Amazon era means tough profit road for P&G
Procter & Gamble vowed to accelerate efforts to compete on price and product innovation Thursday as it reported another round of lackluster results that underscored the challenges of the Amazon era.
The consumer products giant, whose offerings include Crest toothpaste and Tide detergent, said it was keeping a lid on prices of many products amid increasing competition from Walmart and other big-box stores that have cut prices on consumer staples to draw in customers.
At the same time, new niche players like online store Harry’s have made inroads into shaving products, while Amazon itself has unveiled its own brands of diapers and other categories.
“This is not business-as-usual P&G,” Chief Executive David Taylor said on a conference call with analysts. “We will make additional changes needed to accelerate progress.”
The company plans to redouble cost-cutting initiatives, while still investing in new products that can attract a price premium.
P&G also announced an agreement to acquire the consumer health unit of German pharmaceutical and chemicals group Merck for 3.4 billion euro ($4.2 billion) in cash, hailing Merck for its “fast-growing portfolio.”
“They’re certainly self-aware that the retail world is moving from under their feet,” said Keith Snyder, analyst at CFRA Research.
“It’s hard to turn a $190 billion company on a dime. It’s going to take a while turn the ship around.”
Snyder said he was not troubled that the company dropped prices in all five categories compared with the year-ago period, viewing the move as a strategic effort to win market share.
P&G reported essentially flat profits of $2.5 billion for its fiscal third quarter.
Revenues rose four percent to $16.3 billion.
Shares of Dow-member P&G tumbled 3.3 percent to $74.95 in afternoon trading. Other consumer products stocks, including Clorox, Colgate-Palmolive and Kimberly-Clark also fell sharply.
The company faced blunt questions on a conference call after Taylor had asserted the company was on the right track during a bruising shareholder campaign last year with activist investor Nelson Peltz of Trian Fund Management, who joined the board in March.
“The steps we’re taking are showing signs but it is taking longer and that is going to require more change and more interventions,” Taylor said.
P&G said premium beauty products like Olay Skin Care had enjoyed strong sales growth, while a heavy cough/cold season boosted sales in health care, which includes the Vicks line of cough drops.
But the company reported another drop in grooming sales and cited tough pricing conditions in its baby care business.
Chief Financial Officer Jon Moeller described the retail environment as one of “intensifying competition,” with companies like Walmart and Target selling items at lower prices as they battle for market share with Amazon and other online sellers.
Big-box stores also are keeping pared-down inventories, preferring to spend their cash on new investments to drive growth, Moeller said.
P&G executives said there was little evidence of direct market share loss in diapers to Amazon’s private label, “Mama Bear,” because most diaper purchases are made at brick-and-mortar stores and not online.
However, Amazon’s positioning of the product is “influencing the behavior of other retailers,” Moeller said.
Taylor defended P&G’s decision to unveil low-priced Gillette razors, saying it needed to take action, especially given fashion trends that have seen more men grow beards.
“What was problematic was if you’re losing too many new customers certainly at a time when there’s societal trends around the frequency of shaving,” Taylor said.
“You put those two together and we said we’re not going to sit around abd watch a significant portion of new users, more millennial customers, not being exposed to Gillette.”