Is P&G’s Business Model Broken?

The Broken CPG Business Model

Read Larry’s Popelka’s latest Bloomberg Businessweek article about P&G’s brand sell-off.                                              

P&G’s problem isn’t too many brands; it’s a dated business model

The problem with Procter & Gamble’s recent decision to sell half of its brands as a way to fix slumping revenue is that it has tried that already—and failed.
P&G claims the product lines it will divest are expanding slowly or difficult to manage, and shedding them will allow the company focus on its bigger brands with more potential. But over the past 15 years, P&G has sold more than 30 iconic brands that were supposedly hindering growth, and none of those divestitures fixed its revenue problem. The strategy did create a slew of new, more successful rivals….

J.M. Smucker, buyer of P&G’s Jif peanut butter, Crisco shortening, and Folgers coffee, has had nearly 50 percent sales growth since 2009. Other companies, such as Innovative Brands (Pert Plus shampoo and Sure deodorant), Pinnacle Foods (Duncan Hines), and Prestige Brands (Chloraseptic) also have done well with P&G’s orphaned products.

P&G’s problem is not its brands; it is a business model that needs a jolt of innovation.

Once, it seemed as if P&G could build successful brands in any category. For decades the company successfully expanded into beauty, health care, batteries, razors, and several other consumer goods categories. As P&G increased its brand portfolio and its global footprint, the company’s revenue multiplied from $11 billion in 1980 to nearly $40 billion in 2000.

That success was a result of a centralized structure that allowed P&G, an enormous company, to outresearch, outmarket, and outspend smaller competitors. But the world has changed in the past 15 years, and P&G’s model doesn’t work as well. The ease of sourcing products and the many different ways advertising media can reach customers make it easier for small startups to compete in P&G’s categories. Such company assets as P&G’s massive research and development arm, and even its efficient manufacturing plants, have become expensive liabilities that hinder flexibility and innovation…

P&G’s total revenue growth since 2008 has been just $1.3 billion, or 1.6 percent, as it loses ground in many of its categories…

The most successful consumer products companies are small and nimble. Annie’s Homegrown, Boulder Brands, and Keurig Green Mountain have more than doubled revenue in the past five years.

P&G’s biggest obstacle to growth is its centralized planning and decision-making. In today’s faster-paced environment, this structure slows innovation and turns every project into a big investment. Companies with more decentralized models are winning in the marketplace because their innovations come more quickly and are less costly, which translates into lower risk. The best innovators don’t try to do everything themselves. They identify what consumers want and coordinate the assembly and delivery of it in the most efficient manner using outsiders. They also make quick, low-risk decisions without a lot of bureaucracy.

Nimble doesn’t mean you have to be small.  VF Corp., one of the world’s largest apparel companies, is successful because each of its brands is run as a separate company, with a separate P&L, separate management, and a separate innovation team. This allows managers to test and launch new ideas quickly without layers of bureaucracy. Even though it has several disparate businesses—from North Face to Wrangler—VF has increased revenue 58 percent in the past five years.

P&G can get its innovation mojo back, too. But it won’t get there simply by dumping poorly performing brands. It must come to grips with its business model problem and dramatically change the way it innovates.

Do you have some innovative new concepts that are stuck in your pipeline?  Let us help you unlock their potential.  Send me a note at: [email protected]

Michael Barde, Manager Business Development