Procter & Gamble (NYSE:PG) recently closed the books on a fiscal year in which the consumer goods giant saw steady operating improvements. Organic sales growth sped up to a 2% pace from 1% despite a weak global selling environment. Profitability spiked as well, mostly thanks to aggressive cost cuts.
P&G lost global market share, though, even with a more targeted portfolio that was packed with just the brands that management had selected for their impressive growth potential. The Gillette franchise is one of these critical franchises, and it stumbled through falling sales again in fiscal 2017.
P&G's shaving business lost roughly half of a percentage point of market share this past year, which marks no improvement over the pace of decline it endured in the previous year. The big driver behind the latest dip was weakness in the U.S. market, where a soft market combined with increased competition to send volumes lower. As a result, P&G's broader grooming product category turned in the worst sales results of its five main divisions.
The Gillette franchise is being challenged both by value-based store brands and by online subscription services like Unilever's (NYSE:UL) Dollar Shave Club. The assaults are having a long-term and negative effect on the business. In fact, P&G's global market share in blades and razors was down to 65% in fiscal 2017 from 70% in 2014. Profitability in the division is falling, too, as the product mix shifts toward the cheaper disposable razor blade models. These stumbles are a key reason why P&G is currently facing a rare proxy challenge from an activist shareholder.
P&G's rebound plan involves a mix of innovation, marketing, and pricing tweaks aimed at returning to a healthy growth pace in the U.S. market where premium shaving products make up a larger portion of the sales base. Its massive advertising and research & development budgets count as important assets in this fight. For example, P&G can afford to send trial products to millions of young men in hopes of producing lifelong shaving customers.
More recently, the company launched initiatives targeting its biggest challenges of aggressive value-based competition and e-commerce disruption. With respect to the first issue, P&G slashed prices across its Gillette product lines beginning in April. Then in the following month, the company relaunched its Gillette Shave Club as a new online-only service under the Gillette On Demand branding.
What to watch
Management is encouraged by the early results of these moves. In fact, shave care volume ticked higher in the U.S. market last quarter after eight straight quarterly drops. In a July conference call, CEO David Taylor and his team cautioned investors that a single quarter's metrics aren't enough to establish a trend. Still, they said they're optimistic that they'll turn the corner and are "highly focused on improving our competitive position" in the U.S. male blade niche.
Investors can expect the shaving business to weigh on profit results over the next few quarters thanks to the price cuts the company is rolling out right now. The real test will be whether this shift, and its upgrades in product development, marketing, and online branding, finally return the shave care division to volume growth in fiscal 2018 following years of stubborn declines.