Procter & Gamble Company (PG 0.54%) has long been a stalwart in consumer goods and a Dividend Aristocrat for investors. But that hasn't translated to strong returns for the company, particularly over the last three years, when the market has steadily gone higher but P&G's stock has been flat.

Management is trying to turn around the business by selling off noncore assets and pushing for operational efficiency. But it doesn't seem like that's helping, and more structural challenges are now hindering Procter & Gamble. Here's why 2017 was a year investors would rather forget.

Woman shopping for detergent

Image source: Getty Images.

Squeezing the business dry

Management has touted its operational excellence in the past year, part of a strategic focus on selling high-margin items rather than just owning shelf space at retailers. For example, between fiscal 2013 and fiscal 2017 gross margin was up 2% to 50.8%, and up 4.5% on a constant currency basis. Operating margin improved 2.7% and 6.1% a currency neutral basis, to 22.1%.

Those improvements are great on the surface. But they help to camouflage how P&G has shrunk as a company over that same time frame.

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P&G's biggest problem long-term isn't a few margin points, or how much shelf space it has: It's the change in the way we shop. The company has long used its control over shelf space at retailers to keep its business growing. But the move to more online retail has shifted the power dynamics. Now, small upstarts like Dollar Shave Club, Honest Company, and Bevel can grow through online sales and target customers through new forms of media, taking market share from P&G. Those trends aren't slowing down, and P&G doesn't seem to know how to adapt to the new consumer environment.

Nelson Peltz, the thorn in P&G's side

One battle that's been raging at Procter & Gamble is with Nelson Peltz of the hedge fund Trian Partners. Peltz owns about $3.5 billion of the company's stock and has been pushing for a board seat in order to push the company to streamline operations. He finally succeeded late in 2017, a blow to management's $35 million battle against his getting a seat.

Peltz could push for P&G to break itself up, extending three years of small sales of underperforming business lines. He's also talked about how P&G needs to become more efficient.

What you can see is that neither solution changes the fundamental fact that P&G's scale advantage is no longer an advantage. And it's easy to argue that management is already streamlining operations as much as possible, leaving little to squeeze from the business.

Peltz may have been successful in getting a seat on P&G's board, but it's not at all clear that he has a plan to do more than extract small amounts of value from a company that's in a structural decline.

Between a rock and a hard place

There aren't any easy answers for P&G, and that's why I see this as a year to forget. The company seems to be doubling down on its industrial-age strategy of using retail brands and shelf space to sell high-margin products. But it doesn't seem to have a broad strategy for selling online; smaller competitors are happily filling that gap and slowly taking market share.

It's tough to disrupt a profitable business by transitioning to more online sales, but that's what P&G might need to do. It doesn't look willing or able to do so in its current form.