P&G Beauty Sales Fall; More Innovation on Deck

Personal care giant reported on Thursday that the segment’s net sales declined 7 percent in the first quarter.

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For all its glamour and promise, the beauty business is a thorn in Bob McDonald’s side.

This story first appeared in the October 26, 2012 issue of WWD.  Subscribe Today.

Procter & Gamble Co. reported on Thursday that the segment’s net sales declined 7 percent in the first quarter. Beauty’s organic sales dipped 2 percent, while organic sales of the company’s remaining four business units grew in the range of 2 or 3 percent.

McDonald, P&G’s chairman, president and chief executive officer, aims to stem beauty’s sales slide with a full pipeline of what he refers to as “discontinuous innovation,” or products designed to create new categories of growth.

Over the last year in particular, a number of Wall Street analysts have criticized McDonald for what they see as a dearth of innovation at P&G. McDonald responded to their concerns during the company’s earnings call on Thursday by loudly touting P&G’s upcoming launches.

“We are in the early innings of our innovation program,” McDonald told analysts, adding that an onslaught of new products will be on store shelves by January, backed by increased marketing spending. The launches are part of the company’s previously announced 40-20-10 plan, where P&G will focus on its 40 largest businesses, which account for more than 50 percent of sales; 20 top innovations, and 10 most important developing markets.

In beauty, new products include the restaged and reformulated Olay Regenerist, a line tailored for young women called Olay Fresh Effects and the “superpremium” priced Pantene Expert Collection. The collection is one of a host of new products intended to reverse Pantene’s share troubles. “In the U.S., Pantene’s share has begun to stabilize, and our most recent launches are performing well,” said McDonald. “We are investing behind our core brands, and we have a full portfolio of innovation this fiscal year that will strengthen throughout the year.”

As the innovation pipeline is churning, P&G is also focused on wringing out $10 billion in costs by 2016.

“We’re making strong progress against our $10 billion plan, and we will not stop there but we’ll not compromise growth in the process,” said Jon Moeller, P&G’s chief financial officer. “Our endeavor and our job is to get this balance right.”

As part of its cost-cutting efforts, P&G trimmed 1,300 jobs in the quarter to bring the total reductions to 3,300. It expects to cut another 900 posts by the end of the month, and plans to have completed a total of 5,700 reductions by the end of the fiscal year.

The company also has identified, but has yet to announce, a senior group president as its productivity czar. The role of global officer of productivity and organization transformation will report to McDonald.

Analysts welcomed the emphasis on cost-cutting. During the call, Sanford C. Bernstein & Co. analyst Ali Dibadj said, “We’re very happy to hear you found religion in cost-cutting.…It’s almost raining cost-cutting, which is good news.”

The company also said its regaining its footing in certain markets, reporting that it held or gained market share in businesses representing 45 percent of sales globally and 60 percent of sales in the U.S.

In a research note Thursday, Deutsche Bank analyst Bill Schmitz called those gains “a sequential improvement but still not good enough.”

The company said while it continues to gain ground in developing markets, which account for 38 percent of P&G’s business, it has seen modest slowdowns in large markets such as China, Russia, Turkey, India and Brazil. “We expect the innovation and marketing plans we have in place for the balance of the year will help to further accelerate share and sales growth despite slower market growth,” said Moeller. “We’re currently forecasting 8 to 9 percent organic sales growth in developing markets for the fiscal year.”

The company’s earnings during the quarter from continuing operations were $2.85 billion, or 96 cents a diluted share, down from $3 billion, or $1.01 a share, in the year-ago period. Net sales declined 4 percent to $20.74 billion, from $21.53 billion, due in part to the negative impact of foreign currency exchange. Organic sales gained 2 percent.

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