P&G cuts prices to save market share
The household products maker is trying to rely less on pricing and more on streamlining its cost structure to recover margins.
The company has lowered its outlook for fiscal 2012, citing continued weakness in developed markets and pricing roll-back, with higher input costs and increased costs related to its massive $10 billion cost-cutting program.
Amid weaker demand and a high cost environment, the consumer giant is trying to rely less on pricing and more on streamlining its cost structure to recover margins, though in the near term this looks to be a challenge. P&G competes with other leading players in the personal care segment, such as Unilever (UL), Kimberly-Clark (KMB) and Colgate Palmolive (CL).
P&G's net sales barely grew by 2% last quarter, despite positive pricing with almost flat volume sales across segments. The volume growth has been depressed over the past few quarters due to slower growth in developed markets and rising prices.
This performance is in contrast with its closest competitor, Unilever, which reported double digit sales growth for Q1. It had strong sales particularly in personal care and home care categories, including a 3.5% organic volume growth, despite continued weakness and depressed consumer spending in developed markets.
P&G's volume decline has likely happened partly because of price increases that came at the expense of its market share in some segments. Volume sales of fast moving consumer goods are highly sensitive to price, and any attempt to recover lost margins through higher pricing may immediately lead to consumers trading down to cheaper alternatives.
Now, P&G is likely to roll back some price hikes in categories such as laundry, home care, oral care and male grooming, especially in the developed markets, apart from introducing new products to expand market share.
The company's gross margin contracted 150 basis points last quarter due to higher commodity costs, restructuring charges, and unfavorable geographic mix. The disproportionate growth in developing regions was partially offset by positive pricing and cost savings. P&G's products in the developing markets have lower-than-segment average selling prices and lower demand for premium-priced products, leading to an adverse product mix and downward pressure on margins.
With no letting up on input costs and limited room for pricing without compromising market share, P&G recently announced a productivity and cost savings plan to reduce spending across all areas by up to $10 billion. As part of this plan, the company expects to incur approximately $3.5 billion before-tax in restructuring costs over the next four years.
These cost cuts will significantly help the company improve its margins, going forward, and reduce its dependence on pricing actions.
We are in the process of revising our $73 Trefis price estimate of P&G's stock.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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