Woebegone P&G

It was considered the recession-proof industry for many years. Economic slowdown could not whip the makers of soaps, shampoos, toothpaste, detergents and diapers and many other household goods because of consumers needs for such basic household products regardless of how the economy was doing. But P&Gs latest announcement cutting its last quarter forecast for the year ending June 2012 had the international media abuzz. For the current fiscal year, the Company forecasts a slowdown in organic sales growth from 4-5 percent previously to 2-3 percent, while net revenues are expected to go down by 1-2 percent against previous expectations of a growth in the same range. Evidently, the makers of Tide, Pampers and Pantene have been dealt a tough blow from various sides, though they were candid in admitting to have erred on various counts. Amongst the external factors that ebbed Companys net sales, a key predicament comes from the foreign exchange rate, which is believed to negatively affect the FMCG giants sales by about four percent. Besides that a sluggish global economy and the consequent sluggish market share growth in developed economies - North America and Western Europe to be precise - also whipped the Companys revenues. As for P&Gs own slip-ups resulting in the dimmed sales growth expectations, lack of radical innovations in terms of product development, higher product pricing than competitors, and too drastic a focus on emerging markets were factors cited by the Companys Chief Executive Bob McDonald. Besides these, P&Gs marketing expenses have been quite high too, with the effect obvious on the Companys operating margin, which has been nearly flat over the past few years. "The Company spends about 31.5 percent of its revenue on selling, general and administrative expenses, compared with 28.1 percent for household product companies," the Wall Street Journal quoted analysts in late February. So P&G has set out an agenda to help remedy the situation. They aim to concentrate more on bigger products that bag a sizeable share of their revenues rather than on smaller products that are not big enough, as well as on product innovation. Other proposed measures include more focus on its biggest market - the US - and a continuation of expansion in developed markets, though with a more balanced stance. This means it would not be entering new emerging markets and would focus on the ten most important ones - likely to be Brazil, Russia, India, China, South Africa, Nigeria, Poland, Turkey, Mexico and Indonesia, according to the Financial Times. But with the global slowdown affecting emerging economies growth rates as well as developed ones, one questions the feasibility of P&Gs plans of going headstrong towards expansion and product development when the recessionary winds are blowing strong. A better plan is perhaps the one disclosed by P&G a few months back - about $10 billion in cost savings by 2016. The plans include eliminating more than 4,000 jobs, streamlining the massive marketing budget, and other cost saving measures such as improving supply chain efficiencies. "P&G should...keep the focus squarely on costs, which at least it can control," said an analysis in the FTs Lex column. Yet, its easier said than done. "The cost-cutting is very much what we had hoped. Now the hard part is executing," an analyst was quoted by the Wall Street Journal. Clearly, the Company has got some major work cut out for it for the coming few years.