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Shares of Procter & Gamble (NYSE:PG) slumped by 0.4% to 84.87 yesterday as investors seemed to indicate concern over the company’s continuing plan to divest selected brands. The plan is not new. It was first introduced in August 2014.
P&G has held its cards close to its vest, preferring to play each brand face-up only when a deal is in place or has been secured. For the most part, the public is unaware of what specific brands will stay and which will go until that are, in effect, gone. The shock yesterday was the announcement that a total of 100 brands will be divested, discontinued or consolidated. CEO A.G. Lafley said that he hopes that, “in July we’ll be able to turn all the cards over, or most of the cards over.”
The strategy is to narrow its focus on the company’s leading brands, including Tide, Pampers and Gillette. At least we know that those three are staying in the fold. It is reasonable that any stakeholder would have some amount of concern knowing the overall strategy but not knowing the details. But Lafley tried his best to assuage any misgivings, saying, “This new streamlined P.&G. should continue to grow faster and more sustainably, and reliably create more value. Importantly, this will be a much simpler, much less complex company of leading brands that’s easier to manage and operate.”
It really does make sense. Two of the primary factors in the selection of brands to divest are those with low single digit sales and high single digit pre-tax margins. The 60% reduction in brands will result in a 14% drop in sales volume and a 6% decline in pre-tax profit. That’s not a bad trade-off, especially in the consumer packaged goods market.
The strategy does not mean that P&G will cease to innovate or introduce new products. It simply means that they will be able to focus on the crème de la crème of the company’s brands. (“Crème de la crème” sounds so much more sophisticated than ” core products.”) Expect innovation and new product introduction to continue and to promote additional, more profitable, growth.
The P&G Focus
One of the elements of any sound investment is the ability to trust the directors and the corporate strategy. P&G is not in crisis mode. They are making these changes in the right way at the right time. The company could not be clearer in its explanation of the wise whys of their plan:
“We are focused on strategies that we believe are right for the long-term health of the Company with the objective of delivering total shareholder return in the top one-third of our peer group.
“We are focusing our resources on our leading, most profitable categories and markets.
- We will focus on our core markets, such as the U.S., to strengthen and grow these businesses.
- We will focus our developing market investments on the categories and countries with the largest size of prize and highest likelihood of winning.
- We will focus the portfolio, allocating resources to businesses where we can create disproportionate value.“
If you don’t like anything else about the plan, you’ve got to love the idea of creating disproportional value.
