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Morningstar | Procter & Gamble Begins to Turn the Tide on Its Top Line, but Competitive Pressures Not Subsiding

In our view, Procter & Gamble is now showcasing the fruits of its multiyear effort to rationalize its brand mix (culling around 100 brands, leaving it with 65) and hone investments on its highest return opportunities, chalking up three consecutive quarters of mid-single-digit organic sales gains. Despite slimming down, we still think P&G carries clout with retailers, maintaining its scale edge. The 65 brands in its mix include 21 that generate $1 billion-$10 billion in annual sales and another 11 that account for $500 million-$1 billion in annual sales. With vast resources to invest in its brands and by supplying products across multiple categories, we think trusted manufacturers like P&G are critical to both brick-and-mortar and e-commerce retailers.While growth has been fairly broad-based, in line with results over the better part of the last four years, grooming (nearly 10% of sales) continues to be plagued by competitive angst (particularly on its home turf). However, we surmise P&G is pursuing a sound strategic path to rebut competitive pressures in this segment by recalibrating its pricing, investing in on-trend new products (such as its recently released razor geared toward men with sensitive skin, which the firm claims afflicts 70% of males), and launching its own subscription-based sales model. And we don’t believe opportunities to win with consumers are limited to new products. As an example, Gary Coombe (president of global grooming) has said P&G isn't satisfied with the packaging and believes investments in this realm could also help stabilize its competitive position.Even with its increased emphasis on reigniting its top-line trajectory, we don’t surmise P&G has abandoned its pursuit of efficiency gains, aiming to extract $10 billion of costs from its operations (centered on reducing overhead, lowering material costs, and increasing manufacturing and marketing productivity). However, we don’t believe the impetus is to juice profits, rather to fuel additional brand spend. As such, we forecast P&G to direct 3% and 11% of sales to research and development and marketing, respectively, up from historical levels of less than 3% and 10.6% in fiscal 2018.