Case Analysis: Proctor & Gamble
Issues
Proctor & Gamble manufactures high quality products and also markets these products aggressively. Because of this, the company has grown internationally by expanding into different markets. Its products did well initially, but over the last couple of years, the company has faced plenty of issues that threaten its market share. These include reduced organic sales growth, stiff competition, and a sluggish economy. Statistics show that the company’s organic sales growth has been stuck between 1% and 3%. A low organic sales rate often harms the revenue collected by the company. Proctor & Gamble is also facing stiff competition from internet upstarts and global competitors. There are different companies that also major in the production of items similar to that of P&G. Some of these companies are well established and often threaten to take over the industry. Finally, the sluggish economy is another issue facing the company. In a sluggish economy, consumers are often less likely to purchase company products. Low sales translate to low revenue. A sluggish economy is an external factor, which means that the company has little effect on the state of the economy.
SWOT Analysis
Strengths
Some of the company’s strengths include a strong brand image, a diversified product portfolio, a global presence, and an effective distribution channel. The company’s brand image is strong because it produces high quality products that customers trust (Pratap, 2019). The company is also constantly making improvements to its products to ensure that they meet the customer’s changing needs. A strong brand affects company finances positively because it increases the popularity of the brand. The company also has a diversified product portfolio, which protects it against losses and increases its revenue. In the recent past, the company cut down on the products it offers. Currently, it only offers ten product categories. The decision to reduce the product portfolio was based on the fact that the company wanted to focus on a few products to ensure quality. Other than this, it owns 65 brands. Some of these brands are well established and are highly valuable. Some of these valuable brands include Gillette, Tide, and Ariel (Bhasin, 2019).
The company is present in multiple countries (Bhasin, 2019). P&G is present in over 180 countries, but its headquarters are in Cincinnati, Ohio. The global presence is often attributed to its effective distribution channels. P&G sells its products through a variety of channels. These include baby stores, wholesalers, drug stores, grocery stores, department stores, and pharmacies (Pratap, 2019). Their products are manufactured in its manufacturing sites and then distributed around the world. In the US, the company has 25 manufacturing sites across 19 states. Around the globe, it has a total of 85 manufacturing sites across 34 countries.
Weaknesses
Some of the company’s weaknesses include the closure of a variety of brands that it owned, it highly depends on US and Walmart, and changing customer demands. Before 2014. P&G owned close to 300 brands, but it currently owns only 65 brands. These brands contribute a huge percentage to their revenue. Also, the company highly depends on the US market and the Walmart store. In 2018, Walmart accounted for 15% of P&G’s total sales, and in 2017, Walmart contributed 16% of P&G’s sales. Also, the US market, in 2018, accounted for 41% of the total net sales, and none of the other countries contributed to more than 10% of the net sales. Finally, customer demands are ever-changing, which means that the company needs to regularly implement a variety of changes. For example, under its beauty segment, customers expect new fragrances each month. Meeting these demands has sometimes proven difficult for the company.
Opportunities
Some of the opportunities the company can take advantage of include rural and emerging markets, increasing purchasing power, and mergers and acquisitions. Rural markets have often proven hard to penetrate for companies selling Fast-Moving Consumer Goods. This market is price sensitive, and the people that live there are impervious to advertisements. If P&G can manage to penetrate this market, it can increase its organic sales. Customer purchasing power has also increased in emerging economies over the past few years; this may prove to be a profitable venture if the company decided to utilize the opportunities. Finally, mergers and acquisitions present a great opportunity for the company. The company could reduce its competition by purchasing or merging with a local competitor. For example, when expanding into new territory, the company can purchase a local manufacturer and distributor of products similar to those they intended to launch in that market.
Threats
The threats that the company has to deal with include stiff competition, regulatory pressures, and growing labor and raw material costs. Most local governments have come out in support of locally manufactured goods. This huge support has led to the rise of local and unbranded competitors, thereby increasing competition in the market. Also, different countries have imposed different legal and political regulations. The company has to comply with these regulations or risk getting fined. The costs incurred to ensure compliance is high and thereby threaten the profitability of the company. Finally, over the years, labor costs and raw material costs have been rising; this has, in turn, led to high operational costs, which reduce company profitability.
Porter’s Five Forces Analysis
The threat of New Entrants (moderate force)
P & G is a well-established company which makes it hard for new entrants to threaten its position in the market. One of the reasons why this force is moderate is the low switching costs (Thompson, 2017). Consumers can easily change to these new companies because they do not incur high costs. If, for example, there is another company offering low prices to similar products sold by the company, some customers may switch to this new company. Also, new entrants often require moderate capital costs to enter the market. Because of this, they can easily enter the market. P&G is advantageous because of its global presence; this limits the threat of new entrants.
The Bargaining Power of Suppliers (Weak Force)
The company requires different raw materials for the manufacture of its products. There exists many who suppliers can easily supply the materials to P&G (Adamkasi, 2017). The variety of suppliers decreases suppliers’ power because, if they increase their prices, the company will immediately switch to another supplier. In this case, P&G has power. Also, P&G often purchases these materials in large quantities, making the company appealing to any supplier.
The Bargaining Power of the Buyer (Weak Force)
There are few similar products in the market; this reduces the power of the buyer. Many varieties of products often translate to buyers having many choices meaning that they can substitute one company for another. If the product variety is low, it becomes hard for buyers to switch to other sellers. Finally, the low switching costs increase the buyer’s power, but then again, P&G has successfully mastered the skill of building customer loyalty.
