Procter & Gamble Co's Worst Business Segment in 2016 So Far

By Markets Fool.com

Image source: Getty Images.

Continue Reading Below

Procter & Gamble (NYSE: PG) in early August closed the books on its second straight fiscal year of declining revenue and profits. Sales dropped 8% overall and core earnings ticked down by 2%.

The consumer goods giant lost market sharein each of its five business divisions, but its shaving unit, which it calls grooming, had an especially bad showing, with an over-1% drop.

Category

Market Share Change

Beauty

(1%)

Grooming

(1.1%)

Health care

(0.7%)

Fabric and home care

(0.2%)

Baby, feminine, and family care

(1.1%)

Fiscal 2016 figures. Data source: P&G financial filings.

The grooming segment is home to electric shaving appliances along with male and female blades and razors. The major brands include Gillette, Mach3, Braun, Fusion, Prestobarba, and Venus, with Gillette leading the pack. P&G is the world's biggest seller of shaving products, boasting an incredible 65% share of the blades and razors segment, 20% of the male electric shavers industry and 45% of the female epilators market.

Continue Reading Below

Grooming accounted for 11% of sales over the past 12 months and was highly profitable, generating 15% of P&G's net earnings. That marked a decrease in segment operating margin since the comparable figures for 2015 were 10% of sales and 16% of profits.

Shaving off profits

P&G's shaving troubles can be pinned on three negative trends: a soft U.S. market, rising low-cost competition, and e-commerce threats. The company can't do much about the fact that the industry contracted slightly last quarter and just barely grew over the last 12 months. The value-based competition, meanwhile, has tilted P&G's sales mix away from its high-margin premium products and toward cheaper disposable razor options. That helps explain why profitability declined as the company increased promotions to fend off discount brands.

The direct e-commerce competition has also eaten into results. Dollar Shave Club, which boasts over 3 million subscribers, has been using low prices and a convenient direct shipping approach to eat into P&G's market share. Rival Unilever (NYSE: UL) said it was that powerful economic model, plus its access into other areas of male grooming, that convinced management to buy the business earlier this year.

Image source: Unilever investor presentation.

P&G can count on Unilever only ratcheting up the online pressure now that it can turn its marketing muscle to the task of extending this fast-growing brand deeper into the shaving segment and out into complementary areas like skin care and deodorant.

Can P&G get back on track?

P&G's growth initiatives revolve around meeting that online challenge with comparable products, stepping up marketing and sampling programs, and improving innovation across the portfolio. Executives can point to some early success on the last two points already. The high-end ProGlide razor made it into the hands of 80% of young men this year, equating to 2 million free sample giveaways. The trial runs helped new cartridge sales spike higher by 18%, compared to a 7% drop in the market niche last year.

Yet the company knows it has an uphill climb ahead. "We need to do more work on the lower end of the portfolio," Chief Financial Officer Jon Moeller told investors recently. "We also need to be more present in the direct-to-consumption e-commerce channels and we need to bring innovation equally across the portfolio and marketing equally across the portfolio, which we are committed to do" through things like the Gillette Shave Club.

Ideally, these changes will begin to reverse P&G's two-year market share slide in grooming, which has traditionally been one of its most dominant -- and most profitable -- business segments.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.