P&G Picked a Tough Time to Expand Abroad

Photograph by Daniel Acker/Bloomberg

Procter & Gamble just learned the hard way how fast low-hanging fruit can go from ripe to rotten.

With a saturated and competitive market at home, the consumer goods giant has bet heavily on so-called developing countries. Here’s how P&G’s chief financial officer, Jon Mueller, rationalized that decision on a conference call with analysts this morning: “This is where the world’s babies will be born and where more new households will be formed.”

But lately, it’s also where governments fall apart and currency markets shudder and heave. It goes without saying that international expansion hasn’t been a recent strategic coup in such places as Venezuela, Argentina, and the Ukraine, three countries where P&G has focused its recent efforts. The Argentine peso, for instance, fetched only 15¢ (U.S.) to start 2013, about 23 percent less than it bought a year earlier. And the first quarter of this year alone saw Ukraine’s currency, the hryvnia, slide 26 percent against the dollar. Japan’s economic stimulus—commonly known as Abenomics after Prime Minister Shinzo Abe—has been weighing on U.S. consumer products as well.

P&G’s profit margin, around 13 percent, is pretty rich today. But it doesn’t take much of a swing in the hryvnia or yen to put the company in the red on the sale of a box of Gillette razors, a package of Pampers or a bottle of Tide laundry detergent. Not only is P&G taking in less money (in dollar terms) for every product in economically turbulent places; it’s workers are also demanding higher wages to keep pace with living expenses. The company already has relatively low margins in the markets it views as developing, part of the process of currying favor with consumers who are relatively new to its products.

P&G’s only recourse is to raise prices on its goods and move more production nearby, both of which it is trying to do. But in a business built on customer loyalty, monkeying around too much with sticker prices can quickly send shoppers to competing brands. And in Argentina and Venezuela, price controls are back in fashion, so in many cases companies such as P&G can’t charge more even if they want to.

In the recent quarter, P&G posted a 2 percent increase in profit. Stripping out currency costs, though, it would have posted a 17 percent gain. That dynamic is likely to continue in the coming months. P&G still expects to increase profit 12 percent to 14 percent this year, while nine percentage points will be blown away by currency “headwinds”—and that forecast is based on sunny assumptions about these volatile markets.

In a staid and competitive business such as consumer goods, there are more or less five ways to improve returns: Win market share, make new products, raise prices, cut costs, or find new customers. To any executive who has spent years slugging it out in the aisles of Costcos and convenience stores, the last option looks by far the easiest route. But geopolitical risk is a lot harder to model than, say, U.S. detergent demand.

Morgan Stanley analyst Dara Mohsenian even wondered this morning if P&G needed to “bake in conservatism” a bit more in its forecasts. “The world seems more volatile,” she noted, “and there obviously have been a lot of external issues that have pressured results.” Name a big U.S. consumer-focused company——Nike, Coca-Cola, Ford Motor—and the same point is valid. There’s no place like home.

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