as Tide detergent, Crest toothpaste and Comet household cleaner. Fifteen additional P&G brands each generate at least another half-billion in annual sales, reinforcing the truth that much of the company’s income derives from relatively few sources. Contrast that concentrated profitability with that of Procter & Gamble’s primary competitor, Unilever, which has 100 more brands, yet fewer billion-dollar ones.

As a rule, any company with a market capitalization knocking on the door of a quarter-trillion dollars is too big and unwieldy to operate as a single discrete concern. P&G is thus separated into halves, or in its own corporate parlance, global business units: Household Care, and Beauty & Grooming. These two are further subdivided into two divisions apiece: Fabric & Home Care; Baby, Feminine & Family Care; Health & Grooming; and Beauty, respectively. Each quadrant represents approximately one-quarter of Procter & Gamble sales. Health & Grooming is the smallest of the four, yet was still responsible for $17 billion in revenue during the most recent fiscal yea.

Procter & Gamble’s product line isn’t as sexy nor as groundbreaking as those of its internet- and computer-related counterparts on the list of the world’s largest corporations. But having so quotidian a product line is an integral part of P&G’s success. Consumers want well-fed pets, pleasant-smelling underarms and moisturized hair, and consider it vital to spend hundreds or thousands of dollars a year to achieve such. Such indispensable expenses are the open secret to P&G’s dominance, which is reflected in the company’s presence in retail outlets everywhere. We’d mentioned previously the phenomenon of companies colossal and minuscule existing largely as suppliers to Wal-Mart Stores, Inc. (NYSE:WMT). Procter & Gamble fits in the former category: fully one-seventh of the world’s largest consumer products company’s revenue comes from sales to the world’s largest retailer.

The Bottom Line

The consumer products market is notorious for requiring its players to choose between market share and profitability. Product lines are broad, margins are small, and competition endless and fierce. Build a better mousetrap or a more absorbent paper towel and customers will be only too happy to patronize your company. With decades of expertise, scores of highly trained middle and lower-level managers and a history of innovation and adaptation, it’s small wonder that Procter & Gamble remains one of the largest and most profitable companies doing business today.

 

 

 

 

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