Shrink To Grow Has Not Saved Procter & Gamble

| About: The Procter (PG)
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Summary

Continuing decreases in volume for all organic business segments.

Negative volume growth in the company's highest margin business units.

Declining market share for billion dollar brands.

In August 2014, twice former CEO AG Lafley announced that Procter & Gamble (NYSE:PG) would undertake a shrink to grow strategy to bring new life to the anemic consumer goods giant. The company would divest or eliminate its 100 smallest and least profitable brands (out of 200 total) and refocus on the beauty, fabric, home and household businesses. Iam's was sold to the Mars Company, Berkshire Hathaway (NYSE:BRK.B) swapped it's P&G shares for Duracell and Coty (NYSE:COTY) purchased Cover Girl, Clairol, Herbal Essence, Max Factor and Wella.

Two years later, has shrink to grow revived P&G? Based on the latest released results it has not.

Decreasing Volume In All Continuing Businesses

P&G's last divestment was the beauty brands to Coty in July 2015. To analyze the business, organic results from proceeding quarters will be used. Organic results exclude the impact of acquisitions, divestitures and foreign exchange. P&G's fiscal year runs from July 1st through June 30th.

Comparing the first nine months of FY 15/16 to the same period year ago, organic unit volume decreased 2% overall.

  • Low single digit decrease in Fabric & Home Care
  • Mid single digit decrease in all remaining businesses
  • 10Q Form

For the remaining Procter & Gamble brands (Crest, Tide, Pampers, etc), the company sold 2% fewer units in the first nine months of fiscal year 15/16 than it did in the first nine months of fiscal year 14/15. This is an addition to the decreases from the prior fiscal year.

Comparing fiscal year 14/15 to 13/14, unit volume decreased 1% overall.

  • Low single digit increase in Fabric and Home Care
  • Low single digit decrease in Baby, Fem, Family, Grooming and Health
  • Mid single digit decrease in Beauty, Hair and Personal Care
  • 10K Form

The Baby, Fem, Family, Grooming and Health divisions which are not impacted by the Beauty divestiture had decreasing volume in fiscal year 14/15 and again in the first nine months of 15/16.

Nearly two years later, shrink to grow has not increased volume in the brands that will constitute P&G's future.

No Growth in Highest Margin Business Units

Following the beauty brands divestiture, Procter & Gamble will have twenty-one billion dollar brands across five business segments.

Below are the sales and income contribution for each segment for fiscal year 2014/2015.

Business Unit % of Net Sales % of Net Income Billion $ Brands
Beauty, Hair and Personal Care 24% 23% Head & Shoulders, Olay, Pantene, SK-II
Grooming 10% 16% Fusion, Gillette, Mach3, Prestobarba
Health Care 10% 11% Crest, Oral-B, Vicks
Fabric Care and Home Care 29% 24% Ariel, Dawn, Downy, Febreze, Gain, Tide
Baby, Feminine and Family Care 27% 26% Always, Bounty, Charmin, Pampers

The only business unit to experience volume growth in either FY 14/15 or the first nine months of this fiscal year was Fabric and Home Care; the business unit with the lowest profit margin. P&G's highest margin businesses (Grooming & Health Care) both experienced volume decreases the first nine months of this fiscal year and the entirety of the prior fiscal year.

Shrink to grow was supposed to enable P&G to focus on it's most profitable businesses. In the past two years, only the lowest margin business has shown any sign of volume growth.

Declining Market Share For Billion Dollar Brands

Consumer packaged goods is an extremely competitive industry (Henkel, Unilever (NYSE:UL), Church & Dwight (NYSE:CHD), Colorox (NYSE:CLX), Colgate (NYSE:CL), etc) and P&G may be losing it's traditional leadership position. The company is likely facing the strongest competition it ever has.

Men's grooming, the company's highest margin business, is losing market share to online retailers like Harry's and Dorco. According to research firm Slice, e-commerce now accounts for 8% of all razor sales; this market was non-existent four years ago. Gillette only has a 21% share of the online market vs a 60% total market share. Continued growth in online razor and cartridge sales will lead to declining market share for Gillette.

Tide, the traditional leader in the $6.8 Billion US laundry market, is now competing against Persil, a European product from Henkel, which hit US shelves in March 2015. Consumer Reports rated Persil as the top detergent last year. Market share for Persil may reach 10% in the United States by 2020. Tide and Persil both compete in the premium laundry price segment; Persil's gains in market share will likely be Tide's loss.

Similar narratives can likely be told for Pampers that is now battling with The Honest Co and paper products Bounty and Charmin losing to lower cost and equally effective private label products. P&G's largest brands are facing the strongest competition they ever have and losing market share as a result.

Conclusion

In conclusion, two years after shrink to grow began, new life has not been injected into Procter & Gamble. Unit volume in the company's remaining brands continues to decrease. The sole business segment to see any growth the past two years (Fabric & Home Care) is the company's lowest margin business. Numerous billion dollar brands like Gillette and Tide are losing market share to strong competition. Shrink to grow will focus the company on it's core segments but it will not be sufficient to produce significant business gains.

Contrarian View

Two years of time is not sufficient for positive results to manifest from shrink to grow. After the Coty sale is finalized the company can refocus it's efforts on the remaining most important businesses.

P&G's international business is negatively effected by the strong dollar and weak Euro, Yen and Peso currencies. Once international currency markets rebalance, P&G's net income from overseas operations will rise.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.