Procter & Gamble (NYSE:PG) finally has the portfolio that it wants. With the recent sale of 41 of its biggest beauty brands, the company just finished a multiyear initiative aimed at whittling itself down to 65 franchises from over 160 in fiscal 2012.
Management kept the remaining brands around for their impressive growth and profit potential. The franchises also represent areas where P&G already has a dominant market position and can more easily protect market share.
While the consumer goods titan would love for its entire portfolio to post market-thumping growth, the Pampers, Tide, and Gillette brands will likely play the biggest roles in whether P&G's sales rebound gains momentum next year -- or falls flat.
Pampers is P&G's single biggest brand, responsible for $9 billion of global sales per year. It anchors the company's baby, feminine care, and family care division that's responsible for 28% for the business and accounts for roughly one-quarter of net earnings.
The key branded competition comes from Kimberly-Clark (NYSE:KMB) and its Huggies products. Until a few years ago, Pampers and Huggies were locked in a dead heat, with each claiming about 40% of the U.S. market. Since then P&G has pulled ahead to a comfortable lead.
The bad news is that those gains haven't been enough to offset losses on the value end of the market from its Luvs diaper line. Most recently, the baby care segment was P&G's worst-performing division: It was the only one of its five segments to post lower average prices. Organic growth, at 2%, was below the company average.
P&G has impressive structural advantages in place that can help it succeed with this brand, though. A network of strong relationships with hospitals, for example, helps deliver trial products to almost every new mom in the U.S. The company aims to pair that sampling strength with increased advertising spending and a bigger commitment to R&D spending to boost market share next year.
P&G has had the most innovation success lately in its fabric care division, and so it's no coincidence that this segment leads the others by accounting for 32% of sales and 27% of profits. Management recently cited the division as a model for the type of approach it hopes will succeed across its portfolio. "Fabric care results demonstrate what is possible when we deliver superior value from best-in-class performance at a modest price premium," CEO David Taylor told investors in August. "The U.S. laundry detergent market is continuing to grow behind our efforts, with the category up 4 [percentage] points last year."
Sampling will be a key focus going forward, as Taylor and his team plan to nearly double the number of free trial products its sends out this year -- up to 30 million units. P&G also has plenty of promising innovations it can trumpet in its ramped-up advertising output, including an athletic-wear targeted Tide brand, new Tide Pods formulas, and Tide Pure Clean, which is focused on the small but growing niche of consumers demanding environment friendliness and sustainability in their detergents.
P&G has had mixed results with its Gillette razor franchise. On the premium side of the business, particularly in the U.S., it has expanded market share with a new innovative Fusion lineup that was backed by huge marketing support. Thanks to successes like that, this division is easily P&G's most profitable, responsible for 15% of earnings even though it only accounts for only 11% of net sales.
The company hasn't executed as well at the value end of the market. It has lost share to private label brands, and to the subscription approach taken by Dollar Shave Club. Now that global rival Unilever (NYSE:UL) owns that brand, P&G can only expect the competition to get more intense from here. The good news for investors is that management appears to understand the scope of the challenge. "We need to do more work on the lower end of the portfolio," Chief Financial Officer Jon Moeller said recently, "and to to be more present in the direct-to-consumption e-commerce channels."
Overall, P&G has forecast a small but important growth uptick for fiscal 2017 that should see organic sales rise 2% after ticking up by just 1% last year. Investors can expect increasing cash returns and higher profitability regardless of whether that rebound continues. However, for P&G to get back on track for sustainable earnings gains, it will need to start posting market share growth in its biggest brands.