Procter & Gamble Earnings: Pricing Problems

(Bloomberg Gadfly) -- The good news for The Procter & Gamble Co. is that its business didn't seem to worsen dramatically in the latest quarter. Unfortunately, it's also hard to make the case that it significantly improved. 

The maker of Pampers diapers and Dawn dish soap reported Tuesday that its organic revenue, a measure that excludes currency effects and other things, grew 2 percent in the quarter from a year earlier.

The company bumped up the top end of its earnings guidance for the full year -- but it attributed that change to new tax cuts, not because some part of the business had suddenly turned a corner.

Looking at individual business segments, too, this report echoed other recent P&G quarters. Once again, the grooming business was the most challenged, with organic sales declining 3 percent from a year earlier, as lower-priced insurgents keep taking market share. And again the SK-II brand -- a luxury skin-care line that includes products such as a 2.7-ounce jar of face cream costing $230 -- was a strong driver of growth in the beauty division.

Unimpressed investors sent P&G shares down nearly 3 percent in early trading on Tuesday. But I also get why the selloff wasn't worse: Activist investor Nelson Peltz was only recently appointed to P&G's board after a hard-fought proxy battle, and there's good reason to hang on and see if he can help put the consumer-goods giant on the fast track to improvement.

This is especially true given that we have fresh reason to hope Peltz and P&G leadership are on the same page. The company bought Native, a natural deodorant brand, back in November, a move consistent with Peltz's idea that P&G should focus on building a stable of niche brands. SK-II's steady growth only underscores the benefit P&G could get from buying or creating new brands. The company ought to crank up its R&D apparatus with this in mind.

One detail in Tuesday's earnings report highlighted why such innovation is so urgent: P&G said pricing had a negative impact on its total sales haul. This came just one quarter after executives had bragged about a streak of 28 straight quarters of positive or neutral impact from pricing.

Yes, much of the quarter's decline reflected smart, strategic price reductions in the Gillette razor brand to help it compete with upstart rivals. But P&G also said it had to cut prices in its value-oriented Luvs diaper brand, too, in response to aggressive moves by competitors.

P&G can only expect more challenges like this across its brand portfolio. For one thing, retailers such as Wal-Mart Stores Inc., Kroger Co. and Amazon.com Inc. are investing heavily in private brands. And as P&G CFO Jon Moeller pointed out, a slow-growth environment -- which the consumer packaged-goods business is right now -- can fuel steep pricing competition.

P&G has banked its turnaround strategy on investing in product performance, not price wars. That's a fine approach, in theory. But these pressures could get too hard to ignore. It's a good thing P&G and Peltz have publicly buried the hatchet; they'll need each other's help to figure this all out.

Update: This story has been updated to reflect Peltz's current board status. 

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

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

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