Copyright © 2008 by Brian Gaudet, All rights reserved, including the right of reproduction in whole or in part in any form
Procter & Gamble
1 Analysis (last updated end of FY08)
Business Summary
Proctor & Gamble develops, manufactures, and sells consumer goods. Primary sales
channels are mass merchandisers, grocery stores, membership club stores, and drug
stores, Proctor & Gambles products are sold in over 180 countries. The company’s
business segments are described in the table below:
Segment Products Key Brand
Beauty Cosmetics, Deodorants, Hair Care, Head & Shoulders, Olay, Pantene,
Personal Cleansing, Prestige Wella
Fragrances, Skin Care
Grooming Blades and Razors, Electric Hair Braun, Fusion, Gillette, Mach3
Removal Devices, Face and Shave
Products, Home Appliances
Health Care Feminine Care, Oral Care, Personal Actonel, Always, Crest, Oral-B
Health Care, Pharmaceuticals
Snacks & Pet Food, Snacks Iams, Pringles
Pet Care
Home Care Air Care, Batteries, Dish Care, Fabric Ariel, Dawn, Downy, Duracell, Gain,
Care, surface Care Tide
Family Care Baby Wipes, Bath Tissue, Diapers, Bounty, Charmin, Pampers
Facial Tissue, Paper Towels
Revenue by Geography Revenue by Segment
Family Care
16% Beauty
Intl. 23%
Developing
30%
United States
40%
Grooming
10%
Home Care
28%
Intl. Health Care
Developed Snacks 17%
30% 6%
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Copyright © 2008 by Brian Gaudet, All rights reserved, including the right of reproduction in whole or in part in any form
Segment Beauty Grooming Healthcare Snacks Homecare Familycare
OPM 19.0% 25.4% 24.8% 15.6% 21.2% 28.2%
ROA 26.1% 28.6% 68.3% 33.1% 63.5% 31.5%
Operating History (3.2)
Ten Year Operating History
ROAA OPM RORE RORE+D GM InvTurn E/FCF E/E+D-C
28.0% 18.7% 15.3% 10.0% 48.2% 5.8 0.93 0.91
3.5 2.7 3.3 <- Rating
ROAA: Return on Adjusted Assets; OPM: Operating Margin; RORE: Return on Retained
Earnings; RORE+D: Return on Retained Earnings & Change in Debt; GM: Gross Margin;
InvTurn: Inventory Turnover; E/FCF: Earnings to Free Cash Flow; E/E+D-C: Earnings to
Earnings+Depreciation-Capex
Organic sales growth was 6% from 2000-2007. Earnings grew from 1972 to 1997 at an
annualized rate of 13.9%; this period covered multiple recessions, two of them severe1.
Over the same period, the SP500 had an annualized EPS growth rate of 8%.
Future Prospects (3)
Procter & Gamble competes through differentiation, and spends heavily on research and
development to create products that are differentiated from that of competitors, and
spends heavily on advertising to signal the value of the company’s brands. Due to their
relationship with many retailers and investment in learning about consumer behavior,
P&G has a good sense of what consumers want in a product, and can effectively focus
research and development to create new products, and improve existing products to better
meet consumer needs. P&G is decentralized, with global business units focused on
individual countries. This cuts overhead, and more importantly, lets the business unit
optimize operations for a particular country. The combination of global scale and local
focus enhances the company’s competitive advantage.
Buyer Bargaining Power
1
From Jeremy Siegel’s “Stocks for the Long Run”, chapter on nifty fifty.
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Copyright © 2008 by Brian Gaudet, All rights reserved, including the right of reproduction in whole or in part in any form
A high absolute value of research and development spending allows the development of
products that actually do add value over the products of rivals, and high spending on
advertising facilitates the signaling of this value. Some examples:
• Detergent optimized for cold water washing (saves energy costs)
• Detergent optimized for single rinse (where clothes are washed by hand)
• Compact detergents to reduce packaging waste
P&G’s three tiered product line helps with pricing power, as the lowest tier acts as a price
benchmark for customers deciding whether the higher tiers are appropriately priced.
There is some retailer concentration, with Wal-Mart accounting almost 20% of sales. But
Wal-Mart needs P&G about as much as P&G needs Wal-Mart, so their bargaining power
is not enough to hurt P&G’s profitability. If the company’s on-line sales channel grows
sufficiently (see under “Threat of Substitutes”) then this will give P&G additional
bargaining power with retailers.
Supplier Bargaining Power
Raw materials are primarily commodities, and are readily available from multiple
sources. Labor is not organized, and is productive, with earnings per employee of close to
$100,000.
Threat of New Entrants
Economies of scale allow P&G to spend much more than rivals on R&D and advertising.
For example, P & G spends over twice as much on research and development than its
nearest competitor. P&G’s largest competitors by trailing 4 quarters revenue are Unilever
($60B), Kimberly Clark ($19B), and Johnson & Johnson’s consumer segment ($16B).
