Proxy Fight at P&G: Can Activist Investors Drive Effective Change?

The Wall Street Journal reports today that activist investor Nelson Peltz has launched a proxy fight with Proctor & Gamble.  No company this large has ever faced a proxy fight.  The investor seeks a board seat in hopes of driving change. Peltz has been frustrated with the lackluster revenue and earnings growth at the consumer products giant over the past several years. According to the article, "Mr. Peltz’s Trian Management Fund argues that P&G failed to capitalize on a five-year savings plan that shrank the company by tens of thousands of employees, more than a dozen factories and hundreds of brands. Trian casts doubt on whether a second, five-year, $10-billion savings plan announced by P&G last year will produce results." 

Many observers and analysts have wondered whether activist investors would push for a breakup of P&G. After all, the company does operate a number of businesses including grooming (e.g., Gillette), fabric and home care (e.g., Tide, Cascade), oral and personal care (e.g., Crest, Prilosec), baby and feminine care (e.g., Pampers and Tampax), and household items (e.g., Bounty, Charmin). However, the company already has divested several units that appeared to be somewhat unrelated to their core brands; P&G divested its pet food, battery, coffee, and potato chip businesses in recent years. Peltz has signaled that he's not pushing for further divestitures at this time. 

What's the problem at P&G?  In my mind, the company can't cut its way to enhanced long run performance.  Perhaps costs are bloated, and some efficiencies must be attained.  However, the core problem remains innovation and growth.  In the heyday of A.G. Lafley's first tenure as CEO, P&G excelled because it generated product innovations that drove robust revenue growth (consider the remarkable success of Febreze and Swiffer).   These innovations have not come at the same pace in recent years.  Moreover, customers have traded down from the premium-priced products offered by P&G to more affordable brands.  Consider the success of upstarts in the razor business, as well as the increasing success of private labels in a number of P&G categories.  

What then of the proxy fight led by Peltz?  It seems to me that activist investors can be helpful at times in forcing difficult reorganizations, cost-cutting initiatives, and divestitures that management may be unwilling to undertake.  However, activist investors are not well-equipped to help companies jumpstart innovation and revenue growth.  How will this proxy fight solve the underlying growth problem at P&G?   It won't.   The company has much more challenging work to do than simply fending off an activist investor's attempt to snag a board seat.  

P&G Overhauls Bonus System

The Wall Street Journal reports today that Proctor and Gamble has chosen to overhaul its bonus system for managers. According to the newspaper, 

"Starting Friday, annual bonuses for thousands of senior managers will be tied more directly to the performance of each leader’s specific business unit instead of being based on the company’s broader, regional operations. “We are trying to get a clearer line of sight between an individual’s responsibilities and their results and their compensation,” Chief Financial Officer Jon Moeller said this week in an interview.

P&G has been trying to reduce bureaucracy, give managers more autonomy to make key decisions for their units, and hold people more accountable for results.  This compensation system change fits with those other efforts.  You should not tie compensation more directly to a specific unit's performance unless you provide the unit manager with a sufficient level of autonomy to make important decisions.

We should keep in mind, however, that no compensation system is perfect.  Diversified firms, in particular, always face a tension between tying compensation to local unit performance vs. the results of large segments or even the corporation as a whole.   One the one hand, you want people to realize the benefits of managing their units effectively.  On the other hand, related diversifiers such as P&G want managers to cooperate with the heads of other units so as to realize important synergies.  The risk of this latest move for P&G is that managers may become too parochial, not thinking enough about how to collaborate with other units to achieve economies of scope.   

P&G Emphasizes Premium Strategy in Razor Market

Over the past few years, Proctor and Gamble has struggled with the question of whether to deviate from the premium/differentiation strategy that made it so successful during the first tenure of A.G. Lafley.  When Bob McDonald succeeded Lafley, he deviated from that strategy as he coped with consumers "trading down" to lower-priced rival products and private labels during the recession.  The moves left P&G in danger of becoming "stuck in the middle" - trying to be both differentiated/premium and low cost at the same time.   

The razor market offers an interesting example of this challenge.  Over the past few years, the company's Gillette division has seen a new disruptive threat emerge, in the form of lower-priced competitors such as Dollar Shave Club (see inexpensive YouTube marketing below).  How would P&G respond? It essentially informed customers that they could always use an older version of the Gillette products if they wanted a less expensive option.  However, Gillette chose not to come out with a new low-price product.  Now we learn from the Wall Street Journal that Gillette will push even higher into the premium space with a new high-priced technologically advanced product.   Gillette is counting on some consumers to trade up as they have many times in the past, when the firm has brought out advanced razors.   Is this one step too far, or will consumers be receptive?   It will be interesting to see.   Sometimes, firms facing disruptive threats can "over-shoot" the high end of the market, offering consumers an advanced product that actually exceeds the needs of most people.   On the other hand, going down market with a cheaper product brings its own challenges, as premium players often are not capable of also competing in the low cost segment of the market.   In a way, we should not be surprised by this move from P&G.  Lafley is back as CEO, and he was very successful with this premium strategy in the past. Moreover, the economic recovery may provide perfect timing for a move to push deeper at the high end of the market.  

Price Wars in the Detergent Aisle?

The Wall Street Journal reports that P&G is considering a less expensive version of its Tide laundry detergent again.  The company has witnessed "value" brands taking share from the premium branded products in the detergent aisle.  Several years ago, P&G tried to cope with that threat by offering Tide Basic, but it abandoned that effort as a result of consumer confusion and fears about cannibalization.  Here's an excerpt from the WSJ article: 

A decision to offer a lower-priced version of the premium brand carries the risk that buyers of regular Tide could trade down and stay there.  Indeed, three years ago P&G scrapped a lower-priced powdered detergent called Tide Basic, which was tested for about a year. P&G said consumers were having a hard time distinguishing between the bargain version and the regular priced variety. The company's concern was that regular Tide users would trade down to Tide Basic, for instance, but be unhappy that it didn't clean as well as regular Tide.

As clearly indicated from the excerpt above, P&G faces some significant risks with a decision to offer a lower-priced version of Tide.   The decision also brings other challenges though.  At the end of the article, we see a quote from a rival company's CEO.  Church & Dwight Chief Executive Jim Craigie states, "It'd be a terrible mistake, I think, if they pulled the price lever on some of their businesses.  Nobody wins a price war game."   This quote points out that P&G, as the category leader, has the ability to influence industry structure.   Launching a low-end version of Tide could trigger a price war, and thereby diminish the overall attractiveness/profitability of this category.  P&G may improve market share, but at the expense of profits for themselves and the industry as a whole.

The Church & Dwight CEO recognizes that you can influence the competition through signals and statements.  It appears that he's trying to signal to P&G that the introduction of a low-end Tide product would trigger an aggressive response by his firm.   In so doing, he may be trying to deter entry into the lower-priced segment which his firm has excelled in over the past few years.  One wonders if his firm (and others) are trying to send other signals to deter a Tide entry into the value segment.