P&G to U.S. Consumer: It's Just Not Working Anymore

It is a sad fact: People grow apart. It isn't anyone's fault. Sometimes interests just change. Such is the story of Procter & Gamble (NYSE: PG  ) and the U.S. consumer.

After building the world's largest consumer goods empire by supplying U.S. consumers with a dizzying array of cleaning products, Procter & Gamble is moving on. It just isn't working anymore. Not that we should be all that surprised. High unemployment and few prospects for a quick recovery have humbled once-fearless American shoppers.

Trading down
New shopping habits have forced Wal-Mart (NYSE: WMT  ) to bolster its discount reputation by cutting prices on 10,000 items and has sparked a price war in the everyday consumer goods market. People are hunting for bargains in the mundane parts of their life, including toothpaste, detergent, and diapers.

In its latest earnings release, Procter & Gamble boasted 8% growth in its sales volume, the strongest volume growth in more than five years, but revenue was up only 5%, the result of smaller price tags. The same story is playing out at competitors such as Colgate-Palmolive (NYSE: CL  ) and Unilever (NYSE: UL  ) , which both reported revenue growth below volume growth.

Although Unilever expressed hope for an end to the pricing pressure before the end of the year, this may prove overly optimistic. Procter & Gamble, which has generally ignored emerging markets to date, is launching new offensives in markets like Brazil and China.

Better late than never ... maybe
Although the growing consumer markets in the world's less- developed markets appear attractive, Procter & Gamble is facing quite an uphill battle. Unilever is the consumer goods pioneer, first establishing a presence in the emerging markets of Africa in 1904, and today gets about half of its sales from emerging markets. Similarly, Colgate dominates Latin American markets, earnings 28% of its sales from the region.

These entrenched operators aren't going to give up market share without a fight, which means higher marketing spending for P&G and expanding the price war to foreign shores. The high costs associated with trying to storm these new markets means there is little room for error, and increased risk for investors.

Go with the leaders
As investors, we need to find companies that can tap the immense opportunity provided by rising consumers in the world's less-developed markets. There are many U.S.-based companies, like Coca-Cola (NYSE: KO  ) and Nike (NYSE: NKE  ) , that have found the solution, and each has made great strides into China as well as other high-growth regions. But often local operators have an advantage over their foreign competitors, meaning they can earn higher returns for investors.

The Motley Fool Global Gains team is constantly on the search for these types of companies. If you'd like to see what it has found, take a free 30-day trial.

Nate Weisshaar doesn't use Procter & Gamble's products enough, according to some, but owns shares of Coca-Cola. Coca-Cola and Wal-Mart are Motley Fool Inside Value picks. Nike is a Stock Advisor recommendation. Unilever is a Global Gains choice. Coca-Cola, Procter & Gamble, and Unilever are Income Investor recommendations. The Fool owns shares of and has a write-covered-calls-position on Procter & Gamble. The Fool owns shares of Coca-Cola. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (29)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2010, at 4:52 PM, midnightmoney wrote:

    In the case of nike the strides made would be exploit as many poor in developing nations to make your shoes as you can so you can turn around and sell those same shoes to wealthier people in those same countries. Is that what you're advising me to do?

  • Report this Comment On August 20, 2010, at 4:54 PM, midnightmoney wrote:

    *invest in that kind of company?

  • Report this Comment On August 20, 2010, at 6:12 PM, capscartor wrote:

    Article is very superficial in it's analysis of P&G. Looking at P&G's history and its performance over the last 5 and 10-years, you can see the Company has hit challenges before and has found a way to overcome them. This latest occurance is perhaps the greatest financial hit the country/globe has seen in any generation still alive. Consequently one would expect shifting dynamics to occur as they have for a [small] percentage of consumers who have pulled back on certain purchases.

    P&G whote the book on branding and brand management/marketing still studied in the best business schools today. To suggest this Company cannot adjust to a changing market or compete in other global markets is not a credible position based on the facts and the historical and current performance of P&G. Hence, I cannot agree with the article's proposition.

  • Report this Comment On August 23, 2010, at 8:19 AM, TMFTheSnake wrote:

    capscartor

    I think you are underestimating the percentage of consumers that have pulled back on buying brand name goods for mundane products (as evidenced by the shrinking margins at all the major consumer products companies), and, consequently, extent of the shifting dynamics.

    I'm not saying P&G is dead, just saying they are facing an uphill battle trying to pry their way into the growing consumer markets in developing markets.

    Waging price wars to win (or maintain) market share isn't a recipe for strong profitability growth.

  • Report this Comment On August 23, 2010, at 8:26 AM, TMFTheSnake wrote:

    hiddenlevers

    Perhaps I'm reading your charts incorrectly, but PG appears to have pretty much followed the S&P's pop and stagnated at about the same time.

    In relation to retail sales, despite continued positive retail sales growth, PG has stalled out, which I interpret as markets recognizing that in order to maintain its share of those growing retail sales, the company has been forced to lower its prices and hurt profitability.

    The real question is where do you see retail sales going in the future? With your macro outlook, are you expecting consumers to bounce back when unemployment sits at 10% and companies are still cutting costs (ususally jobs) in order maintain earnings numbers?

  • Report this Comment On August 23, 2010, at 10:24 AM, slpmn wrote:

    The US may be tapped out for a while, but if P&G can figure out how to cater to Chinese tastes, it would seem there are some serious growth opportunities there.

  • Report this Comment On August 23, 2010, at 2:46 PM, NewOldMoney wrote:

    Great stock to buy low during a decline and hold for years. Buy below the $55 mark and you will do just fine.

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