Only Unilever has the scale to come close to what P&G can spend on advertising.
Procter & Gamble’s advertising and R&D is spread over 44 brands that account for 90%
of the company’s profits. There are many opportunities to leverage proprietary
technology among multiple categories. P&G’s research and development is enhanced by
a global relationship with nearly two million researchers in technology areas connected
with P&G businesses. Moreover, these new products can be quickly brought to market
using P&G’s existing brands and distribution system. P&G’s relative level of innovation
is apparent from the results of the 2008 industrial research institute’s pace setter study
that measures the top new products measured by sales. In 2008, P&G had 10 out of 25 of
the top new products in the non-food category. In comparison, Unilever, J&J, Kimberly
Clark, Colgate, L’Oreal, and Energizer collectively had 7.
Company 2007 Revenue R&D Advertising
Procter & Gamble 83.5 B 2.2 B 8.7 B
Unilever (in Euros) 40.2 B 0.8 B 5.3 B
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Copyright © 2008 by Brian Gaudet, All rights reserved, including the right of reproduction in whole or in part in any form
Kimberly Clark 18.3 B 0.3 B 0.5 B
Colgate-Palmolive 13.8 B 0.3 B 1.5 B
J&J Consumer Segment 14.4 B N/A N/A
P&G consistently cuts costs unrelated to differentiation, giving P&G a cost advantage
that acts as a barrier to entry. For example, continuous reformulation can provide the
same product performance with different ingredients, allowing the formulation to be
optimized for current commodity costs, and consequently saving on input costs. They
also have similar developing country margins as developed country margins, so they
apparently have a manufacturing system that geographically matches costs to the point of
sale. P&G saves on the costs of materials by creating purchasing pools for common
materials used over multiple product lines.
P&G’s distribution network reaches 800 M customers in China, 4.5M stores in India, and
80% of the Russian population.
Threat of Substitutes
Private label goods are a viable substitute for branded products; however, P&G’s three-
tier pricing can reduce this threat. If the third tier (lowest cost brand) is priced close to
that of private label products, and consumers prefer the tier 3 brand to the private label
product, then retailers will need to allocate a proportionally higher amount of shelf space
available for the tier 3 brand, at the expense of shelf space for private labels, thereby
creating a barrier to entry for private label manufacturers and other potential new entrants
to the industry. In their Q208 transcript, P&G mentioned that private label is not really an
issue in developing world. Overall, it is not impacting P&G’s market share. In their
Q308 transcript, P&G mentioned that their products together with private label are
gaining share.
A potential offset to the private label threat is the on-line sales channel, where the
company can price their products closer to that of private label competitors and still
maintain the same margins. Today, P&G sells diapers directly from their Pampers
website, and also sells numerous products on [Link].
P&G sells the types of goods that are typically resistant to diminishing demand during a
recession.
Intensity of Rivalry
Note that the industry follows the semi-log pattern of size that is associated with stability.
The major competitors in the industries where P&G competes all have strong brands; this
tends to diminish rivalry. In developing economies, the consumer goods industry is
expected to grow rapidly over the long-term; this will also reduce competition.
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Copyright © 2008 by Brian Gaudet, All rights reserved, including the right of reproduction in whole or in part in any form
Other Consideration
P&G continues to build manufacturing capacity in local markets. They also package and
price products optimized for developing countries, and distribute them in local stores
within walking distance of consumers.
Major Risks
• Private label competition: P&G and branded competitors have opportunity to
keep margins high as long as collectively they provide more value than private
label competition. This will require continuous innovation. Over the last 13
years, an IRI pacesetters study found that 1/3 of the most successful new products
over the 13 years have come from P&G, more than top six competitors combined.
Upside
P&G Sales per Capita
120
100
Annual Sales in Dollars
80
60
40
20
0
U.S UK Germany Mexico China India
Country
Despite P&G’s large market share, there is considerable room for growth as the global
economy expands, giving citizens of developing countries the ability to purchase
consumer goods. P&G mentioned on their Q309 conference call that if per-capita use of
P&G products in India reached that of Mexico, it would add $20 Billion in sales.
Financial Strength (3.00)
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Copyright © 2008 by Brian Gaudet, All rights reserved, including the right of reproduction in whole or in part in any form
Credit Rating Ave. Maturing Debt to Earnings Fixed Charge Pension Benefits
Debt to RE Cov. Paid / PBT
AA3 0.76 2.82 10.5 4%
The largest risk here is the $16.5B in debt (net of $4.5B in cash) due within one year,
which is less than P&G’s $13.6B in FY 2008 earnings. This is covered with $9B in
committed credit facilities expiring in 2012, which gives P&G flexibility in paying down
short-term debt if commercial paper markets freeze up.
Management
Summary
Future Prospects Financial Strength Operating History Combined Rating
3.0 3.0 3.2 3.1
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