Which Brands Could Procter & Gamble Divest to Inject Growth Elsewhere?

Which Brands Could Procter & Gamble Divest to Inject Growth Elsewhere?

Oru_MohiuddinAnalyst Insight by Oru Mohuiddin – Senior Beauty and Personal Care Analyst.

 

 

Procter & Gamble has stated plans to divest 90-100 brands. Some brands that could potentially be divested, including Wella and Braun, have already received a great deal of publicity. However, there also continues to be widespread speculation about other brands that the company could shed. The brands chosen are likely to be in three key areas:

  • Non-core brands failing to generate incremental revenue growth for the company
  • Brands that do not align with the company’s overall growth model
  • Smaller fragmented brands with limited regional focus

Non-core brands failing to generate incremental revenue growth for the company:

Procter & Gamble’s management has indicated that brands failing to generate incremental revenue for the company are strong contenders for divestment. For example, Clairol is one of the company’s hair care brands that has been losing sales. It would thus make more sense to sell this brand in order to invest more in larger hair care brands such as Pantene and Head & Shoulders.

 

Brands that do not align with the company’s overall growth model:

This group is harder to define, as Procter & Gamble has not clarified which direction it intends to take. Portfolio streamlining was started by Unilever in 2000 with the objective of releasing resources in order to focus on core categories. This is working well for Unilever, leading to share gains across most of its beauty categories as illustrated in the visual below.

Figure 1: Unilever Sales and Market Share in Beauty and Personal Care

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Figure 1 shows Unilever’s sales and share movement in beauty and personal care product categories, against the projected absolute growth for these respective categories between 2014 and 2019. The vertical axis shows growth projections, while the horizontal axis demonstrates the advantage that Unilever has over the third leading players in terms of sales share. Bubble sizes represent company sales. While green denotes sales share gain, orange indicates share losses. The large number of green bubbles clearly illustrates that Unilever has managed to gain share across all beauty and personal care product categories with the exception of fragrances. Using Unilever as a benchmark, how does Procter & Gamble compare to this?

Procter & Gamble loses share across most beauty and personal care categories

The visual below shows the same parameters as the above chart but represent Procter & Gamble’s sales. Unlike Unilever, Procter & Gamble has been losing share across most categories with the exception of oral care and some other smaller categories.

Figure 2: Procter & Gamble Sales and Market Share in Beauty and Personal Care

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In light of Procter & Gamble’s performance during the review period, it is of vital importance that the company releases resources from less profitable brands in order to focus on its core areas. However, Procter & Gamble also needs to decide on the type of business model that it intends to adopt in order to maximise sales growth. Two key factors to consider are:

  • Future growth prospects for each category
  • Proportion of category sales to total revenue

Business model to help drive strong growth in beauty and personal care

Based on these two key factors, the categories that Procter & Gamble would benefit from focusing on are:

  • Facial care: Procter & Gamble has the highest growth projection in absolute terms in facial care in comparison to all other beauty and personal care categories in which it is present;
  • Hair care, men’s razors and blades and oral care: These categories account for a significant share of the company’s total beauty and personal care sales;
  • Baby and child-specific products: Procter & Gamble could benefit from synergies with Pampers;
  • Mass fragrances: Procter & Gamble has a presence in both mass and premium fragrances, although premium fragrances account for most of its sales in overall fragrances with a share of 85% in 2014. Premium fragrances also offer stronger prospects in terms of contribution to absolute growth in comparison to mass fragrances over 2014-2015. However, Procter & Gamble is also well positioned to benefit from growth prospects in mass fragrances. Premium and mass fragrances’ contribution to absolute growth in global fragrances over 2014-2019 is expected to be in the range of 60% and 40% respectively. Latin America is notably projected to contribute over 80% of the projected absolute growth for mass fragrances in these years. Procter & Gamble meanwhile generates nearly US$10 billion in sales from Latin America and could thus benefit from strong growth prospects for mass fragrances in the region. Competitive barriers are also lower for mass fragrances in the region, as fewer multinationals operate in the category. Furthermore, Avon is the leading player in mass fragrances in Latin America but is losing share. Procter & Gamble could thus capitalise on Avon’s share decline. There is, however, room for rationalisation in Procter & Gamble’s mass fragrances portfolio globally. For example, Procter & Gamble could benefit from divesting celebrity fragrances that have not been performing very well;
  • Deodorants: Procter & Gamble could further leverage on mass fragrances to drive growth in deodorants. Absolute growth projections for deodorants are over US$3.5 billion over 2014-2019, with Latin America being expected to contribute over 60% of this projected absolute growth. Given Procter & Gamble’s strong position in Latin America, the company thus also stands to benefit from growth prospects in deodorants. However, a challenge is posed by Unilever controlling nearly 35% of deodorants value sales in the region. Procter & Gamble could however find an opening by extending some of its mass fragrances brands into deodorants, including Puma and Seiva de Alfazema, which is focused on Latin America. Furthermore, nearly 60% of absolute growth in deodorants is expected to come from deodorants in a spray format, which is good news for Procter & Gamble.

Categories that Procter & Gamble would benefit from exiting include:

  • Premium fragrances: This category is more competitive in comparison to mass fragrances. In addition, growth projections for premium fragrances are lower than those of facial care over 2014-2019. Procter & Gamble could thus benefit from prioritising facial care over premium fragrances. The company’s two strong brands Dolce & Gabbana and Hugo Boss would also be likely to sell at a high premium;
  • Colour cosmetics: Procter & Gamble could also consider exiting this category, which accounts for a smaller proportion of the company’s total sales and has lower growth prospects in comparison to facial care. The company has two strong brands, Max Factor and Cover Girl, which could help the company to sell its interests in this area at an attractive price.

In order to maximise facial care sales, it will also be necessary for Procter & Gamble to develop a presence in premium facial care, as growth in developed countries will be driven by this price band. Procter & Gamble owns SKII, which should benefit the company, but this is an Asian brand. The company should look to acquire a Western brand in premium facial care. Selling its interests in colour cosmetics and premium fragrances could help Procter & Gamble to generate sufficient resources to buy a suitable Western brand and thus fill the gap in its premium facial care portfolio.

 

Smaller fragmented brands with limited regional focus:

It would make sense for Procter & Gamble to sell its brands in colour cosmetics and premium fragrances, in addition to its unprofitable brands. However, Procter & Gamble also owns a number of smaller brands with a limited regional presence. These exert pressure on the company’s resources but returns are likely to be lower in comparison to those gained by investing in its larger brands. Unilever also had a fragmented brand portfolio prior to 2000 but the company divested many smaller brands, aiming to have fewer brands with a wider regional presence rather than numerous regionally-focused brands. This strategy benefited Unilever and Procter & Gamble would also benefit from adopting a similar strategy.

List of potential brands to be divested

Based on the above assumptions, brands that Procter & Gamble could divest are listed in the table below:

Figure 3: List of Potential Brands to Be Divested by Procter & Gamble

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This article has been published by Euromonitor 

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