Are you worried that Procter & Gamble (PG 0.86%) has become too big, too old, and too unfocused for its own good? It's not an uncommon concern.
There comes a point when a company's size and age can become more of a liability than a benefit. That was certainly the focus of the company's 2017 proxy fight with activist investor Nelson Peltz, who wanted to split P&G into three different companies that would each be more regionally minded as well as (hopefully) more innovative.
That obviously didn't happen, but maybe it was never needed. P&G is doing just fine in its most important markets. Conversely, most product categories where it's not a decided market leader aren't major opportunities anyway.
Translation: Procter & Gamble is better positioned than most investors might believe.
Not all of P&G's product lines contribute the same
Understandably, not being a leading brand in a particular category of consumer goods means losing out on sales in that category. But P&G is winning where it matters most.
Consider the company's revenue breakdown for the latter half of last year. Fabric care is by far the company's single biggest breadwinner, accounting for nearly one-fourth of sales. Home care (mostly dishwasher detergent), skin care, and baby care (diapers) each contribute about a tenth of total revenue.
At the other end of the spectrum, feminine products and the company's highly fragmented personal healthcare business (Pepto Bismol, Vicks, Prilosec, and Metamucil) mean very little to P&G, even when aggregated.
Data source: The Procter & Gamble Co. Chart by author.
The operating profit breakdown for Procter's broader product categories looks about the same.
Data source: The Procter & Gamble Co. Chart by author.
The images, however, only tell half the story.
The biggest fish in the biggest ponds
If you can't dominate every single market you're in, at least dominate the biggest markets you're in, right? Well, that's exactly what Procter & Gamble is doing.
Take fabric care -- meaning laundry detergent and related laundry consumables -- as an example. According to numbers from Polaris Market Research, the global laundry detergent market is worth around $150 billion per year, en route to more than $240 billion per year by 2029. While it's not the fastest-growing detergent market, North America is still the biggest -- and it's dominated by P&G brands. Tide alone accounts for 40% of fabric care in the U.S., while its Gain brand is second at nearly 20%. No other competitor even comes close.
Dishwashing and home-cleaning brands like Cascade, Dawn, and Swiffer are also part of the P&G family, and like Tide and Gain, they're the dominant names in their spaces. Cascade makes up about two-thirds of the U.S. sliver of the dishwasher detergent market, for perspective.
Diapers are another key market for Procter & Gamble, worth roughly $60 billion per year on a worldwide basis, with around one-third of this business done in the United States. The combination of P&G's Pampers and Luvs make it the biggest name in both groupings, accounting for roughly one-third of both the international and domestic segments' sales.
At the other end of the spectrum, healthcare brands like Vicks and Pepto Bismol aren't big business for Procter. Neither are Tampax tampons or Always pads. These aren't particularly meaningful opportunities, though. The worldwide tampon market is only worth around $5 billion per year, according to data from IMARC Group, while the oral care (toothpaste, mostly) market only drives about $20 billion in annual sales.
P&G's Crest does reasonably well with its one-third share of this toothpaste market, but it's a crowded market with lots of good competition that can keep Crest in check. The same goes for the $17 billion razor market that's home to P&G's grooming brand Gillette -- and a whole lot of competing brands.
3 key takeaways for investors
There are three key ideas worth drawing out of this deluge of data.
The first of these is that while it's easy to criticize Procter & Gamble for what seems like a lack of innovation, keep things in perspective. P&G is the market leader in the most important -- and biggest -- slivers of the consumer goods sector. If it's not broken, perhaps it doesn't need fixing.
It's even arguable that sweeping changes to decades-old products like Tide detergent and Cascade dishwashing soap would alienate both brands' proven customer bases. The company should certainly leverage these brand names and expand their reach with lateral innovations, to be clear, but too much change can often confuse customers who just want to clean their clothes and dishes.
The second takeaway for investors is: Keep your expectations in check. It's often easier for an up-and-comer brand to take share away from a market leader than it is for a market leader to win even more share. That's because smaller, newer players are typically more nimble than older, established brands. Most of any meaningful revenue growth that P&G is going to achieve is going to come from sheer market growth, which is ultimately a function of population growth. Sales and earnings growth in the low-single digits is actually solid progress for this company.
Finally, the third takeaway here is a firmly bullish one. While the company's net growth opportunities may be muted, there's a reason Procter & Gamble is a market leader in the biggest segments of the consumer goods market -- it's just a well-run company.
That's not to suggest it doesn't stumble on occasion. It has. And while Peltz's call for more innovation might have been short-sighted, that's not to say the activist investor was wrong about culling some of the corporate bloat that builds over time.
On balance, though, Procter is prioritizing the right things, and succeeding in the businesses where and how it needs to the most -- detergent, home-cleaning, and baby care. On the flipside, razors, tampons, and personal health products aren't prioritized simply because they'll never be huge businesses for P&G.
This savvy allocation of resources along with the company's raw financial muscle are among the reasons this blue-chip name is still one you can feel good about tucking away in your portfolio for the long haul.
