P&G claims the product lines it will divest are expanding slowly or difficult to manage, and shedding them will let the company focus on its bigger brands with more potential. But over the past 15 years, P&G has sold more than 30 iconic brands that were supposedly hindering growth, and none of those divestitures fixed its sales problem. The strategy did create a slew of new, more successful rivals, which is the risk you take when trying to recoup revenue for your castoffs.
J.M. Smucker (SJM), buyer of P&G’s Jif peanut butter, Crisco shortening, and Folgers coffee, has had nearly 50 percent sales growth since 2009. Other companies, such as Innovative Brands (Pert Plus shampoo and Sure deodorant), Pinnacle Foods (PF) (Duncan Hines), and Prestige Brands (PBH) (Chloraseptic) also have done well with P&G’s orphaned products.
P&G’s problem is not its brands; it is a business model that needs a jolt of innovation.
Once, it seemed as if P&G could build successful brands in any category. For decades the company successfully expanded into beauty, health care, batteries, razors, and several other consumer goods categories. As P&G increased its brand portfolio and its global footprint, the company’s revenue multiplied from $11 billion in 1980 to nearly $40 billion in 2000.
That success was a result of a centralized structure that allowed P&G, an enormous company, to outresearch, outmarket, and outspend smaller competitors. But the world has changed in the past 15 years, and P&G’s model doesn’t work as well. The ease of supplying products online and the many different ways advertising media can reach customers make it easier for small startups to compete in P&G’s categories. Such company assets as P&G’s massive research and development arm, and even its efficient manufacturing plants, have become expensive liabilities that hinder flexibility and innovation.
P&G does get some 50 percent of its new technologies from outside suppliers through a program called Connect & Develop, but the effort doesn’t appear to have made the company any more entrepreneurial. Most of the solutions it gets through this program are reworked or modified by its internal R&D group. In the small company model, complete products are outsourced, making the process more efficient.
Look at P&G’s Folgers brand, once the market leader in coffee. The company sold the $1.6 billion business in 2008. The official line was that it was a slow-growth business and not a good fit with the company. The truth is Starbucks (SBUX) had outinnovated P&G, launching several successful supermarket products to lead the category. In just 10 years, Starbucks built a $4 billion supermarket business through faster, better, more cost-effective innovation than P&G.
P&G’s total revenue growth since 2008 has been just $1.3 billion, or 1.6 percent, as it loses ground in many of its categories.
The most successful consumer products companies are small and nimble. Annie’s Homegrown (BNNY), Boulder Brands (BDBD), and Keurig Green Mountain (GMCR) have more than doubled revenue in the past five years.
P&G’s biggest obstacle to growth is its centralized planning and decision-making. In today’s faster-paced environment, this structure slows innovation and turns every project into a big investment. Companies with more decentralized models are winning in the marketplace because their innovations come more quickly and are less costly, which translates into lower risk. The best innovators don’t try to do everything themselves. They identify what consumers want and coordinate the assembly and delivery of it in the most efficient manner using outsiders. They also make quick, low-risk decisions without a lot of bureaucracy.
Nimble doesn’t mean you have to be small. VF (VFC), one of the world’s largest apparel companies, is successful because each of its brands is run as a separate company, with a separate P&L, separate management, and a separate innovation team. This allows managers to test and launch new ideas quickly without layers of bureaucracy. Even though it has several disparate businesses—from North Face to Wrangler—VF has increased revenue 58 percent in the past five years.
P&G can get its innovation mojo back, too. But it won’t get there simply by dumping poorly performing brands. It must come to grips with its business-model problem and dramatically change the way it innovates.