The Procter & Gamble Co. aims to cut $10 billion in costs by fiscal 2016.
The effort, announced on Thursday afternoon at the Consumer Analyst Group of New York Conference, comes as P&G said it is facing headwinds from slowing growth in developed markets to low-single digits, increasing commodity costs and unfavorable foreign exchange rates.
“The opportunity lies in all areas of costs,” said P&G chairman, president and chief executive officer, Bob McDonald, including overhead costs and what he called “marketing efficiencies.” McDonald said “even a modest amount of efficiencies” will help save $1 billion in marketing costs, as P&G shifts in part from TV advertising to digital and mobile strategies. On the head-count front, he noted that over the past three years, P&G has reduced the number of vice presidents and above by 15 percent.
As Stifel Nicolaus analyst Mark Astrachan wrote in a research note Thursday, the $10 billion program consists of $3 billion from trimming overhead, a figure which includes $800 million from reducing global head count by 5,700, or roughly 4 percent; $6 billion in costs of goods, and $1 billion in reduced advertising and marketing costs.
“The size of the program is significant and greater than anticipated, in our view,” wrote Astrachan. “We believe the announced cost-reduction initiative increases P&G’s earnings flexibility in coming years, particularly if weakness in developed markets persists and input cost inflation and promotional activity remain heightened. As a result, we think P&G will more consistently achieve high-single-digit [earnings per share] growth, in line with long-term targets, for the duration of the program.”
He continued, “That said, we view the decision to reduce advertising and other marketing costs by $1 billion as notable. While the company anticipates it can reduce absolute spend levels and still increase reach, frequency and effectiveness, any mismanagement could negatively impact volume growth and global market share. Admittedly, a lot hinges on competitors’ responses: It could create a more rationale environment, positive for P&G and the sector, or result in market share up for grabs, forcing P&G to respond and reducing category profitability.”
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