Struggles at P&G

Apparently, the heat is on Proctor and Gamble CEO Bob McDonald.  McDonald reported some disappointing sales and profit news this week.  According to the Wall Street Journal, "He said the company's sales likely fell by 1% to 2% in the current quarter from a year earlier, compared with a previous forecast of 1% to 2% growth, and said core earnings would come in at 75 to 79 cents a share, down from a previously expected range of 79 cents to 85 cents."  Investors are becoming restless and asking increasingly tough questions.

P&G clearly needs to find a way to jump start organic growth.  However, I believe investors also will begin asking questions regarding the corporate portfolio.  Does the firm need to trim some operations that appear outside the core?  For instance, Iams is a billion dollar brand for P&G, yet pet food does not represent one of the company's main product lines.   P&G focuses primarily on health and beauty as well as household care.   The US pet food market is not as consolidated as the European market.  Therefore, perhaps there may be an opportunity to find a buyer for the business.   Investors may begin asking questions about other brands too, such as the Duracell battery brand.  Does it fit well with P&G's portfolio.  Whenever a company begins to struggle and investors become restless, these types of questions will begin to be asked.

Kellogg, Pringles, and P&G

Over the past few weeks, a scandal at Diamond disrupted the firm's intent to purchase the Pringles business from P&G.   As a result, Kellogg swooped in yesterday to acquire Pringles instead.  Investors and analysts generally reacted positively to the deal.  The Kellogg stock price rose 5% on the news of the deal.  Analysts believe that Kellogg will accelerate its international growth with the Pringles purchase for two reasons.  First, many countries do not consume cereal as much as the United States.  Second, the existing snack business at Kellogg is fairly US-centric as well.  Pringles offers access to many international markets through its extensive distribution channel, as well as a product more appealing to many foreign consumers. 

While most people are focused on Kellogg today with this news, my attention has turned to P&G.  The Pringles divestiture continues a strategy undertaken by former CEO A.G. Lafley several years ago.  Lafley began to divest many of P&G's low-growth food businesses such as Jif, Crisco, and Folger's Coffee.  He refocused the firm on two categories in which it was dominant, and in which it had strong international growth prospects - i.e. health/beauty and home care/household cleaning. 

A natural question to ask:  What remaining brands might be candidates for divestiture?   I would focus on the Iams pet food business.   While the product line represents a billion dollar brand for P&G, it faces a number of challenges.  First, private labels represent strong competition in the pet food category (unlike some strong P&G categories such as razors/blades).  Wal-Mart's private label, Ol' Roy, is the top-selling dry dog food in the United States!   Second, Iams doesn't benefit from purchasing synergies with other food businesses, as some pet food brands owned by rivals do (for instance, Nestle owns the Purina family of brands, as well as a host of other businesses that procure agricultural inputs).  Third, the Iams business has not performed as well financially as many other parts of the P&G portfolio.