Procter & Gamble (PG) Q3 2017

Jon R. Moeller

In sum

“In the U.S., our largest and most profitable market, categories in which we compete, grew roughly 2% in the first half but were up less than a point in the March quarter. Several factors contributed to this dynamic including delayed tax returns, higher gas prices, bad weather, and what appears to be a drawdown of at-home inventory during the quarter….Foreign exchange created a three point headwind on third quarter earnings growth”

Challenges ahead unlikely to change

“Now looking forward, the external challenges we face: slow market growth, geopolitical and economic instability, foreign exchange impacts from a stronger U.S. dollar, rising commodity costs and retail trade transformation are all very real and aren’t likely to do meaningfully better in the near-term. ”

 

Reduced retail inventory in first quarter not systemic

“Retail inventory reductions had nearly a full point impact on third quarter organic sales growth…We think that the reduction in retail inventory levels was driven primarily by the consumer pattern that…occurred in January and February, and we have seen a rebuild of some of those inventory levels as the consumer came back a little bit more strongly in March. April frankly is slowing a little bit. I don’t know what that means. And you know, you have to realize we’re talking about pretty small changes on the margins. They have a big impact on our results in any one quarter, but it’s hard to look  at that and understand therefore what the future looks like. There’s nothing systemic that makes intellectual sense which would indicate why inventories should contract dramatically. Both retailers and ourselves still have significant out-of-stock opportunities to address. The last thing a retailer wants is a customer, once they’ve finally attracted her or him to their store, to not find the product that they want to buy….I expect that volatility to continue but I don’t see a systemic trend one way or the other.”

Increased online sales

“…organic sales grew 30% online in the quarter. It’s now 5% of our business, maybe it’s about a $3 billion business. It’s primarily focused, but not exclusively, in the U.S., China, and in Northeast Asia, particularly Korea..There has been a lot of talk though about…what happens to big brands, businesses like P&G in an e-commerce context, and is that good or bad? And we actually believe that it’s good, “

Side note: A new way to check product performance

“In deprivation testing, we ask consumers to score the product they currently use, say out of 100 points. We replace the product they’re currently using, typically a competitive product, with the product we’re testing and have consumers use it for several weeks. Then we give them back their original product and ask them to score it again. If their score of the original product has not changed appreciably after use of the new product, we’ve not made a significant difference in expectation or delight and therefore wouldn’t rate the new product as irresistibly superior. If they rate their old product significantly lower after use of the new product, we know the new product has elevated the level of performance they expect in the category.”