P&G Faces the Future as $12.5B Beauty Brands Sale to Coty Finalized

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Procter & Gamble has been on a fitness kick in recent years. Its message for the last few years to investors and Wall Street — it must shed some flab and get stronger and leaner before the CPG titan can grow as robustly as it did a decade ago.

Under new CEO David Taylor, taking over from plans laid by A.G. Lafley during his second term as chief, P&G finally seems to be getting closer to a new takeoff of sorts, staging a company that is significantly smaller and with many fewer brands than just five years ago — but also with a streamlined cost structure, with a keener focus on fewer categories, and with a determination to kick a once-legendary P&G innovation engine back into higher gear.

For now, the biggest thing on Taylor’s plate is to execute the $12.5 billion sale of 40-plus beauty brands — including CoverGirl, Max Factor, Wella and Clairol — to Coty in a move that will relieve P&G of eight factories, 10,000 workers and $2 billion in debt. The giant gambit moves P&G much closer to Lafley’s major goal of paring 100 noncore labels. As its workforce shrinks to the smallest it’s been in a quarter century. P&G shareholders will enjoy what amounts to a massive equity repurchase as P&G shrinks outstanding shares by about four percent.

P&G beauty brands sold to Coty

P&G’s beauty and haircare brands that now officially belong to Coty:  Wella Professionals (and its sub-brands), Sebastian Professional, Clairol Professional, Sassoon Professional, Nioxin, SP (System Professional), Koleston, Soft Color, Color Charm, Wellaton, Natural Instincts, Nice & Easy, VS Salonist, VS ProSeries Color, Londa/Kadus, Miss Clairol, L’image, Bellady, Blondor, Welloxon, Shockwaves, New Wave, Design, Silvikrin, Wellaflex, Forte, Wella Styling, Wella Trend, Balsam Color, Hugo Boss, Gucci, Lacoste, bruno banani, Escada, Gabriela Sabatini, James Bond 007, Mexx, Stella McCartney, Alexander McQueen, Max Factor and Covergirl.

However, P&G remains moving in reverse for now. Organic sales in the most recent fiscal year were flat for the second straight year, and earnings ticked down 2 percent. Once Coty takes possession of the beauty brands, P&G’s revenue base will have declined by 15 percent overall and its earnings power by 5 percent. This retrenchment also includes the shrinking of its worldwide manufacturing footprint to its smallest in more than 20 years, including the sale or closure of a dozen US factories in the last five years.

Yet the company isn’t only paring its revenue base and profits by choice; it must also fend off rivals.. P&G lost market share in four of its five main product categories in fiscal year 2016, Motley Fool noted, while holding steady in just one: fabric care and home care. Its share of the US skincare market fell to less than 13 percent in September, for example, down from more than 14 percent in July, according to Bloomberg.

P&G’s Pampers brand remains locked in a titanic struggle with Kimberly-Clark’s Huggies brand to clothe the bottoms of infants worldwide as the millennial generation creates a new baby boom, while Unilever is lapping P&G in revenue growth.

But as the Fool also notes, P&G volume figures rose in the most recent quarter across all of its product divisions, at an average of 2 percent. That’s the kind of growth Taylor needs to continue in order to fulfill the promise of all of the brand and cost paring.

That’s where one of the most crucial factors for P&G’s future growth comes in. After a boom under Lafley’s first term in home-grown innovation and even in procuring innovative features and products from outside, under its Connect + Develop program, for the past several years P&G has failed to achieve earlier levels of creation of new brands and products to stay ahead of rivals.

There have been new products lately such as Pampers Swaddlers diapers, Gillette Fusion razors and the big win of Tide Pods detergent. But the Fool pointed out that P&G hasn’t introduced a hit new brand worth more than $1 billion in sales in more than a decade. By contrast, rival Johnson & Johnson, despite its own many woes, got one-quarter of its sales last year from products it introduced just in the last five years.

Taylor also has admitted that P&G could have done a better job of anticipating the shift toward value among American consumers. The company’s brands and products have always offered a combination of quality and price premium. But since the end of the great recession, US shoppers have demonstrated stubbornness about insisting on value in their everyday purchases, helping to explain the rise of store labels and e-commerce and some of P&G’s challenges as it adjusts.

“We need to do more work on the lower end of the portfolio,” P&G CFO Jon Moeller told investors recently. So it’s clear to P&G what areas it must address to reignite growth. Now the key is execution.

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