By Serena Ng And Ellen Byron
Procter & Gamble Co. is dismantling a beauty business it
aggressively built a decade ago, giving up on areas like salon
products and designer perfumes that distracted from core areas and
hurt its growth.
The world's largest consumer-products company said Thursday it
would carve off brands including Wella shampoos, Clairol hair dye
and CoverGirl makeup and merge them with Coty Inc. in a complicated
$13 billion deal.
P&G spent about $80 billion over the past two decades
scooping up brands including Gillette razors, Duracell batteries
and Iams pet food, only to end up selling some of them to focus on
boosting sales of Tide detergent, Pampers diapers and other
mainstays.
The new round of divestitures is a remarkable reversal for Chief
Executive A.G. Lafley, who returned to the company in 2013 to lead
it out of a long slump. In his first stint running P&G from
2000 to 2009, Mr. Lafley pushed the company heavily into the beauty
business, which he prized for its fatter profit margins and growth
potential.
Under his leadership, P&G paid more than $10 billion for
Wella and Clairol, bought a chain of boutique hair salons, and
formed partnerships with designer brands like Valentino and Dolce
& Gabbana to sell perfumes in high-end department stores, a
departure from the long-honed strategy of mass marketing everyday
staples.
But the company has decided it won't chase fashion trends
anymore. Mr. Lafley is now preaching focus by exiting as many as
100 brands and reducing the company's nonmanufacturing workforce by
about a third.
"P&G was looking to conquer the world of beauty but it went
too far out of its comfort zone," said Carrie Mellage, vice
president of consulting firm Kline & Co.'s consumer-products
practice. She said there are few synergies between beauty products
sold in high-end department stores and those sold at mass
retailers.
P&G, General Electric Co. and some other American
corporations are rushing to shed underperforming divisions and slim
down after years of bulking up through acquisitions outside their
core expertise. The change of heart among top executives is an
admission that their companies had grown too big and bloated to
manage effectively, which caused their stock prices to languish in
recent years.
Meanwhile, the rise of activist investors empowered by big war
chests and more-accommodating corporate governance rules has raised
the stakes for companies that persistently turn in worse results
than their peers. Three years ago, an assault by activist
hedge-fund manager Bill Ackman helped crystallize discontent among
investors in P&G, culminating in a decision to remove Chief
Executive Bob McDonald.
The latest deal will involve transferring 43 P&G brands into
a separate company that will merge with Coty, a New York-based
company that makes Sally Hansen nail polish, Rimmel cosmetics and a
range of perfumes. The beauty brands P&G is parting with have
annual sales of $5.9 billion--more than a quarter of the $19.5
billion beauty division total for the year ended June 2014.
(P&G hasn't reported results yet for its most recent fiscal
year.) It would more than double the current size of Coty, which
reported $4.6 billion in sales in its fiscal year ended June 2014,
and will involve the transfer of around 10,000 P&G employees.
Coty shares fell 4.7% on the news; Procter shares were flat.
The deal's final price and form haven't been settled, and it may
not be completed until the second half of next year, P&G said.
It likely will allow P&G shareholders to exchange their shares
for shares in Coty or a new merged entity that will own the beauty
brands of both firms. P&G also said it is aiming to return up
to $70 billion to shareholders via dividends and share buybacks in
the next four years.
In an interview, Coty Chairman Bart Becht, himself a former
P&G employee, said his company had expressed interest in
P&G's beauty assets as far back as last summer, when Mr. Lafley
first mapped out plans to shed dozens of brands to focus on the 65
that account for almost all of the company's sales and profit.
P&G isn't entirely exiting beauty. It will keep its largest
hair, skin and personal-care brands, which include Pantene shampoo,
Olay facial moisturizers and SK-II luxury skin care. Sales of
Pantene and Olay, however, have been weak in recent years and Olay
has steadily lost market share. The two brands are the chief
reasons why P&G's beauty unit has lagged behind other
divisions.
Early on, as Mr. Lafley talked up the budding beauty business,
brand managers were eager to apply P&G's rigorous consumer
research and production prowess to the often inefficient practices
common in beauty-industry product development and
manufacturing.
"At the time, going after this business made all the sense in
the world, " a former P&G employee said.
But a company adept at pitching products based on performance
was suddenly trying to conquer categories won by the subtleties of
fragrance, packaging and sexy image advertising.
P&G created sleek workspaces in New York and Geneva to
dazzle beauty editors and entice prospective partners. Employees
stumbled a decade ago by showing up at fashion events in navy sport
coats and khakis, but later traded up to sharp suits and trendy
heels.
"You were expected to look the part, and you were told if you
didn't," another former P&G employee said.
Mr. Lafley's enthusiasm for the beauty business spilled into the
way P&G marketed its other products. The packaging and
advertisements of Crest toothpastes and whitening products
increasingly touted beautiful smiles in addition to functional
benefits. Dawn introduced dish soap that promised to improve "the
look and feel of hands."
The company's instincts, however, proved wrong for the business.
In 2008, P&G bought the Frederic Fekkai brand founded by the
celebrity hairstylist, a pioneer of selling 7-ounce bottles of
shampoo for more than $30 at retailers like Saks Fifth Avenue and
Neiman Marcus. P&G expanded the Fekkai line to mass retailers
like Target, despite protests from department stores that it would
kill the allure, according to people familiar with the matter.
Ultimately, Fekkai's sales dwindled and the brand was sold this
year.
Other attempts to build scale across its beauty brands
foundered, too. Some inside P&G hoped to find tie-ins between
its mass brands and designer fragrances, including product
placement of Pantene shampoo and CoverGirl makeup at Dolce &
Gabbana and Gucci fashion shows, according to the former P&G
employees. The fashion houses and some brand experts at P&G
balked and ultimately the ideas were scratched. Instead, P&G's
mass brands forged broader sponsorships with Fashion Weeks in Milan
and New York and the Grammys.
At the highest levels, P&G executives struggled with how to
manage and define the beauty business. At one point, P&G's
beauty division included Gillette and Braun shaving gear, and
brands were subdivided into "male" and "female" categories. That
approach was scrapped after two years. For another period, the
beauty brands were part of a group that included oral care and
feminine-care products.
Over the past year, the 68-year-old Mr. Lafley concluded that
P&G needed to focus more on brands that had clearly defined
benefits, and not those whose sales were dictated by fashion
trends.
"We start thinking we are a beauty company and we spend all our
time at the Oscars or the Grammys or in Fashion Week, which now
runs for months, and we don't stay focused on the consumer," he
said at an analyst conference last year.
Write to Serena Ng at serena.ng@wsj.com and Ellen Byron at
ellen.byron@wsj.com
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