P&G has run out of runway. The 2006 acquisition of Gillette – the value of which equated to 10 years of the prior Owners’ Cash Profits (OCP) – capped an orgy of acquisition-led growth. The Company milked that strategy as much as it could until managers realized the firm had become lumbering and bloated. Now, as it completes the shedding of over 100 brands and their associated costs, P&G is searching for a sustainable, profitable path to return to top line growth.
We think P&G has two routes to this growth – Developed and Developing markets. Business development strategies are very different for each, and both must be executed perfectly to justify much higher of a stock price.
Complicating matters is the rapidly changing face of global retail (Walmart and P&G – A $10 billion Marriage Under Strain). P&G will need to navigate this revolution successfully. P&G’s portfolio of brands, which it has strengthened through recent divestitures, is a core point of leverage for its retailer relationships. Without this scale of multi-category brand leadership, P&G’s ability to negotiate with retailers would be harmed.
As part of our valuation for Procter & Gamble Company (PG), IOI’s team focused on understanding and projecting possible demand scenarios (see IOI’s Chart Book on Procter & Gamble). There are essentially two paths down which P&G must execute to return to sustainable growth:
- Winning the innovation battle in Developed Markets.
- Wining the growing middle class in Developing Markets
Let’s take each in turn and see what we believe they can bring to the revenue party.