Procter and Gamble FY 3Q17 Earnings Call Notes

Jon R. Moeller – Procter & Gamble Co.

Emerging markets contracting

“India de-monetization continued to impact consumption in that market. In Saudi Arabia, one of our 15 largest markets, a prototypical household has endured a 20% income reduction, while utility prices have doubled and will more than double again by July as government subsidies are reduced. Economic crises in Egypt and Nigeria are dramatically impacting category size and markets in Russia, Argentina and Brazil are also contracting. ”

Deprivation testing

“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.”

Biggest opportunity for saving is in raw packaging materials

“Within this strategy, the largest opportunity, about $4.5 billion of the $7 billion, is raw packaging materials. These savings will come from strategic supplier partnerships, supplier consolidation and through an overarching simplification of our SKU lineups and manufacturing platforms. We’ve established joint business plans with our top suppliers focused on end to end supply network synchronization with a goal of reducing product cost year-on-year.”

Digitizing manufacturing

“We’re digitizing our manufacturing operations and automating with robotics using, for example, collaborative robots to automate activities like palletizing, and autonomous vehicles to move materials and pallets within our operations. We see an opportunity for additional $1 billion of savings from transportation, warehousing and other cost of goods sold.”

Packaging still important even in e-commerce

“the increase in the amount of business that’s done through e-commerce does not decrease the need for superior packaging. In fact, in some ways it increases it. There are product integrity challenges that are created by the e-commerce logistics channel that we need to address. And that’s the Air Assist packaging I was talking about. That’s one of the things that it’s designed to address. There’s also kind of a new moment of truth, if you think about it, in an e-commerce purchase. There’s the first moment of truth which is on the site. There’s the second moment of truth when you open that brown box and what’s inside of it and how is that packaged. And that can be a delighter or that can be a detractor and we want that to be a delighter. And then of course there continues to be the next moment of truth which is the use of that product and it needs to perform in an irresistibly superior way. So also, 95% of the business that continues to be in bricks and mortars retail stores, that packaging is very important in terms of informing brand choice, educating, communicating with consumers, attracting her to the shelf. So I don’t see packaging as being an area that should receive less attention going forward. If anything, it should receive more.”

April is slowing a bit I don’t know what that means

“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. ”

E-commerce 5% of business total but 40% in Korea

“That’s a very interesting question. First, let me just comment on the progress on e-commerce. I mentioned earlier, 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. China is about a $1 billion business online currently. I would expect that’ll be 20% to even as high as 30% of our business within the next 12 to 18 months, so that’s moving very quickly. Korea, it’s 40% of the business today. ”

E-commerce in US skewed to bulky items

“The U.S. development in e-commerce is very different by category, with some of the bulkier and heavier products appealing to people online, so they’re not having to fill up their shopping carts with those items, baby diapers, as an example, but also items were more specialized attention. Skin care, for example, is seen as a benefit.”

Share is just as high online

“There has been a lot of talk though about kind of the other side of your question, which is 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, that we can be very effective in an e-commerce world, and our market shares currently bear that out. Our online shares, on an aggregate basis globally, about equal to our offline shares, and as I said, the growth rates, not just from a growth standpoint but also from a share growth standpoint, are currently higher online than they are offline.”

Consumers actually expose themselves to fewer brands online

“There are two kind of discussions that occur relative to the online environment, and people who prognosticate the demise of big brands in that environment refer to lower barriers to entry, and they refer to what I’ll call the land of endless assortment. And clearly, there are lower barriers to entry, which is a threat to our business but is also something we can benefit from if we’re proactive about it just as well as anybody else can. From an assortment standpoint, if you actually look at shopping behavior, a typical shopper exposes themselves to a lower, smaller assortment online than they do offline. When they go to the store, they’re exposed to what’s ever there. Very few shoppers click through to the third or fourth page of a search, and what typically shows up on the first page of a search are the more popular offerings, the larger offerings. And then there are tools, whether it’s subscription or other tools that allow us to increase the loyalty of those consumers to our brands.”

Significant decline in growth rates in Jan and Feb, rebound in March, slow in April

“What we saw, and that I do know, was significant decline in category growth rates, I’m talk about the U.S. now, in January and more significant in February with a rebound in March. And April is, by all indications, relatively soft. And I don’t know what all the drivers are of that. And we’re just going to have to see as we go forward. And as I said, that’s going to have an impact, hopefully a positive one, but it will have an impact on our results both this year and next.”