Procter and Gamble lowered its sales guidance last week. The crown jewel of American consumer goods boasts 20+ billion-dollar brands, including Tide, Swiffer, and Dawn. Management said a strong U.S. dollar is weakening its overall business. "The U.S. dollar has strengthened significantly against essentially all major currencies around the world," CFO Andre Schulten told investors, "We forecast a $1.3 billion after-tax impact, an incremental hit of $400 million versus our initial outlook for the year."
The new outlook lowers the company's sales projections from 0-2% to a decline of 1-3%. According to the Wall Street Journal, it marks P&G's first annual sales decline in 15 years. Wall Street has already forgiven the company. After dropping about 2% on the news, the stock has now rebounded back to around $130 a share. Where it traded before the earnings call.
For the quarter, the Cincinnati-based consumer goods giant reported results all-too-common today. Price increases led to sales growth, offset slightly by stagnant volumes.
Organic sales, which account for currency changes and m&a activity, increased 7%. Price increases contributed to 9 points, with volume declines offsetting 3 points. The details are impressive. P&G was able to get price increases for 85% of its sales, with more being sold-in this fall. "We feel very encouraged by the fact that we were able to realize 9% of pricing in organic sales growth," Schulten said, "and effectively only see about a point of reduction in volume."
Russia is the gap between what P&G management reported and what they're celebrating. The company took a significant volume hit when it pulled product out of Russia—and last quarter, it finally materialized.
Procter and Gamble has long followed what could be best described as a premium product strategy. It invests significant money in marketing, trade, and product development. This allows the company to develop "better" products and then convince customers and consumers its worth more. Throughout COVID, the company pulled back marketing and trade investment—demand was so high that there wasn't a reason to spend money on marketing and promotions.
Now that society is normalizing, the company is back to executing leading-edge strategies.
Trade Promotion Management vs. Trade Promotion Optimization
Before I get to P&G's, here's a quick digression.
- Every consumer goods company is expected to provide retailers with marketing support. This is mostly done through a percentage of sales—which manifests through lower list prices for retailers—and a budget to run different price promotions. If something is on a store shelf, trade put it there.
- The management of this is called Trade Promotion Management (TPM). Given the size (billions of sales) and scope (hundreds of products per company), the entire operation is fairly complex. Most manage it by retailer, with relatively generic promotional strategies. Over 52 weeks, a typical company may develop a completely novel plan for 2 of them.
- It isn't that most manufacturers are lazy; the management is a huge lift.
- For example, many manufacturers are organized by product teams. That means they're experts on manufacturing, selling and marketing a specific product. Let's say the company sells plastic wrap and aluminum foil. There is significant overlap in both categories, but there's also a big deviation. Reynolds holds a defacto monopoly on American aluminum foil, while plastic wrap has competitors in Clorox and SC Johnson. The sales and marketing plans will be different, requiring coordination between the teams.
Coordination is hard.
The next level of maturity is called Trade Promotion Optimization (TPO). To use a sports analogy, TPM builds a basketball team by only drafting players who led their last team in scoring. TPO is building a team around various metrics: points, assists, offensive efficiency, and defensive efficiency. It's an incredible amount of work and requires a diverse internal infrastructure, but it can result in a significant return on investment.
In the consumer goods world, TPO means developing and managing detailed promotional plans, at the individual product level, across categories.