There are any number of consumer staples stocks that an investor can buy, and yet Procter & Gamble (PG 0.30%) consistently stands out in the crowded field. Part of the reason for that relates to its status as a Dividend King, with 66 years' worth of consecutive annual dividend increases under its belt. But there's a lot more to the story, with management's focus on "superiority" being a key driving force behind its strong results.
Leading the pack
It wouldn't be realistic to suggest or believe that P&G is better than any other consumer staples company at everything. That's too much to ask of any management team. However, its focus on superiority has resulted in very strong results across many important metrics, not all of which are financial.
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For example, P&G has long prioritized innovation, spending heavily on research and development to ensure its products offer real benefits to consumers. This is important because most of the company's brands sit toward the high end of the price spectrum. The only way to get consumers to pay more is to offer them more. Procter & Gamble's financial results suggest it is winning on this front, with the company growing or maintaining market share in more than half of its 50 key category and market combinations globally in the fiscal second quarter of 2023.
That may not sound impressive until you remember that inflation has been raging lately. Financially pressed consumers tend to trade down when they feel they can get better value for money in a similar product. That is impacting the company's sales, with volume declines partially offsetting the benefit of price hikes. But P&G is clearly still holding its own despite a year of material price increases. Consumers wouldn't keep coming back (and paying more) if they didn't see the superiority of the company's products.
P&G's direct customers
Here's the interesting thing: Consumers are the end customers, but they are not the direct customers to whom P&G sells its products. Procter & Gamble's actual customers are retailers. And superiority is vital to retailers, too. For starters, desirable brands bring customers to stores. Thus, P&G's focus on bringing high-value products to market tends to result in pretty constructive relationships with retailers. This is one of the reasons why the consumer staples maker is able to keep pushing through price hikes.
But there's a lot more to talk about here. For example, P&G's development efforts actually created entirely new product categories, such as the Swiffer line, that help to grow industrywide sales. Recently, the company introduced Dawn Powerwash, a new way to take on dirty dishes. According to management, this product has driven a 50% expansion in the Dawn brand since its introduction and, more importantly, helped Dawn drive 90% of the category's overall growth. That's the kind of result that supports strong retailer relationships.
But it isn't just products that feel the effects of superiority; the company's advertising efforts are also important and a vital factor for retailers. Procter & Gamble's size allows it to spend aggressively to market its products, which brings consumers into stores just like its new products do. But the company is also working hard to reach consumers in the right way, willingly upending historical approaches.
The best recent example of this is in its diaper business. The company's Pampers Club is an opt-in rewards program that helps it better target customers. Children only need diapers for a limited period of time and the type of diaper required changes as the child ages. Putting all of this information together as it spends marketing dollars allows for better results for consumers, retailers, and P&G, notably improving the return on advertising spending. That's superiority in action again, just in a different arena.
The Wall Street pendulum
Businesses rise and fall over time; that's never going to change and it impacts P&G just like any other company. Since it slimmed down its product portfolio nearly a decade ago, it has been performing very well. That said, the stock price has fallen 9% so far in 2023, while the Consumer Staples Select SPDR ETF is only down 3% and the S&P 500 index is up 4%.
The focus on superiority, however, is a long-term approach, though it's not always talked about in the same language. And given the long history of success here, the smartest investors know that this focus is what has helped Procter & Gamble maintain its industry-leading position over many decades. The key takeaway from this is that when Wall Street pushes the stock drastically lower (think a dividend yield in the 3.5% space versus today's 2.6%), you'll probably want to ignore the market, concentrate instead on the company's business superiority, and jump in to buy the stock.
