Quick Summary
The global market share of the company is under immense pressure with competitors such as Unilever plc (ADR) (NYSE:UL) offering high quality products at cheaper prices.
The consumer confidence has been dropping considerably, leading to dip in overall sales
Restructuring in product pricing and improvisation with product packaging and quality will enable P&G to still remain dominant and competitive
Competitive landscape
Other than Unilever, P&G competes with in the skin and hair care segment. The company is a massive player in this space with a market cap of $93.5 billion. It generates approximately 33% of its total revenue through hair care products, followed by skin care (26%), makeup (20%) and other small categories. Similarly, Unilever is another huge player in this space with a market cap of $123 billion. It generates revenue through skin and hair care products. The company has managed much deeper penetration in the emerging markets relative to both The Procter & Gamble Company (NYSE:PG) and L’Oreal. Although, both companies are much smaller in size relative to The Procter & Gamble Company (NYSE:PG) in terms of market cap, they present a stiff challenge to the company in the skin and hair care space.
Recent troubles
Heavy dependence on mature markets – Historically, P&G always held a dominant position by focusing on developed markets, in contrast its main competitor Unilever primarily concentrates on market penetration of emerging economies. This is reflected in the figures reported by the two giants for 2012. P&G reported a contribution of approximately 30%, where as Unilever reported a 50% contribution from the emerging markets. The consumer demand in the developed region such as Europe and North America has fallen considerably in the past few years due to weak economic conditions. The beauty segment of The Procter & Gamble Company (NYSE:PG) struggled to post any like for like growth in the first six months of the previous year. Like for like sales were down by 2%, in contrast Unilever continued to report growth as the demand from emerging markets continued to drive sales for the company. The personal care segment of Unilever reported a robust 7% growth.
Weak pricing strategy – In addition to falling demand in the developed region, the pricing strategy of P&G is not ideal. P&G’s top line of products is targeted to the premium end of customers. Considering the weak economic environment, consumers are turning away from buying expensive beauty products. This benefited more economically positioned brands of Unilever to a large extent. Unilever is positioned in a slightly lower bracket and provides a higher value for money, thus the penetration rate in emerging markets has been phenomenal.
Strategy going forward
Given that beauty products contribute close to 25% to the total revenue of P&G, investors and several other analysts expect the company to make a few changes in order to avoid losing further ground to competitors.
Aggressive pricing – It is essential for P&G to address the issue of losing market share on the basis of price positioning. The company operates on higher price per unit relative to Unilever, and it is evident it will continue to lose ground to competitors if it shows rigidness to compete on prices. During the final quarter of 2012, the average prices in the beauty segment of P&G grew by 3%, on the contrary prices in Unilever’s personal care grew by 3.3%. The Procter & Gamble Company (NYSE:PG) seems to be realizing the importance of price wars which may lead to squeezed margins, nonetheless it can be made up by a deeper market penetration.
Strategic packaging – Responsiveness to price sensitive markets underpins Unilever’s success. Unilever responded strategically to the current price sensitive nature of the developed regions by offering products in lesser quantities for consumers with weaker purchasing power. P&G has exhibited some interest in implementing this strategy in few product categories; however it still remains to be seen if the company inculcates this strategy across all product categories
Differentiation through Innovation – Incremental Innovation still remains the nucleus of consumer goods industry. Frequently, coming up with new innovative products is a pre-requisite to survival in the industry. Going forward, coming up with diverse and better positioned product lines will allow it to remain competitive against the likes of Unilever.
Investors must keep a close eye on how The Procter & Gamble Company (NYSE:PG) addresses these issues, as any long-term organic growth will only be witnessed once these problems are resolved.
The article Procter & Gamble (NYSE:PG) Under Serious Pressure originally appeared on Fool.com and is written by Ashit Gulati.
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