Sunday, March 25, 2001

Competitive edge eludes P&G

Layoffs to lead to lower prices

By Randy Tucker
The Cincinnati Enquirer

        All Procter & Gamble wants to do is provide the consistent, predictable sales and profit growth that it has promised shareholders.

        But changing consumer attitudes toward brand-name products and an economic slowdown are making it tough for the Cincinnati consumer goods giant.

        The announcement Thursday that P&G will slash 9,600 jobs on top of 15,000 cuts announced in June 1999 has been viewed as an admission by the company that it has lost its competitive edge in many of its core categories, experts say.

        Those experts say P&G must win back customers that it lost as its products became too pricey compared with its competitors' brands. Buyers decided the so-called extra value offered by P&G in its products wasn't worth the extra money.

        “Although we applaud PG's more aggressive stance ... we remain concerned that restructuring will continue to be PG's highest growth business near term,” Ann Lefever Gillin, who follows P&G for Lehman Brothers, wrote in a research report Friday.

        The new cuts — which will include 1,900 mostly white-collar jobs in Cincinnati - will cost P&G $1.4 billion upfront, after taxes, and result in annual savings of $600 million to $700 million by 2004.

        P&G said it will also continue to pare its portfolio of underperforming businesses, which could result in further charges of $400 million to $800 million.

        The consolidation through job cuts and brand divestitures is designed to revamp P&G's overall performance, which Mr. Lafley described as unacceptable in the past year.

        To reverse that trend, Mr. Lafley has decided that more jobs must go so P&G can lower its overhead, which will allow the company to lower prices on some products.

        P&G said its overhead costs are 20 percent higher than the “best benchmark company.”

        The goal of the job cuts is to become more competitive and regain some of the mar ket share P&G has lost to competitors in big categories such as oral care, feminine hygiene and tissue and towel.

        “P&G is hoping to reach the average person again,” said Doug Christopher, who follows P&G for Crowell, Weedon & Co., in San Francisco. “When you look at where they're positioned, they need to become more price-competitive.”

        Most analysts agree that P&G's strategy will eventually return the company to the solid sales and profit growth that has been its hallmark for most of the past century.

        But even if P&G brings prices back in line with its competitors', there is no guarantee that it will expand market share and lead to a reversal of fortune for the struggling company, which is operating in a increasingly competitive environment.

        Lyle Schonberger, director of research at H&R Block Financial Advisors in Detroit, said the Cincinnati-based maker of Tide, Pampers, Crest and Pringles faces a number of challenges outside its own business environment that it has little control over.

        An economic slowdown that has led U.S. stock markets into bear territory and resulted in widespread layoffs and fear of recession could eventually lead consumers to pass up even more brand-name products — no matter how competitively they are priced — in favor of private-label and store brands, Mr. Schonberger said.

        Procter & Gamble's biggest brands, such as Tide laundry detergent and Bounty paper towels, historically have enjoyed the type of consumer loyalty that allowed the company to raise prices without losing market share.

        And although P&G dismisses private-label brands as not offering consumers the same value as its branded products, economic hard times can lead even the most loyal consumer to opt for lower-priced alternatives, Mr. Schonberger said.

        “I remain convinced that P&G knows what it's doing in terms of business strategy,” he said. “But you have things like an economic slowdown, which unfortunately adds an extra dimension to the puzzle that makes it a little bit tougher.”

        Pundits foresee more private-label brands on the horizon because they are good for consumers and retailers, such as Wal-Mart - P&G's biggest retail customer, which recently introduced its own brand of detergent to compete with Tide.

        Private-label brands can insulate a retailer from an economic slowdown by offering lower-priced goods for people trying to curb spending.

        They also can help enhance a retailer's image and build store loyalty by introducing products under their own names that meet the same quality standards as brand names.

        In addition to increased competition from private-label and store brands, P&G also faces stiff competition from rivals who have consoli dated their brands and are now more focused on the same core businesses that P&G wants to expand.

        “You and I are not going to buy any more detergent this year than last year, so if everyone's focused in those categories, maybe two out of those three players don't get any bang for their buck,” said William Steele, manager of Banc of America Securities in St. Louis, one of P&G's largest institutional shareholders.

        But Mr. Steele said he has seen some improvement in recent months in some of the categories in which P&G has lost market share.

        “It appears, based upon the December balance sheet cash-flow data and the January market-share data, that Procter's clearly headed in the right direction,” he said. “One quarter or one four-week period doesn't make a trend. But we are seeing the signs pointed north, not pointed south, so we're cautiously optimistic.”

        Mr. Steele said it will take time, innovation and a lot of money for P&G to win consumers back to its brands.

        But, he said, the tricky part will be achieving that goal while striking a balance between spending the money to boost market share and at the same time cutting costs.


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