How Procter & Gamble Makes Money? Understanding P&G Business Strategy

This article is about how Procter & Gamble company (“PG”) makes money. Firstly, we explain the current business performance of P&G. Then, we explain the business model and business strategies of P&G. Then, we share the key business segments of P&G and how the company generates revenue from each of those segments. Finally, we share the revenues, the profits, and the profit margins of P&G for 2015.

The Procter & Gamble company (“PG”) is a global leader in fast-moving consumer goods. Founded in 1837, Procter & Gamble (P&G) introduced many innovations that are now common practices in corporate world—including market research, the brand-management system, and employee profit-sharing programs. P&G has been able to remain successful for that long due to its focus on acquiring & building consumer-preferred brands and products. At the end of fiscal 2015 (June 2015), 21 of P&G's brands reported more than a billion dollars in net annual sales. 2015 was a tough year for P&G, its revenues and profits were down by 8.2%, 38.6% respectively.

Procter and Gamble Revenues and Net Margins FY 2010 To 2015

Key Elements Of P&G Business Strategy

P&G is focusing on four key business strategies to regain market leadership: (1) Become A Focused Company of Leading Brands (2) Become A Global Company in Targeted Growth Markets (3) Become A Company Driven by Innovation (4) Become A Far More Productive Company

Become A Focused Company of Leading Brands

P&G has built significant scale by acquiring popular brands such as Gillette, Wella Professional, Iams and Ambi Pur. Due to softening revenues and profits P&G is moving away from product portfolio expansion to a brand consolidation strategy. In 2015, P&G announced that it would divest 100 underperforming and non-core brands and will focus only on 70 brands in 10 business categories. These top 70 brands account for over 90% of P&G's revenues and 95% of net profit. P&G has announced the sale of Duracell, to Berkshire Hathaway. It also exited its China-based batteries joint venture. It announced the sale of its Camay and Zest soap brands to Unilever and in July 2015, P&G announced the mega sale of 43 beauty brands (including cosmetic brands, cover girl, max factor and fragrance brands like Hugo Boss, Gucci and Dolce & Gabbana, and other hair styling brands) to cosmetics company Coty Inc. in a $12.5 billion deal.

To better appreciate this consolidation drive, let us look at P&G advertising effectiveness. P&G spends the most on advertising to convince consumers that its products are worth their money. It’s advertising expenses that are around 11% of its annual sales make P&G the world’s largest spender on advertising. Before brand consolidation, this expense was split amongst 170 brands. Over last 6 years, revenue growth has slowed while advertising as a share of revenue has increased or remained same. In other words, the amount of additional sales it gets from additional marketing is dropping. Brand consolidation will help it spend advertising money on targeted brands thereby maximizing the marketing effectiveness.

Procter and Gamble Advertising Effectiveness FY 2010 To 2015

Brand consolidation is a very interesting move that will help it improve advertising effectiveness and regain market leadership in targeted growth categories.

Become A Global Company in Targeted Growth Markets

P&G that started its globalization strategy in the year 2001 has decided to slow down its expansion across international markets in order to refocus on improving its market share and operating margins in targeted geographies.

Procter and Gamble US vs International Sales FY 2001 to 2015

International markets currently account for about 63% of P&G's annual sales, up from 48% in 2001. It has now decided to focus on its top 40 country-product categories that account for more than half of the company's sales. It is also planning to strengthen its position in its 10 largest emerging markets, including China, India, Indonesia, Brazil, and Russia, in which it already has a presence.

Become A Company Driven by Innovation

P&G invests about $2 billion annually in research & development, significantly more than its competitors. This high R&D spend helps P&G launch improved and innovative products at regular intervals to maintain, as well as expand its market share. The latest examples of innovation by P&G include the first power toothbrush with Bluetooth® technology, Tide PODS Plus Febreze, Tide PODS Free & Gentle and Tide PODS Original Scent, SK-II Mid-Day Miracle Essence and SK-II Mid-Night Miracle Essence, Pampers Premium Care Pants, Crest 3D White and Gillette FlexBall and Venus Swirl. Innovation, particularly in the premium categories, is the key to driving profitability as P&G already has significant scale and a high level of concentration in developed markets like the US, Western Europe, and Japan.

