By and  on October 9, 2012

Bob McDonald defended his record at Procter & Gamble Co.’s annual shareholders meeting Tuesday morning while his biggest critic — activist investor William Ackman —wasn’t even in the room.

Last week, Ackman loudly criticized the company’s performance and that of McDonald, its chairman, president and chief executive officer, calling P&G “a very fat and bloated company.”

Ackman’s hedge fund, Pershing Square Capital Management, controls 1.1 percent of P&G’s stock, and the investor is pushing hard for change at the $83.7 billion company, including within the c-suite. The ownership structure of P&G seems fragmented — with Vanguard Group Inc. as the largest institutional investor at 4.55 percent, as of June 30 — and therefore it may be difficult for Ackman to gain a point of leverage.

McDonald’s remarks at the annual meeting Tuesday seemed aimed at Ackman’s concerns, as he sought to assure shareholders about strategy at P&G, the world’s second-largest beauty company after L’Oréal.

“Our plan, as you can see, is decisive, simple and focused. Grow our core and win with innovation fueled by productivity,” McDonald told shareholders. “It’s a plan that has the support of our board of directors, the commitment of our leadership team and the full engagement of Procter & Gamble people all over the world.”

He added, “It’s a virtuous cycle of reinvestment, growth and shareholder return.…This model has been working at Procter & Gamble for generations, but the model itself doesn’t guarantee our success. We have to execute it consistently across the business and we have to do so with discipline. We recognize the need to improve performance and we are working hard to do that.”

He reiterated his 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. The plan, he said, will help P&G grow organic sales 1 to 2 percent faster than the market. At the same time, the company is working to wring out $10 billion in costs by 2016.

McDonald also trumpeted what he sees as P&G’s many successes, including its portfolio of 25 brands each with sales of more than $1 billion, which he called out is three times the amount of its closest competitor. He noted that those billion-dollar brands generate between $1 billion to $10 billion in annual sales apiece. McDonald also called out P&G’s beauty business, calling it “the largest and most profitable beauty and grooming business in the world.”

P&G’s beauty and grooming business, which includes razor blades, totaled $28.66 billion in fiscal 2012. According to Beauty Inc’s annual ranking of the top 100 beauty firms, in 2011, P&G’s core beauty business — grooming and ancillary products, like razors and deodorants, excluded — was second at $20.7 billion in size, behind L’Oréal at $28.33 billion.

So far, it isn’t clear if Ackman’s issue with P&G includes the beauty business. But Wall Street analysts already have the category under a microscope.

“Beauty has clearly been one of the areas of underperformance for Procter and fixing that business is of extraordinarily high importance,” said Sanford C. Bernstein & Co. analyst Ali Dibadj. “Some of that has to do, in my mind, with pricing. Some of that has to do with marketing. Broadly, it has to do with focusing on a business that Procter is not legacy wise known to run well. That’s the job of Deb Henretta,” said Dibadj, referring to the company’s newly installed global vice president of P&G Beauty Care.

Stifel Nicolaus analyst Mark Astrachan said of P&G’s beauty business, “It’s not where it needs to be.” He called for more innovation by way of new products and new brands, perhaps even obtained through acquisition.

P&G has long been criticized for introducing too many stockkeeping units across its marquee brands, including Olay and Pantene. The company has struggled to find the right formula for its more than $3 billion Pantene business, which has been relaunched and retooled several times in recent years. This November, the brand will introduce Pantene Expert Collection, which is comprised of two sublines — AgeDefy and Advanced+ Keratin Repair — and fronted by Courteney Cox. But the promise of more products has left some analysts unimpressed. Astrachan said, “Seems like [Pantene] has a lot of sku’s already.”

Caris & Co. analyst Linda Bolton Weiser has called for a more aggressive new product lineup and cost-cutting plan. “McDonald’s two biggest missteps as ceo, in our view, were to allow the company to lag in ongoing cost reduction/productivity and in category-expanding innovation. The two things combined almost guarantee market share losses, which is what has happened,” said the analyst in a recent research note.

Although debt analysts see in P&G a very strong company with a solid positioning, beauty has been a recent trouble spot. In the beauty segment, Head & Shoulders, Olay, Pantene, SK-II and Wella all pull in more than $1 billion in sales each. While P&G has shown in the past it can move the sales needle — for instance, driving Olay’s sales past the billion-dollar mark — management is also closely attuned to its bottom line.

The beauty division made up 24 percent of P&G’s sales last year, but accounted for only 22 percent of the firm’s net earnings.

“There’s something in that beauty business that’s not doing well — it should be a larger contributor to net earnings than it is,” said Grace Barnett, a debt analyst at Fitch Ratings, who covers consumer goods companies, but does not rate P&G.

“In mass, they’re in the higher price portion of mass,” Barnett said, referring to it as “kind of a no man’s land.”

And the other leading players are coming hard.

“The competition doesn’t seem to be afraid of doing whatever promotional activities they need to attract the consumer,” Barnett said.

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