Consumer

Sarah Halzack is a Bloomberg Gadfly columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

A contentious corporate soap opera is nearing a dramatic conclusion. Procter & Gamble Co. on Tuesday said its shareholders had voted to deny activist investor Nelson Peltz a seat on its board of directors.

Peltz's Trian Fund Management LP disputed this, saying the vote was too close to call and that it wouldn't admit defeat until it was confirmed by an independent inspector.

The vote capped a months-long war waged with white papers, bigwig testimonials and passive-aggressive press releases, in which Trian and P&G's board each tried to convince shareholders their assessment of the company was the right one.

Trajectory Under Taylor
Since Taylor became CEO, P&G's share price has steadily grown
Source: Bloomberg

But if P&G's victory is confirmed, it shouldn't spend too much time fist-pumping. Peltz may not be pulling up a chair at its next board meeting, but he succeeded in another key way: He cast a spotlight on some of the company's challenges and heightened the urgency of turnaround efforts.

While P&G touted its demonstrable progress under CEO David Taylor, Peltz painted a vastly different portrait of a company not innovating fast enough and lumbering along without sufficient digital savvy.

Left Behind
P&G's long-term organic sales growth does not compare favorably to that of its competitors
Source: Trian white paper

Peltz's assault forced shareholders to ponder all sorts of tough questions about P&G's business: Is this board of directors sufficiently competent? Is the current organizational structure designed for success? But there's one question, I think, that will be particularly sticky: Why isn't P&G doing a better job at maintaining and growing market share?

Yes, it is forecasting organic sales growth of 2 to 3 percent for the current fiscal year, and hopes to soon get in line with the 3 to 3.5 percent growth it sees for the broader market. But this year's target doesn't seem particularly ambitious, given how long the turnaround plan has been underway. 

You could say P&G shouldn't be punished for favoring realism over optimism. But it also shouldn't settle for "good enough." Every time the company reports earnings now, this will dwell in the minds of shareholders who have read Peltz's blistering white paper.

Ultimately, I think P&G would be better off with Peltz on its board. I was bewildered by the company's repeated assertions that Peltz's extensive experience with consumer packaged-goods companies didn't make him a good fit for the job.

P&G says the food business is just a completely different beast from selling razors, diapers and tampons. Sorry, but that strains logic.  Both businesses require deep understanding of supermarket and drugstore merchandising. And both are high-frequency, loyalty-driven product categories that call for a similar approach to customer acquisition.  

P&G doesn't have anyone on its board with a résumé similar to Peltz's. And it's hard to see how having a different, relevant perspective at the table wouldn't do the company some good.

The good news for P&G is that it can still cherry-pick some of the better pieces of Peltz's advice.

Take, for example, his suggestion that it get more serious about cultivating small and mid-sized brands. Yes, P&G deserves credit for hanging onto a dominant market share with mega-brands such as Tide detergent, Crest toothpaste and Dawn dish soap. But look at what has happened with its razor business.

Knicked
Gillette still commands the market, but new brands are stealing market share
Source: Trian white paper, Euromonitor

Gillette still easily dominates the category, but smaller brands are getting traction. Some of that is thanks to their innovative, e-commerce-based business models, but some of it surely reflects a growing consumer preference for brands with a small-batch vibe.

We see this all across the consumer landscape: Beauty behemoth Estee Lauder Companies Inc. is seeing strong sales of boutique-like brands such as Smashbox. Campbell Soup Co. is using acquisitions to build a roster of smaller labels. Target Corp. has found success stocking local craft beers

I'm not convinced P&G grasps the true disruptive potential of small brands, but Peltz sure does. As Trian pointed out in its white paper, smaller consumer packaged-goods companies -- those with less than $1 billion in sales -- are growing three times faster in the U.S. than large ones. 

Given P&G's market-share erosion, it ought to more seriously consider this changing marketplace dynamic.

Slipping Away
It's not just razors: P&G has lost market share in several key product categories
Source: Bloomberg, Euromonitor International

P&G has plowed tens of millions of dollars into this proxy fight. Now it must show this was the right call. And it must take care that this showdown doesn't end up simply proving out one of Peltz's main criticisms -- that its leadership is an insular group, hobbled by reticence to embrace new thinking.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Sarah Halzack in Washington at shalzack@bloomberg.net
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net