Procter & Gamble (NYSE:PG) is regarded as one of the safest bets on Wall Street for many reasons. The company has been in business for 177 years, has a market value of over $200 billion, and owns 23 brands that each generate over $1 billion annually, including such household names as Tide, Gillette, and Crest. Even more impressive, P&G has paid a dividend for 124 consecutive years and raised its dividend for the last 58, making it one of the vaunted Dividend Aristocrats. Today, the company now pays a healthy 3% dividend yield.
However, beneath the surface is a company in transition, and the P&G of the future will be significantly different than the one investors have become accustomed to over the past 10 or 20 years -- and not necessarily as safe an investment. Here are a few reasons why:
Last summer, recently returned CEO A.G. Lafley announced that the company would sell off as many as 100 brands in an attempt to cut costs and focus on its 70 to 80 core brands, which make up 90% of revenue and 95% of profits. The announcement was well received by the market, which sent shares up 4.3% on the news.
The move may seem like a wise one, as underperforming, little-known brands may only be creating a lag on profits, and brands like Perma Sharp and Fekkai are unlikely to be missed, but jettisoning so many of them could mean the company is selling its next big star. After all, the growth opportunities for such well-known brands as Tide or Pampers in a developed market is limited, while a smaller brand or product has more potential for sales growth.
A lack of innovation
Related to the divestment strategy is a lack of innovation from the household goods giant. The company hasn't launched a major product in over a decade. It was long an innovation leader in the industry, with R&D investment levels as a percentage of revenue double those of its major competitors for much of the late 90's and early 2000's, but that's changed as the figure has fallen from close to 5% in 2000 to just over 2% in 2011, and that complacency is a major shift from the company's traditional strategy. Though consumers may not know it, P&G pioneered many product categories that have become necessary items over the years, such as disposable diapers. The Swiffer was perhaps the company's last groundbreaking invention, but that came out in 1999. This shift, along with the decision to sell off dozens of smaller brands, seems to signal a company content to rest on its laurels.
Lafley may be regarded as a legend for reversing a sales slump at P&G in the early 2000's, but he wasn't supposed to be here anymore. P&G's board brought him out of retirement after his replacement, Bob McDonald, struggled to drive performance following the financial crisis, but Lafley is 68 and is unlikely to sit in the executive chair much longer. His replacement is unclear at this point, but that decision may be more important than any other for long-term shareholders. P&G has reportedly narrowed the field down to four internal candidates, but the decision carries additional weight considering McDonald, Lafley's first handpicked successor, had a brief and unsuccessful tenure.
The threat of e-commerce
P&G's biggest advantage is probably its brand reputation and relationships with stores, which guarantee it prized shelf space. However, with the rise of e-commerce, smaller start-ups have a much better chance of success today than they did under the old model.
According to research group Business 360, traditional consumer packaged companies are poised to see "their competitive position erode as nimbler players capture the consumer relationship," and Sanford & Bernstein expects the share of CPG sales that take place online to go from 1% today to 25% five years from now. Amazon.com's short-lived launch of household products under Amazon Elements also shows how the category is ripe for disruption.
Dynastic brands like Gillette have been attacked by competitors such as Dollar Shave Club and Harry's, both of which use subscription models and have been quickly adding subscribers and raising new financing. In some ways, these direct-to-consumer vendors have an advantage over P&G because the heavy hitter would draw the ire of retailers if it mimicked the direct-to-consumer model.
Looking ahead, Procter & Gamble has already projected a decline in profits this year due to the strengthening dollar, and while that's a temporary problem, the above challenges may only grow as time goes by. Just as we've seen with Coca-Cola and McDonald's, yesterday's winning recipe is not guaranteed to serve up the same results tomorrow. With the competitive landscape changing quickly, Procter & Gamble's long and prosperous history is no assurance of continued success.