As US slows, P&G turns to developing markets

AP News
Posted: Jan 27, 2012 5:27 PM
As US slows, P&G turns to developing markets

Emerging markets are playing a bigger role in Procter & Gamble Co.'s growth, in another sign that U.S. companies are courting new customers overseas as American shoppers get tapped out.

The maker of Tide laundry detergent, Crest toothpaste and Pampers diapers said Friday that its market value grew 9 percent in developing countries over the latest quarter, but just 2 percent in North America and 0.5 percent in Western Europe. That news came as P&G reported a 49 percent drop in profit for the second fiscal quarter, hobbled by higher costs for materials and a big write-down on the value of two of its business units.

Developing markets like Africa and parts of Latin America and Asia now make up almost 37 percent of P&G's sales, up from 27 percent five years ago. That growth was buoyed by recent expansions like toothpaste offerings in Nigeria and fabric softener in Indonesia. In the same period, the share of sales that P&G makes in the U.S. dropped to 37 percent from 43 percent.

"We are shifting the footprint of the company to take advantage of the growth where the growth occurs," CEO Bob McDonald said in a call with analysts.

He noted that P&G has closed technical centers in Western Europe and North America but recently broke ground on a new center in Singapore and doubled the size of another in Beijing. Of the roughly 19 plants the company had under construction in the last six months, only one was in the U.S.

That adaptability has helped P&G gain revenue no matter the economic climate in the U.S., McDonald said. For example, while some competitors have blamed slowing diaper sales on a drop in the U.S. birth rate, P&G has focused on selling baby products to fast-growing populations in Asia. P&G's baby care revenue rose 6 percent in the quarter, while overall revenue rose 4 percent.

The globally focused strategy isn't without challenges. In some cases, P&G has to convince a new crop of customers that they need a product they'd previously lived without, like disposable diapers. The products sold in places like Africa and Latin America are usually lower cost, which means they typically carry lower profit margins.

But P&G also is keenly aware of the fragility of recession-weary customers in the U.S. and Western Europe. This quarter, it took big write-downs on the value of its salon professional unit and the appliances unit, which mostly sells electric razors.

The company noted that discretionary purchases are a tougher sell in a weak economy. It also noted that Western Europe, where concerns about a debt crisis are crimping consumer confidence, accounts for about half the sales for both units.

P&G is also raising prices across the globe to make up for its own higher costs for many raw materials like alcohol and the resin used in making diapers. In the last quarter, it raised prices an average of 4 percent.

P&G knows it must proceed carefully or risk driving away customers. In the last earnings call, it said the higher prices hurt its market share in Western Europe and North America.

But Friday, executives sounded more optimistic. They said more competitors were following suit and raising their prices as well, which should stem any loss of market share. For example, Colgate-Palmolive Co. announced Thursday it had raised prices in North America after more than two years of cutting them.

Stifel Nicolaus analyst Mark Astrachan, who described the quarter as "not a terrible result," said P&G should lower prices in some categories to gain back lost market share.

McDonald said P&G closely watches whether other companies follow its price increases, and if they don't, "then we react to resume the value equation we had when we were growing share."

P&G also noted that, like other U.S. companies that do business in foreign markets, it is no longer benefiting from favorable foreign currency exchanges. When the dollar is weak, as it was for much of last year, revenue a company raises overseas translates into more dollars when converted at headquarters. But now, many foreign currencies are slipping.

As a result, P&G lowered its per-share earnings estimate for the fiscal year, to $4 to $4.10 per share from $4.15 to $4.33.

For the quarter, net income fell 49 percent, to $1.69 billion from $3.33 billion, on the higher materials costs and the write-downs of the appliance business and the salon business. But after stripping out the one-time charges like the write-downs, net income was $1.10 per share, beating the $1.07 predicted by analysts polled by FactSet.

Revenue grew 4 percent to $22.1 billion, helped by the higher prices. That was roughly in line with analysts' expectations.

P&G's stock fell 50 cents to close at $64.30 Friday.