By and  on January 30, 2012

The Procter & Gamble Co. faces a beauty conundrum that’s showing up on its bottom line.

The consumer products giant has very effectively taken smaller brands, such as Pantene and Olay, and reinvented them for a broader market, rolling out a wide variety of products at different prices around the world and pumping up volume.

The Pantene and Olay brands have been transformed into global powerhouses, but growth is no longer so easy to come by, and both brands are situated in the economically strained middle market, not the booming prestige sector.

Factor in higher commodity costs, which have offset modest sales gains, and profits at P&G’s beauty division fell 8 percent to $802 million in the second quarter ended Dec. 31. Sales rose 1 percent to $5.4 billion on unit volume gain of 1 percent, although organic sales and volume expansion logged in at 2 percent.

The business’ growth is also tilted toward developing geographic regions where prices are lower. Volume grew in the high-single digits in developing markets and decreased in the midsingle digits in richer developed nations.

In the U.S. market, P&G has been challenged for the last year, according to figures supplied by the Chicago-based sales tracking firm, Symphony-IRI Group.

“P&G underperformed across the board [not counting the relatively small fragrance category],” said Victoria Gustafson, principal of strategic insights of Symphony-IRI. “The only growth they saw was in cosmetics.”

For the 52 weeks ended Dec. 25, P&G’s sales in cosmetics grew by 2 percent, while the overall market moved ahead by 8 percent in food, drug and mass stores. P&G’s fragrance business shrank by 1 percent, which was better than the 5 percent drop sustained by the general market. In hair care, P&G had a 2 percent sales decline, compared with a 4 percent gain in the overall market. The company’s skin care sales dropped by 5 percent, in sharp contrast to the 3 percent sales advance for the category.

Overall, P&G’s total beauty business declined by 2 percent, while the market moved ahead by 4 percent.

P&G highlighted some of its second-quarter strengths. In Asia, the company’s hair care volume grew by the midteens and skin care expanded by midsingle digits. Organic shipments for prestige-priced products were up by single digits. And there were a number of gains in the blade and razor business.

Wall Street’s take on P&G’s beauty business covers the spectrum from those who see its weakness as a symptom of macroeconomic woes, to those who wonder if it makes sense to keep beauty in the P&G fold.

“I don’t think you leverage the Tide brand and the Olay brand successfully,” said Ali Dibadj, an analyst at Sanford C. Bernstein & Co. “The hope is that Procter & Gamble benefits from being big and what you see is that over the past several years, the beauty business has not benefited from that.”

Dibadj suggested P&G has overexpanded some brands. “In many instances, companies like Procter don’t continue to improve the business, they start milking it and arguably what they’ve done with the Olay brand is to essentially take two or three [stockkeeping units] and now make it hundreds of products at many different price points and that essentially milked the brand without maybe supporting the brand as much as they should,” he said.

On a conference call Friday, Dibadj said there was support for the belief that the beauty and nonbeauty businesses were “diverting in terms of growth.”

“What do you think about that argument — that it’s just too complex to manage P&G as is, and it would be better managed broken up?” he asked Robert McDonald, the company’s chairman, president and chief executive officer.

McDonald replied the company’s size was an advantage and that it is incumbent upon the management team to turn that scale into better growth.

“Improving the productivity is going to be part of it, to give us flexibility when these kinds of short-term impacts occur. Continuing to innovate, continuing to build brands,” he said.

“Performance has not been terrible,” said John San Marco, analyst at Janney Capital Markets. “Their overall beauty business is growing [by] low-single digits this year. Given how much exposure they have in Europe, that’s nothing to shake a stick at, it’s at least what their peers are doing.”

Connie Maneaty, analyst at BMO Capital Markets, said P&G’s beauty business has seen slow growth for quite some time.

“In some ways, Procter’s beauty business is a victim of its success because they took Pantene and Olay from small players in categories and they grew them to be very big businesses and at a certain point, it’s very hard to get big businesses to continue to grow,” Maneaty said.

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