Procter & Gamble Co. plans to streamline its business to focus on “consumer-preferred and customer-supported” offerings by divesting or discontinuing about half of its brands within the next two years.

The firm aims to whittle down its portfolio from roughly 160 brands to between 70 and 80, President and CEO A.G. Lafley said during the firm’s fiscal 2014 fourth-quarter earnings call Aug. 1.

P&G did not identify brands it will cut. The firm will target certain brands as well as lines within brands, but will not focus necessarily on particular geographies or categories within its portfolio.

The streamlining will come from discontinuing, divesting or otherwise jettisoning underperforming products, which represent less than 10% of total sales, Lafley said. The targeted items make up less than half of the average company margin, and in aggregate, their sales and profits have declined 3% and 16%, respectively.

The firm will retain brands – including the Crest oral-care, Metamucil fiber and Head & Shoulders and Pantene hair-care lines – that are category leaders and have accounted for 90% of P&G’s sales and more than 95% of its profit over the past three years.

The core brands span the firm’s four industry segments – Global Health & Grooming, Beauty, Family Care and Home Care – and will be organized into a dozen business units, Lafley noted.

“This will be a much simpler, much less complex company of leading brands that are easier to manage and operate,” Lafley said. “This simplicity will significantly focus investment and resource allocation and enable execution,” he added.

Addressing analysts’ concerns over the scope of the streamlining, Lafley said an analysis of P&G’s portfolio indicates that “more does not drive growth, and more certainly does not drive value creation.” He noted that the firm tripled sales and quadrupled profit for its beauty and grooming business from 2000 to 2007 by offering just a half-dozen brands, including Pantene and Head & Shoulders.

“I just believe very deeply that we’re picking our spots in these industries that play to our strengths and our assets and we’re going for it,” Lafley said.

The restructuring will accelerate the consumer product giant’s ongoing initiative to cut $10 billion in costs by 2016 through a mix of productivity gains, manufacturing savings and overhead reductions ([A#05120227014]).

Playing To Its Strengths

Lafley said P&G will compete only in categories and with brands that play to its strengths. Of the firm’s core brands, 23 generate sales between $1 billion and $10 billion each, 14 bring in sales of $0.5 billion to $1 billion and the rest have sales of $100 million to $500 million.

“We will focus on leading brands, marketed in the right countries, channels and customers where the size of the prize and the probability of winning are highest with product lines and SKUs that really matter to shoppers and customers.”

The structure will make it easier for consumers to find P&G brands and will enable research and development to focus on products and technologies more “consumer-relevant and impactful,” Lafley added.

The changes also will inform the firm’s supply-chain transformation, enabling P&G to match manufacturing capacity to brand portfolio and product lines and optimize distribution. “This should enable industry-leading responsiveness and service to customers at lower costs throughout the value chain,” Lafley said.

To manage and operate the simpler brand portfolio, P&G has changed its organizational structure, including reducing hierarchy within its sales operations. A more nimble structure will allow business unit leaders to work together and directly with Lafley and Chief Financial Officer Jon Moeller, Lafley said.

Fielding questions about why P&G is pursuing the product rationalization now, Lafley said “in an ideal world” the change would have come during the financial crisis in 2007 and 2008.

“That would have been the perfect time,” said the CEO, who retired in 2010 and returned last year when former head Bob McDonald was pressured to step down. But in the midst of the recession “you don’t always have the time to think through [it] or the resources to act on a transformation of this size and scope,” he said. “I don’t see any virtue in waiting another minute.”

Lafley added that P&G already has taken measures to streamline its business since the recession, making portfolio pruning an ongoing effort. “I just want to accelerate it,” he said.

Fiscal 2014 Results

P&G expects organic sales growth in the low- to mid-single-digit range in its fiscal 2015, which began July 1, according to a same-day release. Net sales growth is anticipated to be in the low single-digit range, including a negative one-point impact from foreign exchange.

For its fourth quarter, organic sales grew 2%, including a 2-point benefit from pricing. Net sales slipped 1% to $20.2 billion, including a negative 2-point impact from foreign exchange and a modest negative impact from minor divestitures.

For its full fiscal 2014, net sales grew 1% to $83.1 billion, including a negative 2% impact from foreign exchange. Organic sales were up 3%, and net earnings grew 3.4% to $11.8 million for the year.

Health-care product sales inched up 1% to $7.8 billion. Organic sales grew 2% due to growth in oral care and personal health care.

P&G To Cut Portfolio In Half, Refocus On Core In Simplification Strategy

More from Archive

More from HBW Insight