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Small brands, digital strategy an issue for P&G, rivals

Since Nelson Peltz's Trian Fund Management LP began its proxy fight with Procter & Gamble Co. in July, the fund has argued that P&G's big brands are a big problem.

Trian, which is aiming to add Peltz to P&G's board of directors in a shareholder vote at the company's annual meeting Oct. 10, contends that a lack of innovation within P&G's decades-old brands has caused the company to lose market share. Among other remedies, Peltz has urged P&G to add smaller brands to its portfolio, including local labels and ones that appeal to younger consumers, as well as look for new ways to sell the company's products online.

While an S&P Global Market Intelligence analysis does show market share losses in the last decade for some of P&G's key brands — such as Olay beauty products and Gillette shaving razors — others, such as its Oral-B and Crest brands as well as Head & Shoulders shampoo, have held steady over the same period. And although industry experts agree that Procter & Gamble should nurture small brands and look to e-commerce to remain competitive, many say its rivals, such as Anglo-Dutch firm Unilever Plc and paper products maker Kimberly-Clark Corp., could benefit from taking similar advice.

"They're not really criticisms of Procter & Gamble," Ken Cassar, principal analyst at San Mateo, Calif.-based e-commerce research firm Slice Intelligence, told S&P Global Market Intelligence in an interview. "They're criticisms of big [consumer goods] companies" as a whole, he said, adding that Peltz's chiding of P&G could be applied with "equal veracity" to its rivals.

By sales, P&G is the world's largest consumer goods company, with $67.29 billion in revenue during its 2017 fiscal year, according to the company's SEC filings. By contrast, consumer goods sales during Unilever's 2016 fiscal year totaled $35.92 billion — a figure that does not include revenue from food products, a business in which P&G does not compete.

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Generating those billions in sales are some the world's largest consumer brands, many of which have lost market share to smaller brands in recent years. As competitors such as Unilever's Dollar Shave Club and Harry's emerged with mail-order subscription services for men's razors and shaving supplies, for example, P&G's Gillette has lost ground. By its own admission, the company's share of the razor market fell to 65% in 2015 from 70% in 2014.

But P&G is not alone in continuing to develop and promote its big brands. Despite Unilever's 2012 purchase of Dollar Shave Club, for instance, the company said in its 2016 annual report that it plans to focus its research and development efforts on "global brands at scale," with regional adaptions of those brands and local labels as secondary priorities.

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In response to P&G's market share declines, Peltz has argued that the Cincinnati-based company needs to create or buy small brands that appeal to millennial consumers.

"They want a brand with emotion, a brand that has a story behind it," Peltz said during a conference call with investors Sept. 11.

In response, P&G executives have said that the company has used its major brands to introduce new products, such as individual-load laundry soap packets sold under Tide PODS. The company has also signaled that it may be prepared to make acquisitions after divestitures in recent years.

Small brands, especially those that promote their use of high-quality ingredients or environmental sustainability, are attracting attention from consumers and larger consumer goods firms, Slice's Cassar said. Smaller firms such as The Honest Company, founded by actress Jessica Alba, have carved out such a niche selling diapers, skin lotion and other products made using natural ingredients, he said.

Such brands could appeal to P&G since growth at some of the company's oldest, biggest brands "may have reached a share 'ceiling,'" Barclays analyst Lauren Lieberman wrote in a Sept. 12 research note.

As market share growth at the big names has shrunk, so has the price gap between major brands and their smaller, local counterparts, analysts at consumer research firm Kantar Worldpanel wrote in a May 2017 report. That makes it harder for makers of major consumer brands to convince customers that their products are of a better quality than their smaller competitors.

"No longer does being a global brand automatically command a price premium," the analysts wrote.

Where customers buy their packaged goods is just as important as what they are buying, Slice's Cassar said. In a Sept. 6 report advocating a range of changes at the consumer goods firm, Trian said P&G needs to revamp its digital strategy, arguing that e-commerce "has leveled the playing field for brands of all sizes."

That is particularly true on the website of Amazon.com Inc., Cassar said, adding that many smaller brands have grown sales by selling through the retailer's Marketplace platform.

"Figuring out how to work with Amazon as effectively as possible is probably priorities one, two and three," Cassar said.