Following recent quarterly results, I mused that consumer-goods giant Procter & Gamble
Where the magic happens
First, it's important to understand that new products generally involve one of two types of innovation: a change in core functionality, which usually occasions a pricing adjustment; or a change in such features as color, scent, and style, which enhances product-line variety without substantially affecting price or function. The distinction matters. In broad strokes, functional innovation justifies pricing moves. Pricing, in turn, directly affects profit, both through the sale of higher-margin wares and the additional volume that comes from selling goods across a wider range of price points.
Good news, shareholders -- P&G appears to favor functional innovation.
In the value segment, a lower-priced Pampers diaper is off to a strong start in international markets, helping to boost P&G's category market share to record levels in Germany. Meanwhile, India is shaping up as a battleground for bargain-minded consumers. Stripped-down versions of Tide detergent and Gillette Mach3 razors greet shoppers with roughly 30% and 50% price discounts, respectively.
Yet P&G hasn't abandoned its historical focus on even better products at increasingly higher prices. The company plans to introduce the Gillette Fusion ProGlide system in June, which will arrive on the heels of a product upgrade from Energizer's
In the past, I've doubted P&G's premium-oriented portfolio. Now I find myself questioning the wisdom of a still-pricier Gillette product. Broadly speaking, however, the premium strategy does have merit. Just ask competitor Nestle (OTC: NSRGY), which continues to count the premium platform among its core growth drivers. Personally, I believe we'll see the success of such price and quality upgrades vary according to geography, with emerging markets often proving more receptive.
P&G is also expanding product-line features along consumer taste. The new Tide Stain Release line is a prime example; consumers can choose among powder, liquid, or "duo pacs." Notably, empirical research demonstrates that greater product variety can enhance consumers' quality perceptions, since it implies expertise and specialization from the manufacturer.
That said, such dynamics only hold when consumers perceive variety to be focused on compatible product types. In that light, the outcome of P&G's effort to extend the Olay brand into body care rests with capricious consumer opinion. Likewise, rival Unilever
In general, P&G's product innovations imply a more flexible, re-energized business strategy. That's good. Whether it'll be good enough to put P&G in the company of faster-growing consumer-staples names such as Church & Dwight
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Procter & Gamble and Unilever are Motley Fool Income Investor picks. Energizer Holdings is a Stock Advisor selection. Unilever is a Global Gains recommendation. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.
Fool contributor Mike Pienciak owns shares of Church & Dwight and holds a May 2010 bear put spread on Energizer, but he holds no financial interest in any other company mentioned in this article. The Fool has a disclosure policy.
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