Become A Far More Productive Company

As a result of the Company’s strategic focus on leading brands, P&G plans to save $10 billion in costs by 2016, which includes saving potential across all spending elements—cost of goods sold, marketing spending, and overhead—for the next several years. It is planning to utilize better manufacturing reliability and adherence to quality standards and Increasing localization of the supply chain to improve the cost of goods sold. It is working on optimizing media mix with more digital, mobile, search and social presence, improved message clarity to achieve greater savings in non-media spending.

How P&G Makes Money?

P&G operates its business through five segments- Beauty, Hair and Personal Care, Grooming, Health Care, Fabric Care and Home Care and Baby, Feminine and Family Care. P&G customer segments include-  mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons, distributors and high-frequency stores. Walmart is P&G’s largest customer that accounted for around 14% of the total revenues in FY15.

P&G also directly sells its products to customers through www.pgshop.com.  Following diagram shows how the money flows in from the different customer segments and the key cost elements where the money flows out to.

How Procter and Gamble Makes Money

P&G Business Segments

P&G reports its activities in five business segments: Beauty, Hair and Personal Care, Grooming, Health Care, Fabric Care and Home Care and Baby, Feminine and Family Care

Procter and Gamble Business Segments

  • Beauty, Hair and Personal Care: P&G offers a wide variety of products in this segment. Beauty category offers products ranging from deodorants to cosmetics to skin care. P&G is the global market leader in the retail hair care and color market. Head & Shoulders, Olay, Pantene, SK-II and Wella (that is recently sold out to Coty) are the billion dollar brands in this segment
  • Grooming: P&G is the global market leader in the blades and razors market. Fusion, Gillette, Mach3, Prestobarba are the billion dollar brands in this segment. It sells electronic hair removal devices, such as electric razors and epilators, under the Braun.
  • Health Care: P&G operates in oral care and personal health care category. Crest, Oral-B, and Vicks are its billion dollar brands. The company generates healthcare revenues outside the USA through PGT Healthcare partnership with Teva Pharmaceuticals Ltd.
  • Fabric Care and Home Care: This segment is comprised of a variety of fabric care products including laundry detergents, additives and fabric enhancers; and home care products including dishwashing liquids and detergents, surface cleaners and air fresheners. Ariel, Dawn, Downy, Febreze, Gain, Tide are the billion dollar brands in this category.
  • Baby, Feminine and Family Care: In baby care, the company mainly provides, Pampers diapers, pants and baby wipes. Always is the leading brand in the feminine care category. Family care business is predominantly a North American business comprised largely of the Bounty paper towel and Charmin toilet paper brands.

P&G FY 2015 Revenues By Business Segments

In FY'15 (fiscal year ended June 30, 2015), P&G generated $76.3 billion of total revenues. Of these total revenues, P&G generated

  • $22.3 billion revenues, 29.2% of the total, from the Fabric Care & Home Care segment.
  • $20.2 billion revenues, 26.5% of the total, from the Baby, Feminine & Family Care segment.
  • $18.1 billion revenues, 23.8% of the total, from the Beauty, Hair & Personal Care Segment.
  • $7.7 billion revenues, 10.1% of the total, from the Healthcare Segment.
  • $7.4 billion revenues, 9.8% of the total, from the Grooming Segment.

Procter and Gamble Business Segment Revenues

P&G FY 2015 Profits And Profit Margins

Of the $76.3 billion of P&G total revenues in FY'15, $38.9 billion were the total cost of products sold. This resulted in the gross profits of $37.4 billion and a gross profit margin of 49%. P&G other operating costs were $25.6 billion. These include Marketing expenses, selling expenses, R&D costs, administrative and other indirect overhead costs and depreciation & amortization expenses on non-manufacturing assets. This resulted in $11.8 billion of operating profit and an operating margin of 15.5%. After interest and other non-operating income and expenses and income taxes, P&G had a net profit of $7.1 billion and a net margin of 9.4%.

Procter and Gamble Revenues and Revenue Share-FY15