What’s Procter & Gamble Up To?

I am getting this question a lot since the announcement last week that P&G plans to cull approximately half its portfolio of 200 or so brands.

(Click here to see the P&G Brand List compiled by Sanford Bernstein’s Ali Dibadj.)

The news is being greeted largely as a positive. This should probably serve to reduce your confidence in the business press and securities analysts.

The question that needs to be asked (and IS on the minds of many good P&G soldiers) is “And then what?”

Offloading a bunch of brands that don’t produce Billion Dollar revenue streams or can’t aspire to global reach doesn’t “fix” the brands that do. And hopes that this move will create vast margin expansion are largely misplaced.

P&G has been in near constant restructuring for the last three or four years. Much of the “fat” has been cut and because so many of the brands likely to be sold aren’t heavily staffed or supported, the “savings” won’t be easy to count. The small size of these brands already demonstrates P&G’s effective focus on its biggest and best properties, so it’s hard to see how much distraction would be eliminated.

If anything, whatever bloat that remains on the Billion Dollar brands will stand out more starkly. The need to address root strategic issues will only become more desperate.

And what are those issues?

• A Portfolio of brands that generate most of their revenue in slow growth North America and Western Europe. While P&G has spent lots of money trying to build their business in Brazil, India and SE Asia, as well as other high growth developing countries, the lion’s share of the business continues to originate from developed countries.  While they have enjoyed success riding the GDP wave in developing countries, P&G rarely holds leading share positions in these markets and, as such, their results are often quite volatile. After years of investment, the majority of profits are still rung up by the US and a few large European markets.

• A Portfolio of brands skewed to premium price points being sold to consumers who are being pinched by poor economies and lower real incomes. In their most important markets, P&G faces both retail customers and consumers looking for every opportunity to trade down. Demographic and economic pressures like aging, a shrinking middle class, and low wage immigration are only going to make this problem worse.

• An already rich margin structure that demands higher returns on every incremental investment dollar. Storybook P&G grew large in an era when return expectations were both lower and slower. They could tolerate 10, 15, even 20 years to grow a brand like Pampers, Tide or Head & Shoulders. Spending even 5 years to grow a marquee brand seems almost unimaginable today. Simply put, the tyranny of large numbers makes it hard for P&G to play out long term opportunities even though these opportunities are precisely what’s required if they are to grow.

• A business model that relies on expensive new item introductions to carry the “buy me not the other guy” message. This creates enormous pressure to innovate in product categories where the majority of the important problems have been solved … often times, for decades! Rather than focus on increased marketing spending, stronger advertising messages or more attractive price points, P&G continues to go to the innovation well to defend and grow its big brands.

• An increasingly centralized decision making and incentive structure that hobbles the creativity and flexibility needed for P&G to win AG Lafley’s famous “first moment of truth”. Over a decade ago, P&G split their marketing and selling organizations. The split was messy, difficult and took a long time to codify.  Today, the people who call on retail customers and take orders have never been more separated from those who develop and manage the brands. This makes it extremely difficult for P&G to respond to local volume building ideas or exploit competitor missteps. It also requires an extremely complex set of control systems to manage global, billion dollar brands.

Extreme diets alone don’t fix unhealthy conditions. It is not clear how any of the strategic issues facing P&G get better because they shed a large number of smaller, “non-strategic” brands. So the question remains, “And then what?”