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Procter & Gamble Thoughts


It's finally gotten around to cost cutting; now we'll see if it cuts prices.

MINYANVILLE ORIGINAL When I was an MBA student at Cornell, a Procter & Gamble (PG) representative made a presentation to our marketing operations class. The only thing I remember was a small sort of suitcase that opened up wide in the middle to show eight different bottles of Mr. Clean liquid cleaner.

The purpose, as I remember, was to show the advantages of lots of market research into consumers' conscious or unconscious reactions to small packaging differences. It was like the puzzle books of the time that would show you a black-and-white drawing of some scene and ask you what subtle thing was wrong. I remember the whole class looking at two bottles trying to figure out the difference, which turned out to be that the earring on Mr. Clean had been moved to a different ear.

Obviously, P&G has had huge success over the years applying detailed analysis to consumers' buying behavior and the development of superior products, all of which takes a significant amount of overhead spending. Unfortunately those efforts resulted in missing the forest for the trees.

Management, from what I have seen, did not have any planning for US consumers so tapped out on debt that its products were going to be too pricey. No planning for the European sovereign debt bubble and its affect on consumers. in their other big market seems to have been done, either.

Closer review of the recently announced $10 billion cost-cutting plan showed that it was not as ambitious as it first seemed; $1 billion includes savings from FY12, a present value adjustment to the 2016 savings cuts of $1 billion, and $2 billion is related to achievement of a higher sales level. Overall job cuts were only 10% of the savings.

Then, in its third quarter release P&G management lowered implied guidance for the next quarter by 14% and said that it is cutting some of its latest price increases in a number of areas. There was a lot of tension on the earnings call, as CEO Bob McDonald seemingly did not take responsibility for the situation in the opinion of some sell-side analysts.

In the wake of the release and the call, at least two sell siders reduced their ratings on the stock. McDonald did say that part of the reason for the poor result is that competitors did not go along with P&G's price increases in a number of areas. With the present consumer environment and with P&G having very high-priced products in this environment (and being a market share donor in most categories because of it), why would they expect oligopoly-as-usual pricing changes? In fact, why raise prices much at all?

The stock is currently $64, down from $68. But I still think that the stock should be bought. It was important to me that this last restructuring announcement came so quickly after the inconsequential cuts announced previously. That, to me, shows that management has gotten some religion on cost cutting.

There is plenty of room for further cutting -- to lower product prices though there may be a few quarters of slippage waiting for results to show that it is needed. If consumers who used to buy product B, but cannot afford it, are buying cheaper product A, there is no reason to spend anything on a newly launched whiz-bang product C.

At $64, P&G stock discounts a 2% five-year growth rate, which is just too low. I think this stock's worth buying because management is doing something about its overhead problems. Next I'll be looking for changes on pricing.
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Position in PG
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