Last Friday’s quarterly earnings conference call put Procter & Gamble CEO Robert McDonald squarely in the hot seat, as some analysts openly blamed him for weak profits and a series of missteps, according to The Wall Street Journal.
Sales for P&G — the world’s largest maker of consumer packaged goods — increased 3%, compared to 8.5% for Unilever PLC and 6.5% for Colgate-Palmolive, the Journal reported, while its stock price has remained relatively unchanged compared to an increase of 13% for Unilever and 17% for Colgate.
Two unrelated issues are hurting P&G, says Wharton management professor Lawrence Hrebiniak. “The first is a strategic, product-mix issue. P&G has been focusing more and more on higher-end products, including beauty and cosmetics. These products are being hurt by down markets, especially in Europe. Some high-end products are doing well because of pent up demand and/or low interest rates — such as autos — but the same doesn’t hold for P&G’s stable of expensive offerings. The day of ‘rack ‘em, stack ‘em and sell ‘em’ at low cost that characterized the marketing of Tide and other commodities has changed, and the newer emphasis on the high-end isn’t faring well worldwide.”
A second, related issue is that growing emerging markets are looking for the low cost commodity products that P&G is emphasizing less and less, Hrebiniak adds. “Greater decentralization of structure and operations is needed to cater to local tastes and demands, but P&G seems weak in this regard. Perhaps too much centralization, coupled with downplaying the products that emerging markets are looking for, is hurting market share and the bottom line. McDonald and his team need to look carefully at strategic and operating issues — especially decentralization and getting closer to emerging markets — to turn things around.”
Some of the analysts on the conference call took the unusual step of blaming McDonald for the company’s woes, according to the Journal, which also pointed out that P&G saw a 16% decline in earnings, registered drops in market share in 55% of the categories and countries it operates in and plans to cut 4,000 jobs by 2016. P&G brands are available in 180 countries and range from Bounty, Crest and Pampers to Gillette, Tide and Pantene.
McDonald, who joined P&G in 1980, has been president and CEO since 2009 and chairman since 2010, and has been credited with spearheading a number of innovations at the company. What he hadn’t counted on, however, was a recession that has led to consumer demand for cheaper brands, and a backlash against the company’s decision to raise some of its prices at a time when other companies were holding steady. As Wharton marketing professor Stephen Hoch notes, “Consumers have turned much more price sensitive, and grocery retailers reinforce those behaviors [by] fighting to retain market share and continuing to push their store brands in order to reinforce a value image.” What P&G is mainly focused on, Hoch adds, is “retaining market share, since when you lose it — and they have plenty to lose as the top dog — it is not easy to get it back.”
Wharton management professor Louis Thomas says P&G’s current woes are because “its strategy over the years has been to build dominant market positions in product categories by starting price wars with competitors. In fact, P&G brand managers are given a strong incentive to defend market share and not profits. So brand managers routinely cut price, and thus margins, in order to hold market share.”
That strategy, Thomas says, has at least two limitations: First, “it is only effective as long as rivals are more financially constrained…. [But] many of P&Gs rivals, such as Unilever, are not financially constrained. In this case, P&G’s strategy simply leads to a prolonged price war, and because it is the bigger firm, it is hurt more than its rivals.” Second, this strategy is “vulnerable to innovation,” Thomas notes. “Other firms can introduce new and better products to limit the effectiveness of P&G’s price cutting. Unilever and Colgate have recently out-innovated P&G in many product categories.”
What P&G needs to do, he adds, is “focus on improving existing products and introducing new ones [as well as] increasing advertising expenditures on these new products. This will allow prices/margins to improve and limit share gains by rivals. In the long run, firms simply cannot rely on price cutting to maintain their position in markets.”
Innovation is key. “P&G has simply tried to raise prices without increasing differentiation,” Thomas says. ”This just leads to a classic prisoner’s dilemma where all firms lose in price wars. One way out is through product differentiation via innovation…. Aggressive pricing strategies have to go together with innovation for the industry leader if it wants to stay the leader. It’s like a strategic one-two punch.”
As for how much McDonald is to blame for the weak results, Thomas suggests that “the problems in certain categories like … shaving and detergents seem attributable to him. P&G was well ahead in those categories but rivals have gained as P&G slowed innovation.”
As for Hoch, “I don’t believe in the great man theory of leaders, and so I don’t see that McDonald is to blame exclusively…. Long term, I would absolutely not bet against P&G. This is not to say that they never blow it; they do. But they are still the class act in consumer packaged goods.”