The last nine months have been a mixed bag for Procter & Gamble (PG 0.67%) shareholders. After the company logged two straight quarters of decent growth, organic sales slumped in the fiscal third quarter and left P&G in danger of missing its full-year targets.
Below, we'll look at the biggest factors contributing to the consumer goods giant's underwhelming 2017 performance.
Shaving stumbles
P&G lost market share across each of its five business divisions last year and, except for flat results in the fabric care segment so far, it should post a discouraging repeat performance in 2017. The grooming category, home to the Gillette razors and blades franchise, is the big standout segment right now -- and not for good reasons.
Image source: Getty Images.
Grooming endured a 6% sales slump last quarter that management attributed to spiking competitive activity. Volume fell as P&G was pinched both by global rivals including Unilever (UL 1.06%) and its Dollar Shave Club subscription service. Smaller, value-based competition from in store brands also took a slice of the business. The company slashed prices in a bid to protect market share, but sales volumes still declined and market share fell by more than half of a percentage point.
P&G is fighting a tough, long-term battle that's seen its Gillette franchise tumble from 70% market share in 2013 to less than 65% today. That's still a dominant position worth defending, and so its rebound plan includes increased marketing support, more impactful innovation, and a boosted presence online. These moves haven't yielded the turnaround yet, meaning shareholders have had to settle for higher profitability paired with sinking market share in one of P&G's biggest franchises.
Weak pricing
Like its peers in the consumer goods industry, P&G aims for organic sales growth that's powered by a healthy mix of both rising prices and higher volumes. Its 1% uptick over the past nine months is entirely thanks to volume gains, though, as prices haven't budged.
Contrast that result with Unilever, which last quarter posted 3% higher prices on flat sales volumes. The company sees a much brighter 2017 ahead, too, with full-year organic growth coming in at between 3% and 5%, compared with P&G's target of just below 2%.
The good news is that P&G has more room to budge on prices, given that its cost structure is one of the strongest in the industry. It already boasts a 21% operating margin. Unilever's long-term goal, meanwhile, is to reach 20% operating margin -- by 2020.
PG Operating Margin (TTM). Data by YCharts.
Higher profitability should allow P&G to comfortably match or even slightly undercut rivals. The company must balance that goal against the potential for harming the premium positioning of most of its brands, from Tide detergent to Pampers diapers.
Looking ahead
P&G will close the books on its fiscal year in early August. The company should post a near doubling of its annual organic growth pace to 2%, putting it well behind Unilever but just ahead of Kimberly-Clark. Shareholders should see plenty of encouraging news in that report, including higher profits, strong cash flow, and increasing cash returns from dividends and stock repurchases. The biggest question will be whether management believes their portfolio transformation will finally yield improving market share results in the fiscal year that ends in 2018.
