Though we’re already bullish with regards to Procter & Gamble (PG) with our $84 Trefis price estimate of its stock, which is at a 30% premium to its current market price at close to $65. CEO Bob McDonald at a recent analyst meeting talked about some key measures that P&G is undertaking to head off and win market share from competitors like Unilever (UL), Clorox (CLX), and Colgate-Palmolive Co. (CL) in the consumer products businesses and companies like L’Oreal (OTCPK:LRLCY), Avon (AVP) and Estee Lauder (EL) in cosmetics and beauty.
What exactly is P&G doing right? We highlight some of the key points driving P&G’s growth strategy.
1) Selling to More Consumers in Existing Markets
To realize its goal of acquiring one billion additional consumers by 2014-15, it comes as no surprise that P&G is focusing on the two most populous nations in the world – China and India. While targeting volumes at lower price-points, P&G has launched lower-priced product extensions of its global premium brands such as Tide and Gillette targeted at consumers with lower disposable income levels in these economies and expanded its distribution network to cover the previously inaccessible rural areas. While the U.S. and Western Europe continue to constitute over 41% and 21% of sales respectively, going forward much of the growth is expected to come from the emerging economies, which have been exhibiting robust double-digit growth primarily on account of expanding middle class with rising disposable income levels and high population growth rates.
2) Selling More Products to the Existing Consumers
Very apt for this period of uncertainty, under McDonald’s leadership P&G has set out on a relative performance goal – to grow 1-2 percent points faster than global market growth, of which half is expected to come from market share gains (a reasonable 0.1%-0.2% gain in share per year for the next five years) in the existing product categories while the other half shall be drawn from ‘white space’ growth i.e. launching more product categories in more countries and launching product extensions of established brands.
While P&G competes in 35 product categories in the U.S., it is only present in an average of 19 product categories globally. The ‘white space’ growth primarily focused on launching more product categories in more countries. P&G is targeting expansion of the global average to presence in 24 product categories by 2014-15.
3) Selling Products through More Outlets
P&G currently sells broadly through four channels: 1) mass volume retail (Wal-Mart, etc.), 2) mom-and-pop stores (which dominate emerging markets), 3) wholesale and 4) modern retail stores. P&G is focusing on expansion in the international pharmacy and e-commerce channels. This shall contribute to P&G products being available at more outlets.
P&G is essentially relying on cost efficiencies leading to operating margin improvements of the tune of 350-450 basis points to fuel the above top-line growth. While most of these cost savings are expected to come from scale, such as sourcing of larger volumes of raw materials at more competitive prices and dilution of SG&A over larger volumes, P&G is also targeting improvements in production planning and business-planning cycle time to improve operating margins.
If P&G were to realize the above stated strategy, we can reasonably expect incremental gain in market share of the tune of 1% in all product categories in 2011-15 over and above our current estimates. We estimate this to lead to a 4% potential upside to our current $84 Trefis price estimate of Procter & Gamble’s stock.
Drag the graphs above to see the impact of Procter& Gamble’s Trefis price estimate of its stock.
Disclosure: No position