Procter & Gamble Sets Realistic Sights on Doubling in Size

As the world’s largest manufacturer of consumer products, a “dividend aristocrat,” and one of America’s largest companies sporting a market cap over $157 billion, it may be difficult to believe that Procter & Gamble (NYSE: PG) still has billions of untapped potential customers. PG currently sells its products in 180 countries and has launched a plan to reach billions of new potential customers living in emerging and developing countries.

Here are excerpts from a 5/9/09 article by David Holthaus published in the Cincinnati Enquirer that caught my attention and interest:

Procter & Gamble has embarked on what it's calling "the most ambitious expansion plan in company history" - an aggressive campaign that will extend the reach of the consumer goods company into some of the world's poorest countries.

Already one of the nation's largest companies, with more than $80 billion in annual sales, P&G plans to more than double its sales to $175 billion over the next 15 years.

The core of the strategy is a major push into countries that don't yet buy detergent, shampoo, diapers and razors in the same quantities as U.S. consumers do, if they buy such products at all.

India, most of Africa, much of Eastern Europe and the Middle East are targets of P&G's growth plans.

Driving the shift is basic demographics. Most of the world's population lives in countries that P&G considers "developing" markets, nations outside North America, Western Europe, Japan and Korea. About 90 percent of the world's babies are born in these countries, creating a market ripe for P&G products.

Indeed, diapers will be central to the growth plans.

In some developing countries, babies typically wear cloth diapers, or sometimes none at all. P&G already sells $9 billion worth of Pampers products around the world; by 2020, that could more than double to $20 billion, executives say.

This is not the first time P&G has expanded its business in the developing world. From 2002 to 2008, P&G’s sales in developing nations grew from 20% to 30% of the company's net sales (approximately $25 billion in 2008), according to SEC filings. P&G’s prior experience and success selling diapers in China is an indicator that management has the knowledge and capabilities to overcome the logistical and retail environment differences between the developed and developing world. Based on its demographics, economic and per capita income growth, India will likely be a key to P&G’s expansion. Here are some more interesting statistics and commentary from the Cincinnati Enquirer article:

Source: wikinvest.com

P&G's experience selling diapers in China can be seen as a model. Since it started in 1998, the market for disposables has grown from 3 million cases to 70 million, P&G says. Even with that rapid growth, the Chinese still spend well under $1 a day, per person, on P&G-brand diapers, allowing plenty of room for growth.

India, with an economy that's growing by more than 7 percent a year and whose per capita income is expected to double over the next decade, is another vast potential market. P&G sees Indian consumers as having a growing appetite for its goods and the money to afford them.

"The potential for P&G in just this one country is extraordinary," chief financial officer Jon Moeller told analysts recently.

The challenges that P&G will face in selling their products in India stem from the lack of an established supply chain and retail distribution centers. However, these challenges present opportunities for P&G such as greater bargaining power with their retailers, selling products designed to the local preferences that can have higher margins, and little, if any, competition from private label brands. This commentary from Werner Geissler caught my attention:

A more basic problem is a lack of income in countries where some subsist on less than a dollar a day. For those potential consumers, P&G has developed small sachets of shampoo or detergent, good for one or two uses and priced within their comfort range, "like an egg or a loaf of bread," said Werner Geissler, vice chairman of global operations.

These mini-products get consumers interested, build loyalty and actually carry profit margins that can be higher than standard-size products, Geissler said.

Despite its size and supply chain challenges, India has population migration trends that may work to P&G’s benefit. Here are some statistics from an article by Patrick Barta and Krishna Pokharel published in the May 13^th Wall Street Journal that I found interesting,

“India has at least 41 cities with more than one million people, up from 23 two decades ago. A half dozen others will soon join the megacity list.”

“By 2020, more than 30% of Indians will live in cities. (Source: United Nations Department of Economic and Social Affairs)”

This rapid rate of urbanization is not unique to India. China, according to the CIA World Fact book, is expected to experience a rate of urbanization of 2.7% per year from 2005 into 2010. As of 2008, it is estimated that 43% of China’s population lives in an urban area. India has experienced a similar rate of urbanization at 2.4% for the same years and it is estimated that 29% of its population lived in an urban area in 2008.

What does this mean for P&G?

P&G will have more potential customers moving into densely populated urban areas and less potential customers in the less populated rural areas in both India and China. The urban areas have more developed infrastructure relative to the rural areas of these countries, which eases supply chain challenges and allows P&G to reach customers with greater efficiency increasing overall profitability. It also plays directly into P&G’s marketing strength.

As the world’s largest consumer goods manufacturer, with prior success selling products in developing nations, and anticipated further expansion into the developing world, Proctor & Gamble is poised to yet again achieve its aspiration. Procter & Gamble’s R&D spending and its focus on product development and innovation will only widen and deepen its offerings, aiding its future growth.

The Connect + Develop program and its increasing research and development spending set Procter & Gamble apart from its peers. P&G spent $2.22 billion on R&D in 2008, $2.11 billion in 2007, and $2.07 billion in 2006 exceeding their closest competitor Unilever’s (UL) R&D spending by approximately $1 billion, on average, per year for the years 2008, 2007, and 2006 according to SEC filings. The Connect + Develop program is an innovation in new product development. Created by CEO A.G. Lafley to continue P&G’s growth through new product creation with outside parties, this program earned P&G the eleventh place in Fast Company’s “The World’s Most Innovative Companies” list.

We are bullish Procter & Gamble, acquired a position about a month ago, and feel that it is an undervalued stock that is poised for superior future growth. Recently, P&G has underperformed the S&P 500 and its sector (Consumer Staples) year to date. Even though P&G underperformed the S&P 500 and its sector near-term, P&G outperformed the S&P 500 and slightly underperformed its sector in the last 52 weeks. However, looking at P&G’s performance over the last 10 years, beginning approximately one year after P&G began its operations in China, P&G has considerably outperformed both the S&P 500 and its sector.

	YTD	52-Weeks	10 Year
PG	-17.57%	-22.46%	+12.08%
XLP	-5.74%	-20.10%	-13.50%
S&P 500	-2.14%	-37.00%	-34.28%

As of closing on May 13, 2009 Source: Google Finance

As communicated by P&G’s management early in the quarter, fiscal third quarter sales were down 8% from a year ago to 18.4 billion, reflecting the recession’s effect on household spending. However, sales would have increased 1% without the effects of an unfavorable currency transaction from the strengthening dollar. Profit decreased to $2.6 billion from $2.7 billion but increased to 84 cents from 82 cents on a per share basis. P&G announced on April 10^th that it would increase its quarterly dividend 10% from 40 cents to 44 cents per share, indicating management has confidence in the company’s future earnings.

As the world’s largest manufacturer of consumer goods, Proctor & Gamble is well positioned to survive the recession and thrive by expanding into untapped markets; building shareholder value with each and every new customer in the developing world.

[Shout out: there is a new summer intern/analyst in the house: Andrew J. Van Loon a recent grad of Pennsylvania State University and Honorable Mention winner of our Spring 2008 Index and portfolio design contest drafted this post.]

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is long PG and UL.

Comments

[Value Seeker:]

Foreign currency has definitely had a major impact on revenue growth. They had been posting 7 - 10% revenue growth consistently up until a couple quarters ago, as can be seen here:
www.rocketfinancial.co...

May 21 02:44 PM

[Alan Young:]

The world's poorest countries may lack the waste-disposal facilities needed to safely dispose of diapers. This could be a public-health issue. I would want to know if the genius marketing dept. at PG has considered this.

May 21 11:18 PM