Analysis: How will P&G's brand sale impact the region?

Procter plans to shed up to 100 brands

CINCINNATI - Procter & Gamble Co.’s decision to unload up to 100 brands over the next two years could have a big impact on the Tri-State. Whether that impact is a net positive or negative depends on who buys the brands and how fast P&G grows after the winnowing process is completed.

“My guess is this will result in a headcount reduction in Cincinnati,” said Matt McCormick, vice president and portfolio manager for Bahl and Gaynor Investment Counsel downtown.

Because P&G has a responsibility to make the best deal for shareholders, McCormick says it will look for buyers that create the most value for P&G – as opposed to employee-led buyouts or private-equity investors who want to keep business units intact.

That means the most likely buyers are out-of-town companies that will ask P&G employees to move with the business, just as J.M. Smucker Co. did when it bought P&G’s Jif and Folger’s brands, and just as P&G did when it acquired Gillette.

“What will potentially happen is just like the reverse of Gillette,” said McCormick. “If Smuckers buys it, you have the opportunity to move to Orville, Ohio. Or you don’t. That’s up to you.”

P&G spokesman Paul Fox said there will be employees displaced by the process, but it’s too early to tell how many jobs will be affected. P&G told analysts Friday that it will discontinue, sell, harvest or seek partners for 90 to 100 brands in the next 24 months, brands that lack the growth potential that the company expects from its 70 to 80 core remaining brands.

Harvesting a brand means cutting off future investments to maximize profits for as long as it survives.

MORE: P&G plans to get rid of up to 100 brands

P&G won’t name any brands as targets for divestiture, but stresses it isn’t just looking to unload businesses that fall below a certain threshold for annual revenue or profit margins.

“We’re going to focus on those brands that are operating in structurally attractive businesses that play to our core capabilities and where we have a higher percentage chance of winning,” said Fox.

P&G is likely to hire investment bankers to put together clusters of brands that will attract buyer interest and shop selected brands to targeted potential buyers. It may schedule auctions to attract private-equity firms and other investors interested in offering P&G brands as  freestanding business units.

“In this environment, there are an awful lot of financial buyers who are looking to buy businesses,” said Billy Cyr, president and CEO of Sunny Delight Beverages Co. in Blue Ash. Sunny Delight is a beverage company that P&G acquired in 1989 and sold in 2004.

Cyr is a former P&G executive who has run the 600-employee Sunny Delight company for two private-equity owners since 2004. It generates about $400 million in annual revenue and has about 100 employees in Blue Ash.

Cyr expects P&G to sell most of its divested brands to strategic buyers willing to purchase in clusters.

“They’re not going to do 80-90 individual transactions,” he said. “That makes no sense. It takes too long. It’s too disruptive.”

Because of low interest rates, Cyr thinks P&G will find some buyers willing to acquire brands and hire P&G employees to run them. And he agrees with Lafley’s stated objective to grow P&G’s core brands by eliminating weaker brands that are difficult to manage in large numbers.

“Not all the businesses are going to end up staying here,” said Cyr. “So, I’d have to believe there will be overall a reduction in the total number of employees. But the businesses that remain will be much more robust, more focused and presumably would grow faster.”

One challenge for P&G will be to cover the overhead costs that its smaller brands now fund.

“Most of these brands probably have very little dedicated staffing,” he said. “But collectively they provide revenue that supports several hundred million in overhead costs. Splitting out a quarter of a person here and a third of a person there is very hard work and ultimately some excess overhead simply gets absorbed by the remaining businesses.”

Cyr expects the brands most likely to be divested are those that rank third, fourth or fifth in a particular category.

“Is there really enough room for that much differentiation or should they simply get rid of those brands? They have some of those in laundry and oral care,” he said.

P&G Keepers?

Bernstein Research analyst Ali Dibadj distributed a list of potential “keepers” and “divestitures” to his clients Friday. His list of keepers includes:

1. Pampers – With $11.25 billion in 2013 revenue and a seven percent compound annual growth rate, P&G’s diaper empire isn’t likely to go anywhere.

2. Gillette – P&G credited its new Flexball product with growing the entire razor category in June. Gillette’s $9.3 billion business grew five percent over five years.

3. Tide/Ariel – At $8.9 billion in 2013 revenue and a six percent growth rate, Tide could be untouchable.

4. Pantene – P&G is putting lots of marketing muscle behind this $3.8 billion shampoo brand.

5. Olay – A.G. Lafley wrote the strategy that made Olay a $3.4 billion brand in 2013. So, it’s doubtful he entertain purchase offers.

6. Oral-B –The toothbrush brand has been P&G’s weapon of choice against Colgate brands in Latin America. It generated $3.3 billion in 2013 revenue and has a five-year growth rate of seven percent.

7. Head & Shoulders – Also sports a 7-percent compound annual growth rate, with $2.6 billion in 2013 revenue.

8. Always – This $2.53 billion feminine hygiene brand is the launch vehicle for P&G’s next big category entry: Adult diapers.

9. Charmin – The $2.1 billion toilet paper brand has a five-year growth rate of 3 percent.

10. Crest – This $2 billion toothpaste brand is where P&G introduces much of its innovation, including a new product announced in today’s earnings call: A Sensi Strip that relieves pain from sensitive teeth.

 

P&G Movers?

Here are 10 P&G brands that are not growing, according to Bernstein Research, which distributed a list of brands with 2013 revenue and their five-year compound annual growth rate.

1. Cheer – This 64-year-old P&G brand has been known as a “blue-magic whitener” and “all Tempa Cheer” alternative for cold-water washing. More recently, it’s been a budget detergent that generated $120 million in 2013 revenue and a five-year growth rate of minus 13 percent.

2. Prilosec – Introduced in 1989 as the world’s first nonprescription proton pump inhibitor, this little purple pill fights heartburn and generated $313 million in revenue with a growth rate of minus 6 percent.

3. Joy – Introduced in 1949, this dishwashing detergent generated $210 million in 2013 revenue with a five-year growth rate of minus 5 percent.

4. Ivory – It’s the reason they call P&G the Ivory empire, but it generated only $112 million in annual revenue with a minus 4 percent growth rate.

5. Bold – Launched in 1974 as the UK’s first low-suds detergent, Bold was a $458 million brand in 2013 with a five-year growth rate of minus 5 percent.

6. Dryel – P&G’s home dry-cleaning kit generated only $19 million in 2013 revenue with a five-year growth rate of minus 2 percent.

8. Dax – This universal washing powder is sold in the Ukraine. It generated $16 million in 2013 revenue with a five-year growth rate of minus 7 percent.

9. Londa Professional – Londa was acquired as part of the Wella acquisition in 2003. It had a five-year growth rate of minus 3 percent, generating $61 million in 2013 revenue.

10. Rochas – This fragrance brand inspired by French designer, Marcel Rochas, was acquired by P&G in 2003. It generated $42 million in 2013 revenue with a growth rate of minus 6 percent.

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