Sunday, July 29, 2001

P&G dropping food, beverage from its diet

Low profitability pushing four brands from portfolio

By Cliff Peale
The Cincinnati Enquirer

        When Procter & Gamble Co. unveils its fiscal 2001 earnings next week, its once-proud food-and-beverage business likely will be relegated to the back pages.

        P&G still earns money selling Jif peanut butter, Crisco shortening, Pringles chips and Sunny Delight fruit drink, but low profit margins or subpar growth rates have persuaded it to take all four out of its core portfolio.

        After current and anticipated deals are completed, the Cincinnati-basedcompany will hold only Folgers and Millstone coffees. The company regularly goes through entire analyst briefings without even mentioning the food-and-beverage division.

P&G performance by segment
        “It's on its way out, let's face it,” said Rita Freedman, who studies P&G for PNC Advisors.

        As Procter targets its core brands for investment and gets rid of what it considers distractions, its food-and-beverage brands have become casualties of the company's cost-cutting.

        The move, at the same time, offers an example of how P&G will try to compete in the 21st century. Instead of throwing as many brands as possible into the marketplace, Procter will pick those categories in which it can dominate, then shed the others.

        That has been the model with food-and-beverage, accelerating the past two years.

        The brands built by P&G in the category are household names. But growth in unit volume — literally selling more packages of soap or potato chips and a key indicator for P&G — has lagged for years.

        In fiscal year 1993, for example, food-and-beverage volume dropped 1 percent, but cost cuts led to record profits. In that same year, the group's profit margin before interest and taxes was 7.2 percent, compared with a company-wide margin of 10 percent, said analyst Ann Gillin Lefever of Lehman Bros.

    Deals to sell or swap Crisco and Jif, along with a new alliance with Coca-Cola Co., still are in the pipeline for Procter & Gamble Co.
    P&G says it has received what it calls expressions of interest in Crisco and Jif, but it has not commented on those offers. The company has said it will keep the brands if it does not receive adequate offers.
    The company said it still is committed to forming a third company with Coke that would include Pringles and Sunny Delight. Analysts have speculated that Coke might try to change the terms of the deal, but most expect it to be completed.
        Even though Procter has been in the food-and-beverage business since it introduced Crisco in 1911, the results have solidified a long-held feeling among P&G watchers that the company was not big enough to compete and should get out of the food-and-beverage business.

        “There's been a sentiment that it's diluting their profitability,” Ms. Lefever said.

        That sentiment didn't arise overnight. Wall Street analysts have had questions for decades about the food business and how it fit with Procter's other brands in such areas as personal care.

        In the late 1990s, Procter started selling some of its most noteworthy food brands. Duncan Hines, which it purchased in 1956, was sold in 1998. The next year, it sold Hawaiian Punch.

        In February of this year, Procter announced a new venture with Coca-Cola Co. that will include Pringles, Sunny Delight and the Punica fruit drink that is sold in Europe.

        And then came the April 25 announcement that P&G would solicit bids for Crisco and Jif.

        P&G officials would not comment for this story. But in an interview earlier this year, president and chief executive A.G. Lafley made it clear that downsizing food-and-beverage was one of the choices P&G was forced to make.

        “We do have a coffee business that's global, and we're going to grow that business,” he said. “We're never going to be able to globalize peanut butter.”

        Most analysts expect good news from P&G when it announces 2001 earnings Aug. 7. But they know that food-and-beverage will not be a part of that story.

        “I think we're going to get better news around costs,” Ms. Lefever said. She has predicted per-share earnings of $3.10 per share for the full fiscal year.

        She said Folgers is the exception in the division, producing returns on invested capital of more than 30 percent.

        P&G is investing more funds into Folgers. Earlier this year, it broke ground on a $100 million expansion of a roasting facility in New Orleans.

        But overall, the food-and-beverage unit's returns have been substandard compared with health care, beauty care and other divisions that now are in favor with Mr. Lafley, she said.

        For example, P&G's vaunted worldwide distribution network has not helped Pringles. The brand has been hamstrung because it is rarely displayed prominently in convenience stores, where consumers make the valued “impulse buys.”

        That could change with the Coke deal. In fact, P&G already is experimenting with distributing Pringles through Coke's vaunted bottler distribution network.

        Mr. Lafley has said the Coke deal could more than double the growth rate of Pringles and Sunny Delight.

        The financial results of the food-and-beverage unit have not been encouraging.

        In the year endedJune 30, total sales and unit volume were flat. And in the quarter ended March 31, sales fell almost 4 percent to $938 million, compared with a year ago.

        Earnings in the period increased nearly one-third, but totaled only $67 million.

        Those stagnant sales and profits mean P&G will choose to invest its increasingly scarce expansion funds in other areas, said analyst Bill Steele of Banc of America Securities.

        “They're trying to focus on core categories,” he said. “At the end of the day, you have to pick and choose.”

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