The threat of Substitution (weak force)
The threat of Substitution often increases when there is a high variety of similar products in the market. Reduced product variety often reduces the threat of Substitution, which means that the risk of customers substituting P&G products with similar products is low (Thompson, 2017). The low switching costs between the company and the existing companies producing similar goods is what the company should be concerned with because it increases the threat of Substitution.
Existing Rivalry (strong force)
P&G is facing stiff competition from companies in the consumer goods industry (Thompson, 2017). Competition often increases when more companies enter the market. Less competitive markets are those where companies either enjoy a monopoly, or there are few players. Since the consumer goods industry is composed of many companies, P&G has to compete with them to become a leader in the industry. Finally, the low switching costs between competitors further increases the Rivalry between these two firms.
Financial Analysis
Income Statement
The company’s financial information shows that in the past three years’ total revenue has been growing at a very low margin. For example, in 2018, the revenue grew by only $1774 from 2017, and in 2019, the revenue increased by only $852 from 2018. The Costs of Goods Sold has also been increasing for the past three years. The only advantage is that the margin by which the costs are increasing is low. For example, in 2018, the Costs of Goods Sold increased by $1794 from 2017, and in 2019, they only increased by $336. Still, the Costs of Goods Sold is high since they almost twice the company’s revenue. Finally, the net income, which shows the company’s profits after deductions, is low and has been decreasing for the past three years. The net income was at $15079 in 2017, but it had reduced to $3634 in 2019; this was a 75.9% decrease in two years.
Shares
The value of the shares of the company has been reducing over the years. In 2017, the earnings per share was at $5.80, but this value reduced to $1.45 in 2019; this was a 75% decrease in value (“Procter & Gamble income statement 2005-2020 | PG,” n.d.). The basic earnings per share also reduced from 2017 through 2019. In 2017, the basic earnings per share was at $5.59, but this reduced to $1.43 in 2019; this was a 74.4% decrease in value.
Assets, Liabilities, and Shareholder’s Equity
The company’s total assets have reduced over the years. In 2017, its assets were valued at $120406, but in 2019, its assets were reduced to $115095; this was a 4.4% reduction. The one good thing about P&G’s financials is that company assets are more than company liabilities. The only noted problem was that its liabilities have grown over the last three years. In 2017, the liabilities totaled to $64628, but in 2017, they had risen to $67516 (“Procter & Gamble income statement 2005-2020 | PG,” n.d.). Finally, the balance sheet shows that the shareholder’s equity has dropped for the last three years. In 2017, it was at $55778, but in 2019, it had dropped to $47,579, a 14.7% reduction.
Recommendations
The company should expand into rural areas since it remains unexplored by companies that manufacture and distribute consumer goods. People in rural areas rarely see the adverts placed by the company, which is why there is a need for the company to visit these areas and market their products to the people. P&G should also take advantage of the high purchasing power of consumers in emerging markets. Taking advantage of this opportunity will help increase sales. Another way that the company can increase sales is to differentiate its products from similar products. Differentiation will give the company an advantage among the consumers.
Also, it should consider purchasing some of its competitors to reduce the competition it faces in some markets. For example, it could purchase a company producing diapers in the region it plans on expanding to. With local governments pushing for the manufacture of goods locally, local brands are set to rise, which will further increase competition. Purchasing or merging with popular companies in local markets can help the company succeed in certain markets. Finally, P&G should improve its operations in other territories to not overly rely on the US market.
Exhibits
Exhibit 1: SWOT
Strength
- A strong brand image.
- A diversified product portfolio
- A global presence
- An effective distribution channel
Weaknesses
- Closure of a variety of brands.
- It highly depends on US and Walmart.
- Changing customer demands.
Opportunities
- Rural and emerging markets
- Increasing purchasing power
- Mergers and acquisitions
Threats
- Stiff Competition
- Regulatory pressures
- Growing labor and raw materials costs
Exhibit 2: Porter’s Five Forces Analysts
Threat of New Entrants (moderate force)
- Low switching costs
- New entrants require moderate capital costs
The Bargaining Power of the Supplier (weak force)
- The presence of many suppliers in the market.
- The high level of purchases made by the company from its suppliers.
The Bargaining Power of the Buyer (weak force)
- Low switching costs
- Low availability of substitute products.
- High brand loyalty
Threat of substitution (high force)
- Low switching costs
- Low variety of substitute products
Existing Rivalry (strong force)
- Low switching forces
- Large number of firms in the industry
Exhibit 3: Income Statement
2019
2018
2017
Revenue
$67,684
$66,832
$65,058
Costs of Goods Sold
$34,768
$34,432
$32,638
Gross Income
$32,916
$32,400
$32,420
Net Income
$3,634
$9,485
$15,079
Exhibit 4: Graphical Representation of the Income Statement
Exhibit 5: Shares
2019
2018
2017
Basic Shares Outstanding
2504
2529
2598
Shares Outstanding
2540
2657
2740
Earnings Per Share
$1.45
$3.75
$5.80
Basic Earnings Per Share
$1.43
$3.67
$5.59
Exhibit 6: Graphical Representation
Exhibit 7: Assets, Liabilities, and Shareholder’s Equity
2019
2018
2017
Total Current Assets
$22,473
$23,320
$26,494
Total Long Term Assets
$92,622
$94,990
$93,912
Total Assets
$115,095
$118,310
$120,406
Total current liabilities
$30,011
$28,237
$30,210
Total long term liabilities
$37,505
$37,190
$34,418
Total liabilities
$67,516
$65,427
$64,628
Shareholder equity
$47,579
$52,833
$55,778
Exhibit 8: Total Assets
Exhibit 9: Total Liabilities and Shareholder’s Equity