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P&G: Two product wonder

Nov 20, 2000

Procter and Gamble Hygiene and Healthcare (PGHH) is the 65% subsidiary of Procter & Gamble, USA, a US$ 38 bn consumer products major. The Indian subsidiary is the market leader in the anti-cold healthcare (Vicks) segment and feminine care (Whisper sanitary napkins). The company being the least cost producer of Vicks Vaporub among P&G facilities worldwide is the sourcing base for all P&G subsidiaries in Asia. To lend focus to its business, PGHH consciously decided to be present only in two products viz. Vicks and Whisper. Thus it exited from the shampoo segment by selling Mediker (anti-lice shampoo) to Marico Industries for Rs 100 m. Realising that it cannot match the distribution strengths which compatriot Hindustan Lever (HLL) possessed, it truncated its distribution network and signed a distribution agreement with Marico for Clearasil, Old Spice, Camay range of soaps and Ariel detergent bar. PGHH also terminated its manufacturing agreement for shampoos with P&G Home Products, its parents' 100% subsidiary.

P&G's strategy has revolved around premium positioning of both its product categories. In a sense, the company has been focussing on margins (value) rather than volumes. But competition from products such as Dcold and Smyle has impacted the sales of Vicks cough drops and forced the company to increase ad spends. The company’s ad spend has consistently been on the rise. In FY99, PGHH advertisement expenditure as a percentage of turnover was 6.7%. In FY00, it increased to 9%. This has put pressure on the company’s margins.

The anti-cold healthcare segment registered a marginal 1.5% sales growth overall in FY00, with Vicks maintaining a 40% hold on this segment. But in sanitary napkins segment, Whisper continues to be the market leader with a 50% share despite the onslaught of cheaper products from competitors like Johnson and Johnson and HLL. Sales in this segment registered a 2% growth during FY00.

Given the company's clear strategy on focusing on two products, as also its premium positioning, the company is better placed than most FMCG companies to clock double-digit growth figures both in its topline and bottomline in the medium term. In the long term however, P&G's two-product focus might become a bane as competition picks up. To keep competition at bay, the company will have to keep increasing its ad spends, which in the long term is negative. There are also concerns regarding its parent's two 100% subsidiaries in India.

The stock trades at a P/e multiple of 18 times its FY00 earnings, which look reasonable given the company’s dominance in its current businesses and the margins it earns.

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