Lisa Bernard-Kuhn and Alex Coolidge report:
For decades, bigger has been better at Procter & Gamble.
The maker of Tide, Pampers and other household staples has long boasted the world’s largest portfolio of consumer products. With operations in 41 countries and 126,000 employees, its annual sales of $84 billion are more than double those of its closest competitors.
Some P&G shareholders, though, are growing impatient with a stock price that’s hovered in the low- to mid-$60s for years. Some analysts, too, question whether the company has grown too big for its own good. In the past year, it has twice missed profit projections amid the worldwide economic slowdown.
“It’s fair to say Procter is bogged down, and the sheer size leads people to believe it’s a conglomerate, and conglomerates generally don’t grow all that quickly,” says Connie Maneaty, analyst with BMO Capital Markets.
P&G executives clearly state that a breakup is not in anyone’s best interest. To the contrary, P&G has reaffirmed its business model and is cutting $10 billion in costs.
Still, some analysts are wondering aloud: What if P&G were broken into parts?
Speculation has grown with the arrival of hedge fund manager Bill Ackman, whose Pershing Square Capital Management acquired a $1.8 billion stake in P&G in June. Ackman hasn’t disclosed his intentions but has indicated he will move aggressively to shake things up.
Forcing a breakup would be close to impossible without the board’s consent. Ackman controls less than 1 percent of P&G and would need much stronger backing to press for big changes.
Pros
Faster growth
The bigger a company is, the harder it becomes to get even bigger. Consider the math: One hit product might not be enough to move the needle at P&G, whose annual sales grew by 3 percent to $83.7 billion in 2012. That same hit product would constitute much larger sales growth at smaller rivals. For smaller competitors, sales growth is easier, because they’re just not so big. In their last fiscal years, these smaller companies’ sales grew faster:
• Avon, up 4 percent to $11.3 billion
• Clorox, up 4.5 percent to $5.5 billion
• Colgate-Palmolive, up 7.5 percent to $16.7 billion
• Estée Lauder, up 10.3 percent to $9.7 billion
• Johnson & Johnson, up 5.6 percent to $65 billion
• Kimberly-Clark, up 5.6 percent to $20.8 billion
• L’Oreal, up 4.4 percent to $20.3 billion
• Unilever, up 5 percent to $46.5 billion.
Bigger profit margins
P&G maintains that its size saves it money. The company hasn’t recognized dramatic improvements in cost structure. In the past decade, P&G’s sales have more than doubled, but its operating profit margin – a key measure of financial soundness and ability to control expenses – hasn’t gained much ground. In the last fiscal year, P&G had a 17.8 percent operating profit, compared to 16.6 percent in 2002, when it was a $40 billion company.
Several rivals, with fewer workers and product lines, have fatter operating profit margins:
• Colgate, 23 percent
• Johnson & Johnson, 24.8 percent
The percentage points add up to big bucks: A 1 percent increase would push $865 million toward P&G’s bottom line.
Clearer executive focus
While smaller companies focus on a core group of brands, P&G famously grooms executive talent by moving managers between diverse product divisions. Today’s pet food brand manager could easily be tomorrow’s vice president of cough drops. Some say the approach can muddle focus. For example:
• Every day, P&G’s Bounty competes with Kimberly Clark’s Brawny, its Olay moisturizers compete with Unilever’s Dove and its Crest toothpaste competes with Colgate. P&G backers say that comparing it to smaller companies, such as Colgate, which has one-fifth the sales, isn’t always a fair comparison.
• That’s exactly the point for proponents of a simpler business structure. Some businesses are just different, and there’s no advantage to combining them. Different product lines have different business strategies that require different skills to excel.
Unlocks value
Splitting up P&G’s biggest money makers, including fabric care, baby care and retail beauty, could “unlock value” for shareholders, says Ali Dibadj, an analyst with New York-based Sanford & Bernstein. Doing so could set free the company’s faster-growing brands that are being hampered by slower-growing products with thinner margins. For some brands that have been sold off, results have been encouraging: Folgers and Spinbrush gained share outside while Infusium and Pert slowed losses.
Cons
Large scale, big savings
P&G’s large scale gives it a competitive advantage and major cost savings in advertising, manufacturing, transportation, logistics and corporate expenses that smaller companies can’t achieve. For instance:
• The company estimates it saved $1 billion in the past decade through its global business services organization, which handles shared services across P&G for IT, finance, facilities, purchasing and employee services.
• Innovations in one category can be leveraged across multiple categories. Crest White Strips, for example, was created from the company’s innovations with bleach in its beauty and fabric care units. “We’re now leveraging knowledge acquired on White Strips on a new innovation within our Olay business,” company spokesman Paul Fox said.
• Business units also benefit from P&G’s new approach in research and development: “Think of these as technologies that are so breakthrough that no individual business unit could afford to invest in them on their own. On the other hand, the corporation can invest in them,” CEO Bob McDonald told analysts this month.
Break-ups are messy
Dissecting a company that boasts $84 billion in sales and long-term debt and liabilities that exceed $40 billion would be tough and “quite messy,” says John San Marco, an analyst with Philadelphia-based Janney Montgomery Scott.
Why?
• Creditors may prefer their risk be tied to stronger performing sides of the business rather than weaker operations.
• As it stands now, creditors are betting on the performance of P&G’s entire portfolio, thus reducing their exposure to risks that might impact certain business segments more than others.
Stronger brand focus
P&G’s daily business is “a very focused approach and more focused than even some of our smaller competitors,” P&G chief financial officer Jon Moeller said.
That’s because:
• Unlike its competitors, P&G business unit leaders don’t have to worry about back-office activities, treasury, tax or investor calls – all responsibilities handled by the CEO, CFO and their direct staff.
• Business unit leaders “are focused on only one thing, they have one job: growing sales and profit of their business. And they get to do that with all of the assets of the Procter & Gamble Co. behind them,” Moeller said.
Brands mix is strong
P&G says brands in its portfolio have to deliver against growth goals to stay in the mix. The company regularly reviews its brands and is not afraid to vote some off the island:
• In the past decade, the company has shed more than 30 brands and completely exited the coffee, pharmaceutical and snacks businesses.
• “Put simply, we will not retain businesses that cannot deliver sustainable returns,” P&G spokesman Paul Fox said.
P&G’s Mason Business Center, which employs about 2,400, is home to its pet care, pharmaceuticals and personal- and oral-care businesses.
