News of Procter & Gamble divesting as many as 100 brands from its somewhat overblown inventory in a bid to boost profitability through a more efficient/manageable brand portfolio came as no great surprise, even if the extent of the planned divestment perhaps did. CEO and President A. G. Lafferty is the driving force behind this rethink and vision that will see the resulting entity – following this likely drawn-out process – as “a much simpler, much less complex company of leading brands that’s easier to manage and operate”.
While internal reorganisation/rationalisation is certainly a key aspect of the company’s on-going innovation strategy, it is only part of a greater medium-term change in focus, one that is likely to affect not only Procter & Gamble internally, but also the categories in which it operates, and this has particular relevance to its key (and home) North American market.
Procter & Gamble still sees 61% of its net sales associated with low(er)-growth developed markets, and the US is particularly significant to its home care operations, accounting for 8% of total global retail value sales in 2013. Laundry care in North America is, consequently, its single most significant category (globally), accounting for 5.7% of value sales in the same year. While the company has made great strides to move overseas and into faster-growing emerging markets, it has still had to come to terms with doing a large portion of its business in developed low-growth markets.
This reality has been the driving force behind the wider review of operations, the company having experienced retail value sales growth of just 0.3% in 2008-2013 – in spite of the popularity of its upper-tier Tide Pods – which appears to have hastened a change of approach under the stewardship of Laferty, who stressed, “I’m not interested in size at all; I’m interested in whether we are the preferred choice of shoppers.”
“Preferred choice” is an interesting selection of words, for consumers in the laundry aisle this can have a wide range of meanings, and one that might once have sat less well with a company that had tended to concentrate on the mid-to-upper end of category pricing structure.
Procter & Gamble Top Countries and Top Categories 2013
Source: Euromonitor International (Competitor Analytics)
While the appearance of Tide Basics, a cut-price Tide alternative (rumoured to be based around a cheaper Mexican formulation of the brand), in the months following the Lehmann shock didn’t last too long on the shelves, and came with some concern within the company that a low-priced alternative could end up “letting the genie out of the bottle” and undermining the wider mid-to-upper-tier pricing familiar to the parent brand.
The arrival of Pods and a host of other innovations, such as Tide Sport, illustrated the company’s interest in maintaining the higher-end performance, but 2014 saw the budget approach return. Pods, in particular, has done well for the company since its launch in 2012, but the market in North America is saturated and growth in private label as well as cheaper alternatives to Tide Liquid from the likes of Arm & Hammer, Sun Products and Phoenix has meant that the more premium end of the market is no longer enough to keep the company’s sales growing.
Clean and Fresh
Focus has now swung back to the lower tier and products such as Tide Clean and Fresh, which are clearly targeted in terms of price, not to mention packaging and livery, delivering a product that now competes with the likes of Sun and Arm & Hammer (among others) for the mid-to-lower tier of the US laundry care market. While the US population is on the increase (1% a year) and household numbers are also growing, this is certainly not sufficient to keep the laundry care category afloat, prompting this interest in competing at all price points.
Although Euromonitor International forecasts the US market to expand by just 0.1% in value terms in 2014-2019, there is still US$3 billion of opportunity out there when it comes to direct competition with lower-tier producers, which, to a man, compete wholly with Procter & Gamble in the laundry care category.
Procter & Gamble Competitor Overlap, Selected Companies
Source: Euromonitor International (Competitor Analytics)
A new phase
New launches and product refreshing that has taken place during 2014 appears to have ushered in a new phase of competition, and, inevitably, there will be casualties, brands will disappear, companies will withdraw and ingredients suppliers will also be affected. As we have seen in the tissue industry, the only solution for large companies in mature and often saturated markets is to bulk up and rely on economies of scale, laundry appears little different to these basic laws of competition and while companies like Procter & Gamble continue to be very innovative in many aspects of what they do (Swash being a good example), there will inevitably be major rationalisation ahead, and this will affect North America as much as it does Western Europe.
The fly in ointment however comes from the plunging oil price which may well revitalise players who have invested little in sustainability or enzyme technology, Procter & Gamble are committed to both and this asks a new set of questions regarding how successful they can be given this new set of circumstances. Until raw material status quo return (if it ever does) in terms of pricing returns it is likely that smaller players will be able to hold onto low value categories and will have the opportunity to battle the competition to the bottom, a competitive advantage which will likely see the competitive status quo remain for at least a year and possibly for the foreseeable future, how this might effect market value is covered in the a subsequent opinion piece, ‘oil pricing a battle to the bottom?’.