Procter & Gamble announced somewhat disappointing earning this week. While fourth quarter revenue grew by +4.7% to $18.9 billion, profit fell from $2.5 billion to $2.2 billion, a decline of -11.3%. The company’s stock fell by over $2 per share due to the news.
P&G executives explained that the weak results were due to an increase in price promotions and marketing spending. Apparently, P&G spent heavily and protected share and revenue but at the expense of profit.
The Financial Times quoted P&G CEO Bob McDonald stating “Our new initiatives that are premium priced continue to do very well, and I would say that they appeal to the people with jobs. At the same time we also see…consumers without jobs…trade down. I frankly expect that to continue.”
P&G faces a very difficult branding question. How should the company respond to an economy where some consumers are doing well but many more are struggling economically?
In recent years P&G has focused on big, premium brands, generally one main brand per category. In the United States, for example, P&G has Crest in dental care, Tide in cleaning and Pampers in diapers. This approach works well when most people can afford the premium brand and are willing to pay.
As the economy weakens, however, this strategy runs into problems; many people are no longer able to pay for the premium brand. This raises big questions:
-Should P&G simply give up the more price-sensitive buyers? This would lead to significant share loss.
-Should P&G increase spending and reduce promoted prices in a bid to hold onto share? This approach hurts profits, as this week’s results demonstrated.
-Should P&G try to reach both groups of consumers with the same brand through the use of products like Bounty Basic? This seems like an elegant approach but it might dilute the brands. It certainly makes it easier for consumers to trade down.
-Should P&G promote multiple brands, each tailored to people at different economic levels? This would be a big shift from P&G’s recent strategy.
These are difficult questions. Importantly, none of the options is particularly appealing. If the economy continues to struggle, P&G and other consumer products companies will face some tough choices.