Can Procter & Gamble Make the Tide Turn?
Procter & Gamble, one of America’s consistently great companies, is in trouble. The maker of Crest, Pampers, Tide, Head and Shoulders and many other marquee brands risks becoming one more example of a giant that became a bureaucracy and fell into decline.
Cincinnati-based P&G; acknowledged trouble last week as it announced a massive reorganization that will cut 15,000 employees and write off $1.9 billion in costs associated with closing plants and changing its management system.
Its chances of returning to championship form must be rated better than even, based on P&G;’s 162-year history of changing and growing. But success is not a slam-dunk.
In the company’s favor are its new chief executive, Durk Jager, an aggressive 29-year P&G; veteran who is shaking up the company’s settled ways. Also, P&G; now has more new products in the pipeline, including a home dry-cleaning innovation and a line of Oil of Olay cosmetics, than at any time in its history.
But the onetime marketing icon will have to show that it can move fast to deliver the goods around the world. The day when P&G; could dictate to supermarkets is over. Now Wal-Mart and large grocery chains here and abroad tell the company what they want: single global prices for brand names they can ship into stores on any continent. P&G; has had difficulty adjusting to that speeded-up world.
Company sales growth has slowed to a crawl, defying P&G;’s reckless prediction in 1997 that sales would double to $70 billion by 2006. Since then, sales have crept up 3% and 4% a year to $37 billion in 1998, and that 2006 goal now looks unreachable.
Most injurious to P&G;’s pride, rival Colgate-Palmolive, led by its Total brand, took over the No. 1 spot in U.S. toothpaste sales last year, passing P&G;’s Crest, which had held the lead for decades.
P&G;’s fate is important because it has always been a model for other companies to study--the firm that pioneered the consumer economy with Ivory soap, Tide detergent, national advertising and international operations.
And P&G; is important as a model for investors--the kind of superior organization that just about every pension fund invests in, with good reason. From 1926 to 1990, the growth in P&G;’s stock price was 15 times greater than that of the average stock on the New York Stock Exchange, reports Jerry Porras, a professor at the Stanford University Graduate School of Business and co-author of the 1994 book “Built to Last,” which discussed long-lived companies.
In the 1990s also, P&G; stock outperformed the blue-chip Standard & Poor’s 500-stock index. But at the stock’s close of $86.25 on Friday, P&G;’s price is just $3 a share above its 1997 high.
So P&G;’s reorganization is a test case. If the company can regain its vigor, it will demonstrate that elephants can learn to dance--that the large multi-division company can be a successful form in global business.
More than any other reason, P&G; faltered because it clung to inward-looking ways. Its system of separate managers for hundreds of brands and a deliberate approach of testing new products first in U.S. cities, then overseas, has proved slow and dim.
Colgate stole a march in toothpaste merely by noticing that in aging America, gum disease was becoming dental enemy No. 1. Colgate brought out Total, a toothpaste aimed at gum disease, plaque, bad breath and other ills of middle-aged mouths late in 1997. P&G; reportedly had a similar toothpaste in development for six years but didn’t get it to market.
P&G;’s worldwide operations, managed through four divisions covering North America, Europe, Latin America and Asia, have proved a quarrelsome bureaucracy, Jager admitted last week. “We created a complex matrix that was a breeding ground for constant negotiation,” the Netherlands-born Jager, 56, told analysts dryly, taking the unusual step of washing P&G; linen in public.
He is changing the system. From now on, P&G; will operate globally through seven product-related groups, from baby care (Pampers and related products) to food (Pringles potato chips and other products). “These are the most far-reaching changes in the history of P&G;,” Jager said.
Investors remained unimpressed. P&G; stock fell 9% in the days after the reorganization announcement. “Big job cuts don’t impress Wall Street. Analysts want to see what else P&G; is doing to become more nimble,” says Cornelis de Kluyver, dean of the Drucker School of Management at Claremont Graduate University.
Jager, who led P&G;’s Japan operations through years of losses to achieve ultimate success, promised results early in the new century and pledged to speed innovations to market.
Today P&G; has more new products coming out than any other consumer company, says analyst Douglas Christopher of Crowell Weedon, the Los Angeles-based investment firm. Four new items are coming out this year, including Dryel, a home dry-cleaning compound that cleans clothes in a dryer.
Twenty new products will be introduced next year. And Jager said P&G; will make acquisitions to further spur its sales growth. “Unless a company grows at an acceptable rate, year in, year out, it can’t sustain its organization,” Jager said in a clear reference to demands from the investment community that companies show sales growth to earn a premium stock price.
“P&G; has been missing sales and earnings targets,” notes analyst Tony Vento of Edward Jones, the St. Louis-based investment firm. As a result, its stock seems to be on probation: P&G; shares, at more than 30 times projected 1999 earnings, still sell at a premium to that of the average Standard & Poor’s 500 company. But Colgate, Gillette and Clorox, among consumer products companies, sell at higher premiums.
Those stock ratios in effect pose the big question of whether P&G; can change and adapt to new business conditions. It’s an indication of just how competitive global business is these days that the question should be asked of once- invulnerable Procter & Gamble.
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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
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Sign of Decay
When Colgate, powered by its Total brand, passed Procter & Gamble and its Crest brand in U.S. toothpaste markets last year, it was a sure sign that P&G;’s legendary marketing prowess was weakening. Quarterly market share:
Procter & Gamble: 26.7%
Colgate: 29.4%
Sources: Prudential Securities. InfoScan Review
