The world has changed since A.G. Lafley last sat at the helm of Procter & Gamble Co.
Four years later, the consumer — who once willingly traded up to more expensive global brands — wants value and a more local point of view. Formidable competitors, such as L’Oréal and Unilever, have gained ground and nibbled away at P&G’s market share in beauty.
One week after returning to P&G as chairman, president and chief executive officer, taking the reins from his successor Bob McDonald, Lafley faces a threefold task, said Wall Street analysts. In their view, he must simplify the vision, boost top-line sales and market share by first fixing the beauty business and revving up the innovation pipeline, and find a successor to replace himself. RELATED STORY: Market Approves of A.G. Lafley's Return to Procter & Gamble >>
Lafley’s return was applauded by many analysts who view him as an inspired leader adept at simplifying complicated issues and unifying the organization with a clear-cut focus. Several analysts also nodded to McDonald’s $10 billion cost-cutting plan, but said his focus on country-category combinations was overly complex, and his mission of “touch and inspire more lives in more places” — while noble — fell flat.
“[Lafley] was really able to get to the core of a problem, simplify it and give good direction,” said BMO Capital analyst Connie Maneaty. She recalled that when Lafley first took over as ceo from Durk Jager in 2000, “he took a complicated restructuring and made it easy for the company to pull together.” She continued, “When A.G. [Lafley] came in, he said ‘We’re going to focus on the top 10 countries, the top 10 customers and the top 10 brands,’ and boom, everybody started marching in the same direction…He is not a caretaker. He’s been brought in to reenergize Procter and groom executives to succeed him.”
His return is seen as pivotal but temporary.
“From the get-go, his job is to find a successor,” said Deutsche Bank analyst Bill Schmitz, who noted that Lafley will turn 66 next month.
The Wall Street Journal reported late Thursday that P&G is planning to elevate four current senior executives to new top roles. This would potentially put one of these sector presidents in line to succeed Lafley.
Many industry observers have named Deb Henretta, group president of global beauty care at P&G, as a likely candidate to succeed Lafley. During his prior tour as ceo, Lafley took a keen interest in the category. In fact, prior to being named president and ceo in 2000, he was the head of P&G’s global beauty business. But P&G’s troubles in beauty — if they continue — could push her name down the list.
“This is her game to lose,” said Schmitz, referring to Henretta as a possible ceo candidate.
A flood of top-ranking beauty executives have exited the company in recent years, a number of which went on to take ceo posts elsewhere, including Ed Shirley, president and ceo of Bacardi Ltd.; Charles “Chip” Bergh, president and ceo of Levi Strauss & Co., and Christopher de Lapuente, global president and ceo of Sephora.
“P&G is not a meritocracy. It’s very political,” said one financial observer, referring to the exodus of talent.
However, a number of highly respected executives remain entrenched in P&G’s beauty business, including Patrice Louvet, group president, global grooming and shave care; Esi Eggleston Bracey, vice president of global cosmetics; Joanne Crewes, president of global prestige, and Marc Pritchard, global brand building officer.
While Lafley is busy combing through P&G executive ranks across the globe for a successor, he’ll also need to take a hard look at the beauty business, which analysts point out has underperformed compared with L’Oréal and Unilever.
Lafley’s job now is to boost morale, while boosting operations. “Then he needs to get into the actual results and improve the top line and market share, which go hand-in-hand. How do you do that? Through beauty. It should be a huge area of focus,” said Stifel Nicolaus analyst Mark Astrachan.
To get beauty going again, he said, Lafley may give product developers more free rein to create new innovations or to develop — or acquire — new concepts, as opposed to introducing a barrage of line extensions, as the company has done for a number of years, across Olay and Pantene in particular.
“How many lipsticks does Cover Girl need to sell to move P&G’s top line? Understandably, P&G’s management has a bias toward the biggest categories and brands, and beauty — outside daily hair care — becomes too fragmented and nichey,” ConsumerEdge Research analyst Javier Escalante wrote in a research note. “We believe that fixing Wella, Clairol and an overstretched Olay — about $2.5 billion, or 10 percent of Procter beauty sales — requires faster, less-focus-grouped innovation coupled with discipline to kill bad ideas. Essentially, getting closer to L’Oréal’s business model.”
McDonald delivered a robust pipeline of new products this year. In January alone, P&G’s hair-care business introduced 150 stockkeeping units in hair care and color, across brands such as Pantene, Herbal Essences, Head & Shoulders and Vidal Sassoon Pro Series. Olay, for its part, reformulated Olay Regenerist, and introduced a line tailored for young women, called Olay Fresh Effects. But despite the onslaught of products, sales have yet to respond. In the company’s most recent quarter ended March 31, beauty sales declined 2 percent to $4.8 billion, with organic sales declining 1 percent.
And fellow mass-market brands aren’t the only threat. As prices have inched upward across P&G’s premium tier, they’ve begun to lose share to some lower-priced department store brands, including the Estée Lauder Cos. Inc.’s Clinique, pointed out Schmitz. That’s precisely the intention of Fabrizio Freda, Lauder’s president and ceo and a former P&G veteran, who has increased TV advertising in the U.S. to pull mass shoppers to department stores. In fact, Freda’s success at Lauder has prompted some financial observers to speculate that P&G may try to lure him back to take the reins from Lafley. A spokeswoman from Lauder declined to comment. Freda’s current employment contract at Lauder is set to expire on June 30, 2014.
But Wall Street seems confident in Lafley’s ability to make noticeable improvements. “One of A.G. Lafley’s core principles is that the consumer is the most important. When the consumer in North America was asking for [premium products], he gave them that. The view is now the consumer is looking for something different, which is more value for the money,” said Sanford C. Bernstein & Co. analyst Ali Dibadj. “My sense is that Lafley will adjust the core strategy to that and be successful.”
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