Procter & Gamble has cited Turkey in a profit warning. The firm has warned that profits for this quarter will be 4% lower than expected. While the Turkish devaluation will certainly have a negative effect, many believe P&G is also using Turkey to cover a wider failure to improve margins. Either way, it’s bad news for the consumer products firm, which has recently been struggling to reverse a downslide.
The Turkish lira has declined 32% in less than a week after the government allowed the currency to float freely. Many are concerned that the crisis could spread beyond Turkey’s borders, much like the panic prompted by the devaluation of the Thai baht in July 1997. P&G’s announcement offers a possible indicator that Turkish malaise could directly affect the prospects of multinational consumer product companies, which are already grappling with lethargic sales in the country. Turkey is P&G’s 12th-largest market.
In an effort to stem its expected losses, P&G has said it will immediately stop shipping all of its brands, from Pringles chips to Ariel detergent, to Turkey and raise prices on the products still sitting in the country’s stores. In the longer term, the company believes it can probably compensate for the slowdown in consumer spending that is expected in Turkey but only by cutting back on other spending, like advertising.
The worth of P&G’s warning, however, is questionable. Turkey accounts for only about $400 million of the company’s $40 billion in annual sales, so it is quite possible that the company has overemphasized the impact of Turkey’s economy on its earnings – overshadowing the possibility that the aggressive cost-cutting strategy put in place last fall has not achieved its aim of reversing P&G’s recent downslide.
P&G will again have to delay the momentum shift it has sought since June, when it underwent a major management change. As a result of the latest warning, P&G shares dropped $3.92, or more than 5%, to $71.11. Still, the harm caused by Turkey’s economic troubles may be alleviated somewhat by rebounding currencies in other overseas markets. While the euro is expected to drag down revenues for American consumer product companies by 7% in the current quarter, it should provide a boost of equivalent levels in the second half of the year.
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