The above graph shows the
relationship between the inflation in the US economy from 2008-2017 and the
rate of the unemployment in Procter and Gamble (P&G)
Discovered by AW Phillips,
the Philips curve shows the inverse relationship between inflation and
Unemployment in the economy. Here, the inflation of the economy is taken and
the unemployed in regard to Procter and Gamble is taken into consideration to
plot a Philips Curve.
Policy makers believe that
the trade off between Unemployment and Inflation can be exploited. Out of 10,
7%inflation would mean 3% unemployment. And 6% inflation would mean 4%
If Aggregate Demand rises, it
would lead to
An increase in labor,
which would then lead to
Increase in wages
due to the scarcity of workers and their increased power of bargaining.
increase, cost of production increases leading to a increase in higher price of
the product which falls back on the end consumer.
The consumer ends
up paying the increased cost
The US economy saw a Deflation (also termed as Great
Depression) happened in the year
2009; it was caused by the weakness of consumer demand. While some may think
that lower prices are good but it is an extremely destructive force that can
hit the economy. Cutting down prices is the way for the company to cope up with
the decrease in demand, which also results in laying off people from the job.
P&G’s Strategy to overcome the crisis
P decide to make three
critical choices looking at the Macroeconomic state of the country
Since there was a
cash crunch in the economy, the company decided to push their energy towards
cash and cost management, which was done by increasing the prices.
To maintain AA
credit rating P temporarily reduced its share repurchases for the year,
they only repurchased $6 billion in stock and guaranteed a return of more than
100% to their shareholders through a combination of dividends and share count
focus on the businesses that have the maximum revenue generation, which is
Beauty and personal care business, generation about 60% of the sales of the
business. Also, investing heavily on consumer and market research to expand the
customer base and provide the right product to the target customer base.
presence in developing markets
In relation to the graph
provided above, the profit took at deep hit in the year 2015 because of the weaker foreign currencies versus U.S dollar Due
to the large export business to the countries like Brazil, China, Russia and
Japan, the profits were negatively impacted. The exchange rate changed
drastically and had a negative 6-point impact on forex.
Sales (net) slipped by 4% to
20.2 billion (project was 20.6 billion loss).
Reasons for the steep fall in P’S profits in the
1) Why did the exchange rate take a deep hit?
In an attempt to have a
strong currency, China devalued its currency by 2%, just when the dollar was
taking a hike. This was mainly done to make Yuan steadily rise against
trade-weighted partners. Looking at the dynamics of the global currency, China
wanted to make its exports cheaper in the world market. Due to this the net
earning of the company were negatively impacted by around 1.4 billion dollars
foreign exchange fluctuations.
The company reduced exports to Venezuela due a decrease in profit after tax by $2.4
billion. Due to the accounting policy change in Venezuela, the company had to
incur a one time cost of $2.1 billion because of which they had to take a hit
in their top line in 2015.
company also had to incur an impairment charge of 2.1 billion dollars related
to the battery segment; this charge was reported in their discontinued
Price elasticity of Demand (Gillette)
Price elasticity cannot be
accessed for a company; it can only be done for a product. In the case of
P&G, out of the line of 100’s of products, a large portion of revenue comes
from the men’s razor brand Gillette.
Gillette razor, the company
had to reduce its razor prices by 20% in order to regain its market share.
It is essential for
businesses to understand the demand for their product line and how it changes
with the changing price, it is also an essential marketing strategy.
Price elasticity of demand
(Ped) measures the responsiveness of demand for a product after a change in the
price of the product.
Elasticity of 0.3 means
that the demand for razors is inelastic as a 20% decrease in price will only
lead to increase in quantity of 6%. But it’s observed that the elasticity of
razors was not that low a couple of years back.With no barriers to entry
lots of new companies have entered the segment, these companies are offerings
similar products at lower price points, which has lead to the erosion of market
share for Gillette. The company no longer has the power to dictate the price in
the market. Due to this stiff competition the company has been forced to reduce
prices. The company will have to take a hit on its margins to gain back its
dominance in the market. Gillette in the same year has also introduced a new
range of cheap razors priced below $10. These moves should help the company
bounce back in the coming years.The company has reduced its
prices across razor range. Gillette’s market share in
razors has been decreasing from the past six years. In 2015 its market share reached 59%, a
decrease of almost 11% from 2010. It currently stands at 54%; the company saw a
decrease in quantity sold of about 6 percentage points. Its sales in 2015 was
148 million, in 2017 it reached 139 million. In order to reach the same amount
of sales in 2015, the company has reduced its overall razor range by almost
20%, implying a price elasticity of 0.3 Competitor Analysis Competition Analysis in terms
on net revenue Procter and Gamble is one the
biggest consumer industry giant in USA. It has the highest net revenue among
its peers/ competitors. The company
operates in 180 countries and is amongst the top FMCG brands in the rest of the
world. It has a line of about 10 consumer good products. Others like Colgate
and Unilever have limited consumer product segments. And, P&G is the market
leader in almost all the consumer segments in comparison to its competitors.
The FMCG Sector is United States is
extremely brutal. To maintain the leading position in that competitive
environment is tough. P&G aims to deliver superior quality products for the
end consumers to be fully satisfied.
In the current global
market P&G is the best conglomerate in the consumer industry. P&G has
been outperforming its peers on a regular basis. It’s the biggest player in the
United States in terms of Market Cap. Its
market cap is almost equal to the combined market cap of Colgate Palmolive,
Reckitt Benckiser, Estee Lauder and Kimberly Clark. The net income of
P is almost thrice of Unilever, the closest peer of the company in terms
The Price/Sales of the company stands at 3.8, which is in line with the
P’s Price/BV is the lowest in the industry
indicating that the other stocks are comparatively overvalued in the market.
Companies like Kimberly Clark and Estee Lauder are valued at almost 160 times
and 10 times their book value.
The company has one of the
highest dividend yields in the
industry. They have continued to give their stakeholders good returns both in
terms of capital gains and dividend.
The company has the lowest debt equity ratio in the industry.
The industry average is
almost 100% with Colgate Palmolive being an outlier with high amount of
treasury stock. P&G sits in a comfortable position with a debt to equity
ratio of 0.4, which also implies a high interest
coverage ratio, indicating that the company is in a very good position to
service its debt. The company is continuously churning out the unprofitable
brands. Therefore the company does not have to take debt to turnaround these
The company also has the
second highest Earning per share (EPS)
in the industry. The stock is currently priced at $90 per share. The company
suffered the highest decline in revenue when compared to its peers. But this
fall was because the company had decided to sell off its unprofitable and
non-core brands. The company’s market share in razors and diapers has fallen
down but the company has already initiated a turnaround strategy .The company
has divested stake in its underperforming brands like Gucci, Hugo Boss, D
and Lacoste. The company is now focusing on increasing its market share with
the already established brands like Tide, Pampers and Gillette. The company is
also bringing in innovation by introducing new products.
On using discounted cash
flow, we have arrived at an intrinsic value that is more than double of its
current price. The company continues to be a strong bet for both its current
and potential investors.
P is going through a
portfolio transformation, which will only further improve the financials of the
company in the long run. In terms of social welfare the P has continued
to help the society with initiatives like Children’s Safe Drinking Program and
The company has delivered
more than 12 billion liters of clean water. These are just two of the many
programs undertaken by the company to give back to the society. P&G has
continued to grow by delivering good numbers on a consistent basis and it has
done so in a manner where it is not harming the society but only helping it.