With the recently agreed-upon sale of some 40 beauty brands for US$12.5 billion to competitor Coty, Procter & Gamble has taken a major step toward completing its push to drastically shrink the number of brands it manages. The effort, led by second-term CEO AG Lafley, has pushed the company’s consumer health brands closer to the forefront of one of the world’s largest consumer packaged goods companies. However, given the industry’s fierce competitive landscape, challenging the upper echelon of consumer health’s leading companies remains a lofty goal.
Culling the heard: Procter & Gamble slims down to speed up
In mid-2014, after several years of slow growth led to a shakeup in the C-suite and the return of former CEO AG Lafley, Procter & Gamble announced that it would be selling up to 100 brands from across its bulbous portfolio. Ultimately, the company would seek to focus on 70 to 80 core brands that accounted for nearly all the company’s revenues and profit. Over the course of the last three decades, a spree of acquisitions – most notably 2005’s US$53.4 billion purchase of grooming and battery giant Gillette – have turned Procter & Gamble into one of the world’s largest consumer goods companies. In 2014, the company generated retail value sales of US$117.4 million across the Euromonitor Passport universe, with roughly 95% coming from the beauty and personal care, tissue and hygiene and home care industries. However, the company’s portfolio has changed drastically recently. The 2014 sale of Pringles chips/crisps (to Kellogg) and the pet food brands Iams, Eukanuba and Natura (to Mars and Spectrum Brands) drastically reduced its exposure to the packaged foods and pet care industries. Similarly, the divestment of its salon professional hair care and fragrance businesses to Coty (expected to close in late 2016) will significantly reduce its exposure to luxury goods.
Procter & Gamble Sales by Industry, 2009 vs 2014
Source: Euromonitor International
Note: *Last available year’s sales are 2013
Will consumer health benefit from more attention?
Though Health Care (which includes its oral care brands) was the second-fastest growing segment, according to the company’s 2014 regulatory filings, it remains dwarfed by the larger Fabric Care and Home Care, Baby, Feminine and Family Care, and Beauty segments. Even with the recently announced sales and the planned divestiture of Duracell batteries, Health Care will account for little more than 10% of Procter & Gamble’s yearly revenue. While the shift could mean more attention for its consumer health operations, the company’s planned 30% decrease in non-manufacturing staff would suggest the remaining entities will not receive any additional manpower.
The issue is further muddled by the emergence of PGT Healthcare, Procter & Gamble’s global consumer health joint venture with Teva Pharmaceutical Industries. Under the terms of that deal, PGT Healthcare (51% of which belongs to Procter & Gamble) is responsible for overseeing the combined non-prescription (excluding emergency contraception) portfolios of both companies outside North America. While the deal’s long-term viability was initially in question, company officials have since commented that there are no planed changes for its healthcare portfolio. From its base in Geneva, Switzerland, PGT Healthcare will combine Procter & Gamble’s consumer expertise with Teva’s large portfolio of molecules, manufacturing capabilities and regulatory knowhow, and direct the combined consumer health operations outside North America.
Competitor Analytics: Procter & Gamble’s Top Consumer Health Countries and Categories
Source: Euromonitor International
Note: Note: Sales figures are in current, fixed 2014 US$ terms
Can Procter & Gamble emerge from its also-ran status?
While Procter & Gamble is a veritable titan in many of its focus industries, the company has historically lagged behind the industry leaders in consumer health. Since 2009, its global category ranking fluctuated from a low of 12th to a high of 9th, ending at 10th in 2014. One of the company’s most significant shortcomings was its long-standing overreliance on the US market. In 2011, before its joint venture with Teva, the US accounted for 56% of Procter & Gamble’s consumer health sales, compared to less than a quarter of its beauty and personal care sales. While the PGT Healthcare joint venture has further globalised its footprint, its market share has been stagnant since 2012.
Procter & Gamble faces considerable competitive pressure from the industry’s leading players, who have, in general, focused much more energy on expanding their reach and scale in the industry. Using Euromonitor International’s Competitor Analytics tool, we see that Bayer – Procter & Gamble’s largest competitor (as measured by sales overlap, i.e. their combined common country/category sales) – made a considerable leap forward with its acquisition of Merck & Co’s consumer health business in 2014. In addition to new dermatologicals brands, it included one of the world’s leading allergy care portfolios. Allergy care – which generated global retail value sales of US$5.2 billion in 2014 – is a category that is sorely underexploited in Procter & Gamble’s current consumer health portfolio. While top competitors Bayer and Johnson & Johnson have benefitted from investments in advertising and line extensions of their leading brands, Procter & Gamble’s efforts have largely fallen flat. The 2014 launch of the Vicks extension ClearQuil was underwhelming, in part because its uninspired formulations and lack of broad marketing support stood in stark contrast to Procter & Gamble’s tradition of building brands around innovative products that deliver clear advantages over competing products. Furthermore, the combination of GlaxoSmithKline’s and Novartis’ consumer health division in mid-2015 will add even more competitive pressure. The combined consumer health overlap of those two industry heavyweights could surpass Bayer’s, meaning Procter & Gamble will have to compete with the industry’s two largest operations in even more of its key categories and countries, such as US digestive remedies and German cough, cold and allergy (hay fever) remedies.
While Procter & Gamble touted PGT Healthcare’s potential to triple sales to nearly US$4 billion (MSP) by 2020 at its launch, the first two years have seen only modest growth. Given the extreme competitive pressures in the industry and its lack of scale in major markets (including China) and categories (allergy care), the company will need to invest heavily in new product development, advertising and very likely acquisitions to reach the scale needed to challenge for industry supremacy. Considering the company’s recent push for cost-containment and slimmer operations, that may be out of the realm of possibility.
Competitor Analytics: Procter & Gamble’s Top Competitors in Consumer Health
Source: Euromonitor International
Note: Note: Sales figures are in current, fixed 2014 US$ terms
Note: Unless otherwise stated, all sales figures are represented in constant, fixed 2014 US$ terms.