Procter & Gamble plans to offset share losses in its beauty and grooming categories, among others, with an accelerated innovation program that will leverage the equity of its brands, according to President and CEO A.G. Lafley.

"We will be investing to grow share in our core businesses on our leading brands and in all our critical countries," Lafley told analysts during a May 28 session of the Sanford C. Bernstein Strategic Decisions Conference in New York.

Specifically, P&G will grow vertically - diversifying products with price points that attract new consumer segments - while also growing horizontally by turning existing customers onto adjacent products in beauty, grooming and household care.

"This means more new brands and more new products commercialized in the marketplace," said Lafley, noting the innovation pipeline is "full of new and improved products that strengthen our category and our branded portfolio."

In a highly anticipated presentation to analysts, Lafley billed fiscal year 2010 as a year of innovation. The exec said the firm expects to regain market and volume share, but the investment will weigh on its bottom line next fiscal year.

It is estimated by some in the investment community that P&G is losing share in 60 percent of its scanned U.S. businesses and in select categories in developing markets. The company also experienced a 5 percent decline in volume in its recently reported third quarter.

For P&G's fiscal 2010, which begins July 1, the firm anticipates earnings per share in the range of $3.65 to $3.80. With its fiscal 2009 EPS forecast at $3.62 to $3.67, the projected 2010 level would mark the first time in nearly a decade that the company failed to grow its earnings double digits.

Additionally, organic sales are anticipated to grow 1 percent to 3 percent "based on flat to modestly growing" markets. Sales will be stronger in the back half of the year than the first half, Lafley noted.

P&G's tempered guidance for FY 2010 reflects macroeconomic conditions such as cost inflation and currency devaluation. The company also has lost share to private-label and value brands, which have gained appeal with consumers in the recession.

"Commercializing Innovation"

Innovation is not a new priority for the company, Lafley said, pointing out that P&G spends nearly two times more on innovation than its closest competitor.

The difference is the firm's "commitment to putting even more investment and money and people, and even more focus and execution, behind commercializing this innovation," the exec said. He did not specify how much more the firm will spend.

"We're going to do it better, and we will do it at prices consumers see as excellent value," he added.

Product innovation is the "lifeblood" of P&G and "continues to be the primary driver of value for consumers or customers and manufacturers," according to Lafley. Though P&G is especially focused on revitalizing its ailing laundry business, it is looking to bring new capabilities to its oral-care and skin-care segments.

P&G's oral-care business offers a glimpse of how the firm is broadening its relationship with existing customers while bringing in new ones, Lafley noted.

Crest Pro-Health , which debuted four years ago as a $100 million brand, today is worth about $400 million, the CEO said.

The line includes toothpaste in mint and cinnamon flavor, as well as Enamel Shield and Whitening varieties. Most recently the brand launched Crest Pro-Health Night, which it says is uniquely formulated for a healthier mouth in the morning, reflecting its efforts to promote regimen usage. Crest Pro-Health rinses also are available that offer the same targeted benefits.

Crest White Strips come in 5-minute varieties - Daily Whitening Multicare and Daily Whitening + Tartar Protection - and four "intensive" treatments: Classic, Premium, Pro Effects, and new Advanced Seal. The products are powered and priced to appeal to both value and premium shoppers.

Similarly in skin care, P&G's Olay brand has fanned out to offer formulas that retail for $7 to $50, "offering the right choice to reach the full spectrum of skin-care needs," Lafley said.

"The point here is that by offering a range of price-points and product benefits, [customers] can select a combination of product performance and value that represents the best choice for them."

Realizing Potential In Emerging Markets

The largest opportunity for growth may be in developing markets, where the company commands only 19 percent of the consumer goods sector and is growing its share by half a point each year.

Growth is concentrated in three core businesses - consumer health care, beauty and grooming. "All three of these have significant opportunities to grow share and fill in white space and much of this white space is in emerging markets," Lafley said.

P&G "has only begun to scratch the surface" in developing regions, according to the CEO. "We're serving a little more than 3.5 billion of the world's 6.8 billion consumers today," and many of those consumers are still underserved, he said.

Per capita spending on P&G products in China is about $3 a year, and in India less than $1. If the firm is able to increase spending in those regions to levels equal to those in Mexico, it will generate an incremental $40 billion in sales, Lafley noted.

Representing 30 percent of P&G's overall sales, emerging markets hold promise compared with established markets due to their higher birth rates and rising disposable income, among other factors.

Through its distributor network, P&G covers about 4 million stores in developing markets and believes it can double that figure within the next five years and eventually reach 20 million store outlets in those geographies.

Lafley stressed that continual investment in the infrastructure of emerging markets is one that pays off considerably in the future.

"The growth we've experienced in developing markets and our accelerated plans for the future, beginning next year, trace directly back to the investments we made to build a strong local organization this decade," he pointed out.

Investment Community On Board

Investors seem to be embracing P&G's investment strategy as a short-term hit that will pay off for the company down the road.

In a May 11 report following a meeting with P&G management, Deutsche Bank Securities analyst Bill Schmitz noted that if P&G "gives itself enough earnings flexibility by lowering internal and external expectations to aggressively reinvest in new initiatives and regions, the first few years of the next decade could be as good as the first several of the last."

According to Schmitz, P&G is "losing at the first moment of truth (when she buys the product in the store), and without that there is no second moment." Market share losses "are a slippery slope," he adds, noting that "nipping it in the bud now is a lot less expensive than trying to take it back later."

Schmitz added that the investment in innovation could better position the company under new leadership following Lafley's retirement (¹ Also see "Susan Arnold Retires From P&G; “Architect” Credited With Rise Of P&G Beauty" - HBW Insight, 16 March, 2009., p. 11).

"For leading CEO candidate Bob McDonald, this is the best gift CEO Lafley, his executive team and the board can bestow, and the swagger we haven't seen at P&G in quite some time starts to return."

P&G's guidance could provide a much-needed boost to its stock price, says BMO Capital Markets analyst Connie Maneaty in a May 26 analyst report. The firm's stock has underperformed in recent quarters, reaching a 52-week low of $43.93 on March 9 before climbing about 20 percent around the time the report was released.

"For the most part, the PCHP companies whose stocks have rebounded have addressed the issues that have plagued their growth prospects and/or weighed on their balance sheets," Maneaty said.

She noted that similar conservative guidance and action plans announced by companies such as Estee Lauder and Avon helped revive their stock in recent quarters.

At close of business on May 28, P&G's stock price climbed 1.56 percent to $52.59.

- Eileen Francis (e.francis@elsevier.com)

P&G To Recover Eroding Market Share With Innovation Investment

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