P&G have declared the need to focus on core brands.
Procter and Gamble has already made clear its cost-cutting initiatives, which began with cutting its workforce by 9% in recent weeks. Now the consumer goods giant has indicated that lower margin businesses, such as food and beverages may be sidelined altogether. Procter & Gamble has hit the headlines in recent weeks with its job loss announcements, part of a restructuring program called ‘Organization 2005’ designed to save $400-700 million by 2004. However, Organization 2005 is more than just an elaborate name for axing jobs, the consumer goods giant is clearly intent on regaining focus in core businesses.
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Recent indications that Sara Lee will bid for the Folgers coffee brand are further signs that P&G views food and beverages as peripheral and a poor earner. Procter and Gamble has five major business areas – fabric and home care, paper, beauty care, healthcare and food and drink. Of these, paper and food and drink have the lowest return on investments. For example, food and beverages show a 14% return compared to 26% in fabric and home care or beauty care.
February’s $4 billion joint venture with Coca-Cola for its food interests, enabled P&G to offload much of the cost for supporting brands such as Pringles and Sunny Delight to its fizzy drinks partner. Despite some innovative and successful products such as Pringles, P&G’s food and beverages earn significantly lower margins due to the high marketing costs needed to compete with private labels. The tie-up with Coke has provided an ideal way to hang on to these successful brands, yet redistribute the real burden of maintaining them onto Coca-Cola. Fortunately for P&G it found a partner willing and in need of diversifying beyond its own narrow portfolio (and interested in P&G’s nutraceutical capabilities).
P&G’s situation is similar to Unilever when they decided to focus on core brands. Whereas Unilever decided to eventually narrow down their portfolio, it seems that P&G are increasingly looking to sideline food and drink entirely. However, Unilever were tempted to split into two businesses, one focusing on food and drink and the other on personal care and household items. However, it may find it harder to find good partners for other food brands such as Crisco oils and Millstone coffee, being forced to sell them instead.
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