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Procter & Gamble (NYSE:PG) has traditionally been the name to beat when it comes to beauty products market - a category that includes skin creams, shampoos, conditioners and fragrances. The company's portfolio in this segment boasts of names such as Olay and Pantene, brands that pull in more than a billion dollars each year for the company and are also arguably some of the most famous names in their respective categories.

Despite the company's established credentials, however, its footing in the segment is beginning to look rather fragile lately. Rivals such as Unilever (NYSE:UL) have stepped up a gear over the last few years, undermining both market share and pricing power for P&G. In this article, we’ll take a deeper look at the underlying reasons behind P&G's recent vulnerability in the segment and what the company can do to address these issues.

P&G's recent woes can be boiled down to two key factors:

1. Dependence on developed markets

P&G has been the most dominant consumer goods company in Western markets while Unilever has held sway over emerging markets. This fact is also reflected in the respective companies' 2012 sales contribution from emerging markets - more than 50% for Unilever but only 30% for P&G. This balance of power has turned to P&G's disadvantage in recent years with regions such as North America and Western Europe reeling under recessionary conditions severely dampening consumer demand. The company's beauty segment has been hit particularly hard - sales volumes for the last six months of 2012 were down by more than 2% compared to 2011. Meanwhile, Unilever's 2012 performance reflected the continued growth in demand in emerging markets with total volumes in the personal care segment (which includes soaps, creams, shampoos, and fragrances) up by more than 7%.

2. A pricing strategy largely geared toward the premium segment

It's not just weaker overall demand that’s hurting P&G's sales. Some of the company's top-selling beauty products are priced at a premium when compared to competitors. Amid a sluggish economy, an increasing number of consumers have been turning away from such expensive items toward lower-priced, accessible products. Unilever's value-for-money approach has helped it not just win over customers in emerging markets, but is also helping it win over developed markets as well.

What Are the Key Changes Investors Should Be Looking Forward to in the Company's Strategy?

Given the fact that beauty products contribute more than 20% of P&G's stock value according to our analysis, investors are hoping to see some sort of shake-up in the company's strategy in the segment. Here's a look at what potentially can or should be happening:

1. Pricing has to become more aggressive

To correct the slide in market share, the pricing issue is something that P&G will have to fix in the long run. Considering that the company operates at margins well above Unilever's, there is little reason why the company should continue to lose out on customers just because of an unwillingness to compete more on prices. The company has stated its intention of being more price-competitive in the future, but the signs towards the latter half of 2012 weren't very encouraging. Prices in the beauty segment rose by 3% over the last three months of 2012, marginally below Unilever's 3.3% increase in prices in personal care. We're hoping P&G shows more persistence here in the coming quarters.

2. Packaging might be the key

Unilever has done well to apply emerging market packaging tactics to developed markets seeing the increased price sensitivity shown in the Western markets. These include products packaged in smaller quantities, which makes it more accessible to consumers with low purchasing power. P&G has already adopted a similar strategy in detergents selling Tide "pods," which offers detergent, stain removers and brightener in a smaller, convenient single-use package. Investors are hoping the company shows similar initiatives in the beauty segment.

3. Innovation to create differentiation

Innovation remains at the heart of the consumer goods industry. In order to reignite demand for its beauty products in Western markets, P&G will need to come up with new and diverse product lines faster. Investors can already see some positive signs - the company has rolled out a complete overhaul of its "Olay Regenerist" line of products.

We have a $70 price estimate for P&G, which is below the current market price.

Disclosure: None.

Source: How Procter & Gamble Can Stop Its Slide In The Beauty Market