- Procter & Gamble has traditionally been the leading
player in beauty products, especially in developed
- The company's share of the beauty market, however, is
increasingly coming under pressure from competitors such as
Unilever who are offering lower prices. Weak consumer
confidence has further fueled a decline in overall sales.
- P&G needs to adjust its pricing structure as well as
innovate on key aspects such as product packaging and quality
in order to maintain its edge and fuel growth in overall
Procter & Gamble (
) has traditionally been the name to beat when it comes to beauty
products market - a category that includes skin creams,
shampoos, conditioners and fragrances. The
company's portfolio in this segment boasts of names such
as Olay and Pantene - brands which pull in more than more than a
billion dollars each year for the company and are also arguably
some of the most famous names in their respective categories.
See our full analysis for Procter &
Despite the company's established credentials, however, its
footing in the segment is beginning to look rather
fragile lately. Rivals such as
) have stepped up a gear over the last few years, undermining
both market share and pricing power for P&G. In this article,
we'll take a deeper look at the underlying reasons behind P&G's
recent vulnerability in the segment and what the company can do to
address these issues.
trefis_forecast ticker="PG" driver="0885″]
P&G's recent woes can be boiled down to two key factors:
Dependence on developed markets
P&G has been the most dominant consumer goods company in
western markets while Unilever has held sway over emerging markets.
This fact is also reflected in the respective companies' 2012 sales
contribution from emerging markets - more than 50% for Unilever but
only 30% for P&G. This balance of power has turned to P&G's
disadvantage in recent years with regions such as North America and
Western Europe reeling under recessionary conditions severely
dampening consumer demand. The company's beauty segment has been
hit particularly hard - sales volumes for the last six months of
2012 were down by more than 2% compared to 2011. Meanwhile,
Unilever's 2012 performance reflected the continued growth in
demand in emerging markets with total volumes in the personal care
segment (which includes soaps, creams, shampoos and fragrances) up
by more than 7%.
A pricing strategy largely geared towards the premium
It's not just weaker overall demand that's hurting P&G's
sales. Some of the company's top-selling beauty products are priced
at a premium when compared to competitors. Amid a sluggish economy,
an increasing number of consumers have been turning away from such
expensive items towards lower-priced, accessible products.
Unilever's value-for-money approach has helped it not just win over
customers in emerging markets but is also helping it win over
developed markets as well.
What are the key changes investors should be looking
forward to in the company's strategy?
Given the fact that beauty products contribute more than 20% of
P&G's stock value according to our analysis, investors are
hoping to see some sort of shake up in the company's strategy in
the segment. Here's a look at what potentially can or should be
Pricing has to become more aggressive
To correct the slide in market share, the pricing issue is
something that P&G will have to fix in the long run.
Considering that the company operates at margins well above
Unilever's, there is little reason why the company should continue
to lose out on customers just because of an unwillingness to
compete more on prices. The company has stated its intention of
being more price-competitive in the future, but the signs towards
the latter half of 2012 weren't very encouraging. Prices in the
beauty segment rose by 3% over the last three months of 2012,
marginally below Unilever's 3.3% increase in prices in personal
care. We're hoping P&G shows more persistence here in the
Packaging might be the key
Unilever has done well to
apply emerging market packaging tactics to
seeing the increased price sensitivity shown in the western
markets. These include products packaged in smaller quantities,
which makes it more accessible to consumers with low purchasing
power. P&G has already adopted a similar strategy in detergents
selling Tide 'pods' which offers detergent, stain removers
and brightener in a smaller, convenient single-use
package. Investors are hoping the company shows similar initiatives
in the beauty segment.
Innovation to create differentiation
Innovation remains at the heart of the consumer goods industry. In
order to reignite demand for its beauty products in western
markets, P&G will need to come up with new and diverse product
lines faster. Investors can already see some positive signs - the
company has rolled out a complete overhaul of its 'Olay Regenerist'
line of products.
We have a $70 price estimate for P&G, which is below the
current market price.
How a Company's Products Impact its Stock Price at Trefis