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P&G’s sales growth in top form but profitability under pressure

P&G’s sales growth in top form but profitability under pressure
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First Published: Sun, Aug 28 2011. 10 57 PM IST
Updated: Sun, Aug 28 2011. 10 57 PM IST
Procter and Gamble Hygiene and Health Care Ltd (P&G) and Gillette India Ltd (Gillette) have done well to grow their business in the June quarter. Their parent company P&G Co.’s focus on growing faster in developing markets is working. But input costs have risen faster than sales growth.
The two companies have launched new products, kept prices in check despite soaring material costs, and are selling more of low-priced products, thereby growing market share and also the market for their products.
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P&G’s sales rose by 24% to Rs 244 crore year-on-year in the June quarter, while Gillette’s sales rose by about 16%. Input costs have, however, increased much more, with P&G’s material consumption rising by 76%, while that of Gillette rose by 19%.
P&G sells the Vicks range of cold rubs and Whisper range of sanitary napkins, while Gillette sells a range of shaving products, Duracell batteries and Oral-B toothbrushes.
While rising commodity costs is one reason for higher input costs, a change in product mix could be a reason as well. Both companies have, in the past, launched lower-priced products to enrol first-time users of their products. And, then over a period of time, the consumer may upgrade to more premium products. Thus, their sales growth would have been driven by a high percentage of volume growth.
Their parent company had said, in a conference call, that grooming segment volumes rose by 25% in India. But Gillette’s results show sales growth for this segment at 16%. The difference can be explained chiefly by product mix and perhaps price as well.
Gillette Guard, a new low-priced razor, sold 11 million units during the quarter, and has already gained a 4% market share. P&G, too, had cut prices and also launched a low-priced sanitary napkin, which may have affected the product mix.
Even as input costs rose sharply, both companies have been spending heavily on advertising and sales promotion, at about 45% of sales for P&G and about 30% of sales for Gillette.
The pace of growth in advertising expenses is slackening, and over a period of time, sales growth will rise at a faster rate than advertising will. Or, at least that’s what consumer companies seek to achieve.
P&G’s operating profit margins at about 10% are low compared with other consumer companies, but are stable against the year-ago period. Except for raw material costs, as a percentage of sales, other items were either stable or lower.
P&G’s net profit more than tripled, but chiefly because of other income. Operating profit rose by 23%. Gillette’s operating profit margin declined to about 2%, compared with 12% in the year-ago period. Net profit fell by 86%.
Gillette is pushing sales in the batteries and oral-care segment. Oral care volumes rose by about 30%, said the parent, but reported sales growth was about 16%. Lower prices for Duracell batteries may have affected sales. Higher advertising, changed mix and price cuts are affecting sales growth.
What one sees in both firms is aggression in the market place, and this is not going to go away any time soon. In the near term, their profit growth will be volatile, either due to material costs or a bunching up of advertising and promotion expenses.
A few years from now, these companies would have grown their businesses to a level where they may start reaping scale benefits. Till then, their shares too may remain volatile, as investors may not have the patience to ride the volatility in its performance.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Sun, Aug 28 2011. 10 57 PM IST