Should Procter & Gamble Divest its Fragrance and Colour Business to Improve Growth?

April 22nd, 2013
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Oru_Mohiuddin (1)Analyst Insight by Oru
Mohiuddin, Senior
Analyst – Home and Personal Care, Euromonitor International

View Oru Mohiuddin's profile on LinkedIn

A key factor contributing to
Procter & Gamble’s less encouraging performance than its competitors in
recent quarters has been a lack of synergy between the product categories in
its portfolio. Procter & Gamble’s results have been less satisfactory since
the onset of the economic downturn, leading the company to undertake a number
of measures, including streamlining its portfolio and launching a new
restructuring programme in 2012. In the most recent October-December quarter in
2012, Procter & Gamble was more upbeat but reported growth for the overall
company was flat and for its beauty and grooming division was -0.4%, compared
with 10% overall for Unilever, 14% for Unilever’s personal care business and 9%
for L’Oréal over the same period.

Lack of synergy in Procter
& Gamble’s portfolio

Premium fragrances appear to
be a misfit in Procter & Gamble’s portfolio, requiring a different
distribution platform to its other products. Moreover, Procter & Gamble
generates only 6% of its total beauty and personal care revenue from premium
fragrances. Unilever, with a similar operational structure to Procter &
Gamble, previously had a presence in premium fragrances but divested the
business to Coty in 2005 in a drive to streamline its portfolio. Divesting its
premium fragrances enabled Unilever to group its categories according to a
common distribution platform, thus helping the company to achieve distribution
synergies. Unilever’s objective is to achieve more in-depth category coverage
in supermarket aisles by covering the various pricing platforms and
sub-categories. For example, in hair care, it is present with mass and masstige
salon-inspired brands such as VO5 (outside the US), TRESemmé and Nexxus, while
in retail hair care Sunsilk has a mass price positioning and Dove  more
premium positioning. By narrowing its focus to supermarket categories, Unilever
was better placed to establish a stronger presence while benefiting from
greater distribution synergies.

L’Oréal benefits from a
concentrated R&D focus

Procter & Gamble is also
coming under greater competitive pressure from companies heavily focused on beauty,
such as L’Oréal. Mass facial care and colour cosmetics are increasingly being
driven by product sophistication, requiring greater investment in R&D and
more frequent product launches. One of L’Oréal Paris’s new launches is Age
Perfect Renaissance Cellulaire for women over 50, with Julianne Moore its brand
ambassador. Age Perfect Renaissance Cellulaire claims to restore intercellular
communication and boost cellular vitality by protecting mother cells and
providing energy to cells to maintain their metabolic rate. In addition,
L’Oréal’s mass brands copy the formulations of premium brands, which adds to
the value proposition in the mass segment while also raising the bar for
competitors. For example, the formulation of Génifique, offered under the Lancôme
label, is similar to that of L’Oréal Paris’s Youth Code. In colour cosmetics,
L’Oréal launched Maybelline New York Superstay 24hr Lipcolour, which claims to
stretch the limits of longwear.

Although Procter & Gamble
has launched a number of new products, it has been unable to maintain the same
pace of innovation, made more difficult by having to balance R&D resources
across its highly diverse portfolio, ranging from laundry care and shaving to
oral care and skin care. Consequently, Olay saw its share of US facial care
fall by 0.9 percentage points in 2012 while that of L’Oréal Paris rose by 0.3
percentage points. Similarly, Olay’s share in facial care in China, projected
to drive absolute growth of skin care globally, and where Olay is the leading
brand, fell by 0.6 percentage points compared to a 0.3 percentage point gain
for L’Oréal Paris. A similar situation was also evident in colour cosmetics,
where Procter & Gamble’s key colour cosmetics brand Cover Girl lost 0.6
percentage points compared with a 0.2 percentage point gain for Maybelline in
the US market.

Looking forward

In light of this, divesting
premium fragrances, following Unilever’s example, could be the way forward for
Procter & Gamble. However, beyond that, it could also consider withdrawing
from core beauty categories entirely. Colour cosmetics account for 6% of
Procter & Gamble’s total beauty and personal care sales compared to 10% for
skin care. Given that Olay is a globally recognised brand and its key colour
cosmetics brand Cover Girl is mostly based in the US, it could consider
divesting its colour cosmetics business and investing the proceeds in making
its skin care brands more competitive. This way, the company could benefit from
a portfolio that shares a common distribution platform, while also retaining
its skin care business. 

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