Friday 23 March 2018

Global power-player has come a long way from humble roots

Procter and Gamble
Procter and Gamble

John Lynch

The great challenge of big business (perhaps also of small business) is to find a gap in the market. The bigger challenge still is to find a "market in the gap". As an investor I am lost in admiration and constantly on the lookout for a company that can find a big branded business where none previously existed.

Take Procter and Gamble (P&G), for instance. Before 1961 there was no such thing as Pampers, the disposable nappies. Just over 50 years later Pampers sell $192m (€140m) worth of product every single week. That's sales of $10bn (€7.3bn) every year, and the product has a global reach, despite the flood of imitators it spawned. Moreover in P&G's case Pampers is only one brand in a portfolio that has a slot in every kitchen cupboard from here to Japan and back.

The powerhouse of consumer goods worldwide has brands like Head & Shoulders, Febreze, Duracell, Bold, Nice 'n' Easy, Vicks, OralB, Oil of Olay, and many others. It sustains all these products with a staggering $9bn (€6.6bn) per annum advertising spend.

P&G was founded by an English and Irish immigrant to the US. They were William Procter, a candle-maker, and James Gamble (from Enniskillen), a soap-maker who became suppliers of their own special products to the military during the Civil War in the 1860s. It was incorporated in 1905 in Ohio and started its worldwide expansion in the 1930s. As of now it operates in 180 countries and employs 121,000 people.

Middle-class fondness for brands has always been the mainstay of P&G success. Up to recently it has been something the group could rely upon. The US and European habit of reaching for the familiar packaging ensured that these two markets still account for 60pc of group sales. However, the recession has been no respecter of brands and discount retailing has become the big driver of sales. In addition, private label business has become a real force. Last year Wal-Mart, the US supermarket giant, accounted for a significant 14pc of P&G sales.

So the company is targeting the new middle class in the developing markets particularly China, India and Brazil.

It recognises it has not done enough to achieve full product representation in Asia, Africa and Latin America, and is treating these markets as a priority.

P&G has formidable competition in Unilever, Colgate Palmolive, Estee Lauder and L'Oreal and to meet these challenges the company restructured its operations last year. It set up four divisions – beauty, family care, fabric and health. The sheer size of sales of each division is impressive, fabric care is the largest with $26bn revenue and the smallest is healthcare at $17bn.

Brand sales are also impressive with 25 brands selling over $1bn.

Looking forward, the company intends getting its systems right. Two years ago it announced a five-year productivity programme yielding an annual $2bn in savings; last year it hit the target. P&G's commitment to R&D continues at $2bn a year, a figure that has remained constant for four years.

P&G is a bewilderingly large company. It has a market value of $218bn. Sales last year were $84bn, a 1pc increase on the previous year, and turnover is expected to grow 2pc this year. It earns $15.6bn before tax and over the next three years it aims to reach $17bn.

The company is shareholder-friendly paying a dividend for 123 consecutive years and last year was no exception as it returned $6.5bn in dividends to shareholders. The success of its productivity programme will probably fall to the bottom line.

However, organic sales growth remains a concern and while its cost initiatives are working, competition remains aggressive, so the company needs to boost its investors' confidence.

The shares, at $81 are not cheap but the company is helped by having a deserved reputation for being well-run.

Irish Independent

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