Victim of Its Own Success: Why P&G Needs a Turnaround Plan

Procter & Gamble (PG), the world's biggest advertiser, increased its ad budget 17.7% last year to $3.1 billion. Yet its sales over the last quarter were flat, up just 1.5 percent at $21.4 billion in Q4 2010 (the second quarter of P&G's fiscal year.) P&G's Death Star-sized ad budget is, in fact, damaging the company's profitability: net income was down over the last three and six months (to $3.3 billion and $6.4 billion, respectively) while selling costs were up in both periods.

The phrase "SG&A as a percentage of net sales increased" occurs six times in P&G's last 10-Q filing, and on five of those occasions "higher marketing spending" is blamed as the cause.

The global economy is recovering. P&G ought to be growing revenues while keeping a lid on the expenses required to obtain those sales, thus making higher profits. Yet P&G appears to be failing to take advantage of a rising economic tide. As the advertiser that all other advertisers watch, this is cause for concern.

There are two possible reasons P&G is failing to get its act together:

P&G is stuck on the wrong side of the digital media revolution. P&G is famous for its digital marketing innovation. The Old Spice Guy campaign is hailed worldwide as a model for how to use digital media to reinvigorate and promote packaged goods, the most traditional and conservative of all the ad categories. Yet Old Spice is really an exception that proves the rule. What's the online presence of Tide? Have you downloaded a Febreze app? When was the last time you checked out a viral video for Dawn? The problem is that outside the supermarket and the kitchen cupboard consumers don't spend a lot of time thinking about house cleaner and soap. Packaged goods don't drive a lot of search traffic. At the same time, these products are used by everyone. Toothpaste, soap, shampoo, toilet paper -- it's hard to get through the day without using a P&G product. So P&G must reach everyone with its marketing, and that means paying for exposure in old fashioned, expensive, old media. Old Spice Guy may be the darling of the web, but his TV commercials still run on cable every night.
P&G is stuck on the wrong side of commodity price inflation: P&G charges a premium price, compared to competing brands, for its products. The company believes its brands are the best, it wants to be No.1 in every category, and it wants to charge more for that positioning. But the price of oil and food are going through the roof. The phrase "higher commodity costs" occurs eight times in its most recent earnings release. P&G's goods are staples, but it is stuck asking consumers for more money in a world where many shoppers -- particularly outside the U.S. -- are searching for cheap food. Again, to justify those prices, P&G must keep its foot on the floor in terms of advertising, giving consumers new stories about its brands -- and crushing margins in the process.

Combined, the two factors leave P&G a victim of its own success: P&G is unable to stop doing the two things -- advertising and raising prices -- that both made it the standout consumer marketer on the planet and now are hurting its bottom line. Worse, these problems have been around for a while and P&G shows no signs of addressing either of them.

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