Procter and Gamble Co. (P&G) surprised investors last week by lowering its forecast for the June quarter and announcing a shift in its global growth strategy. It said it will run a tighter ship, drive more sales growth and profitability from its 40 largest markets, focus on top 20 innovations and on only 10 emerging markets. The narrower focus on emerging markets is a marked contrast from its earlier strategy, where it wanted to fill up the blanks in the world map where it had a meagre presence. In India, that had seen a more aggressive P&G. The strategy shift is not because its emerging market strategy failed, but because its developed markets position is under fire.
In the year to June, P&G estimates that emerging market sales will contribute to 37% of the total, compared with 20% in 2000. It still lags rival Unilever Plc by a wide margin; Unilever got 54% of sales from emerging markets in 2011. P&G’s emerging markets’ sales grew by about 12% year-on-year. But its 2011-12 forecast says net sales guidance for the April-June quarter is minus 1% to minus 2%, implying that sales in developed markets are expected to decline. That affects profitability, because developed markets typically yield higher margins. For instance, Unilever’s operating profit margin was 16% in western Europe, 14.8% in the Americas, and 11.7% in Asia, Africa, Central and Eastern Europe. That explains the strategy shift.
P&G’s strategy was not different from that of its peers. Plough back profits from the developed world to grow rapidly in the emerging world, with the combination resulting in faster sales growth with slightly lower margins, but faster earnings growth. But this strategy comes unstuck when developed market profits come under threat. In this case, steep commodity price increases saw P&G effect big price hikes in some key categories in its developed markets. Consumers switched to cheaper alternatives, affecting sales growth. P&G’s new strategy is going back to basics, focusing on big opportunities, cutting costs, optimizing resource allocation, and limiting its geographical spread.
What does this mean for India? Here, large multinational firms have already softened their aggressive competitive stances, perhaps goaded by rising commodity prices. There is more sanity in pricing, with a focus on profitable sales growth. P&G will certainly keep India as one of the 10 emerging markets that it will focus on. But its global strategy shift may see some caution creep into its India strategy.
Analysts have been waiting for its toothpaste launch and some have been predicting doomsday for Colgate-Palmolive (India) Ltd. But Colgate may have just got lucky. It is unlikely that P&G will start a bruising battle, as it did in detergents, given its current priorities. If P&G’s India strategy, too, tilts in favour of more profitable growth, other consumer companies in home and personal categories may breathe easier.
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