Proctor and Gamble

Could Procter & Gamble be the next Kodak?

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CINCINNATI — What’s next for Procter & Gamble?

Like every corporation ever formed, P&G has to adapt or die, or maybe divide, to survive.

More than five years into a turnaround, P&G executives have bet the company’s future on a plan to sell off a bunch of small brands to refocus the business on its 65 top-selling labels, including Pampers diapers and Tide detergent. For the last two years, executives urged investors to be patient while the company cut away more than 100 brands they didn’t want.

But now that the company is smaller, it needs to get back to growing again – or risk the wrath of Wall Street.

P&G is not alone among major companies that have struggled to grow amid a sluggish world economy since the Great Recession. And some, such as General Electric, Hewlett-Packard, Kraft, Dow and DuPont, have been forced to take even more drastic steps of larger asset sales or breakups.

CEOs and boards of directors are obligated to scratch and fight. But options get more limited when growth stalls and competition intensifies amid stagnation. No one wants to become the next Kodak.

Investors are waiting for the next several quarters to see if P&G’s changes deliver the promised results: A less sprawling, more focused company whose growth is powered by large brands that are “irresistibly superior” as pledged in April by a top executive.

P&G executives say superior products are key to the next phase of their strategy. Cutting back brands was a tactical retreat. But new and improved products are part of their offense to win. By cutting other costs and simplifying the business, P&G can channel more attention and money to its leading brands that will see refreshed offerings that drive sustainable growth.

“We’re as impatient as anyone to accelerate top-line growth and get back to our long-term target rates,” CEO David Taylor told Wall Street analysts in November. “But we want to get there and sustain it.”

Waiting in the wings if things don’t go according to plan? A New York hedge fund with a track record of pressuring corporations to cut costs, sell assets and split apart has early this year taken a $3.2 billion stake in P&G.

Of course, Procter & Gamble has been here before.

The current turnaround strategy is from the same playbook that P&G used to rebound spectacularly at the start of the millennium.

In 2000, P&G’s sales growth was slowing and the company was reeling from an aborted acquisition to become a big player in the pharmaceutical industry.

Then new CEO A.G. Lafley looked at the company’s brand portfolio and decided to slash slow-growing food brands, such as Crisco shortening and Jif peanut butter, and reinvest in its stronger personal care products. Under Lafley’s original tenure as CEO, the company expanded its beauty business, made its largest-ever acquisition (Gillette), and grew organic sales a robust 5% on average from 2000 to 2009.

Lafley stepped up P&G’s current turnaround efforts after returning in 2013 following the retirement of CEO Bob McDonald. The big divestitures were Iams pet food, Duracell batteries and a raft of beauty brands, such as CoverGirl makeup, that management deemed slow-growing and a bad fit for the company’s core businesses.

Still, P&G is a larger company than it was during its previous turnaround. Company executives have said progress won’t follow a straight line and there will be volatile quarters.

Barclays analyst Lauren Lieberman wrote to investors on May 12 that P&G has made “significant progress” with its turnaround efforts, but results were “taking time to materialize.”

“We believe it will take considerable time for strategic and organizational changes being made to translate into a stabilization of market share and renewed sales growth,” Barclays analyst Lauren Lieberman wrote last month after P&G reported slowing sales in its latest quarter.

Besides focusing on P&G’s biggest, most successful brands, the company is using another page from the Lafley playbook: Focus on growth in your biggest markets, too.

P&G has also been working to fix its business in China, its second-largest market after the U.S. where it does more than $5 billion in business. In recent years, the company botched its product lineup there offering too many cheap products. While the Chinese economy has cooled, the company miscalculated the still strong demand for upscale products.

To address that, P&G executives have high hopes for a new premium diaper being launched in China in August.

Some observers bemoan a lack of dazzling innovations in recent years. But a brand new hit product, such as Swiffer or Crest Whitestrips, may not be enough to turn around a $65 billion behemoth like P&G. (Eighteen years after its introduction, Swiffer still hasn’t crossed the $1 billion sales mark. A new hit product won’t quickly generate $1 billion to $2 billion in additional company sales needed to return P&G to Wall Street’s good graces.)

Still, P&G has reaped strong sales and market share from recent innovations. Tide Pods has popularized unit-dose washing, which is now a $2 billion business. Always Discreet, a more appealing product than adult diapers, has resonated with female consumers and has increased the category’s growth rate. Sales of Downey Unstoppables are strong. Pampers has grown sales by widening diaper sizes for larger and even the smallest babies.

Speaking at the company’s “Analyst Day” event in November, CEO Taylor noted P&G transformed the auto air freshener market over six years after it rolled out Febreze Car, noting the category doubled to $500 million in the U.S., of which P&G now has a 45% share.

“How many of you had a Christmas Tree hanging from your rearview mirror? A week later, they didn’t work,” Taylor said. “It illustrates what happens when you come with a product that solves a dilemma.”

Selling some of its brands and thousands of job cuts have freed up cash for the company to reinvest.

The company has eliminated 34,000 jobs in the last five years through a combination of brand sales and waves of buyouts that started in 2012. P&G has sold or shuttered 17 plants in five years and slashed more than $10 billion in costs over the last five years through jobs and other cuts.

But P&G hasn’t reaped all the windfall it hoped from lower costs and a simplified business. The culprit: foreign exchange.

Worldwide economic woes and sagging currencies from the Brazilian real to the Japanese yen have effectively wiped out $9 billion in total sales in the past two years. With nearly 60% of its sales outside the U.S., P&G is one of the 20 most vulnerable Fortune 500 companies to foreign exchange.

P&G’s Taylor has urged shareholder and Wall Street analysts to have faith in the steps the company has taken and urged them to be patient for the changes to sink in.

But ordinary and institutional shareholders have been listening to those assurances now for five years from three different CEOs. Bernstein analyst Ali Dibadj says P&G’s turnaround is lagging and the company should consider splitting apart.

“We would like to see more financial progress… we expect to see over time that the company stops losing share, which accelerates the top-line,” Dibadj wrote to investors last month. “Nonetheless, this may deliver slower progress than a breakup. We continue to encourage the board and management to consider this option seriously.”

Representatives of Nelson Peltz’s Trian Fund Management have not disclosed their plans for its $3.2 billion stake in P&G, nor has the firm published one of its famous “white papers” of unsolicited advice on how to maximize shareholder value.

But the firm frequently targets down-on-their-luck companies and often suggests cuts and even breakups.

In her note earlier this month, Lieberman sensed “a greater sense of urgency” at P&G. While she indicated Trian may work with P&G with suggestions for its turnaround without seeking a company split, but also added sluggish third quarter results don’t help.

“We do believe Trian thinks the company may not be moving fast enough,” Lieberman wrote.

Still, P&G’s 180-year-old story is far from over. There are other cards to be played. There are a lot of scenarios that could play out.

But the company is now facing pressure like it has never seen.

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