Proctor and Gamble 2021 Q1 Earnings Call – E-commerce and the battle for shaving

On October 20, 2020, Proctor Gamble held its’ 2021 Q1 earnings call with financial analysts. Overall, like many CPG companies, P&G had a fantastic quarter. Organic sales grew 9% across the company, with 9 of 10 categories experiencing top-line growth—led by Homecare, which grew 30%. The progress was seemingly sustainable, with the Cincinnati based manufacturer adding a point of mix and price.

Jon Moeller, Vice Chairman, COO and CFO of Proctor and Gamble, summarized the quarter:

A very strong start to the fiscal year, strong volume, sales and market share trends, strong operating earnings, margins advancing, strong core earnings-per-share growth. We’ve built strong momentum heading into the COVID crisis and have been able to maintain this through the most recent quarter, supporting the guidance increase for all key financial metrics, organic sales, core earnings per share, cash productivity and cash return.

What else did we learn?

1. Proctor and Gamble believes long-standing consumer preferences are changing.

COVID changed everything within the CPG world. Companies that spent decades building brands suddenly saw themselves in prime position—as customers flocked to trusted partners. To keep up with the influx of demand, management reduced SKU counts. E-Commerce exploded—both changing the relationship between manufacturers and retailers. According to Jon Moeller, that change may be permanent.

We do expect that there is some stickiness to new habits that are being formed and new awareness that’s been raised. It’s hard for us to see in our interactions with consumers that we’re going to snap back and revert to the same attitudes and the same behaviors that we had collectively pre-COVID. Even things like the amount of inventory — pantry inventory I keep, and in some way, this is analogous that some of us remember our grandparents. For example, having survived The Great Depression, and they continued to hold on to more brewed and canned items that I could never understand. But it was because of what they’ve been through.

2. E-commerce is growing, but retail is still king at Proctor and Gamble

There was an interesting question by an Evercore ISI analyst. Essentially, P&G has 22 billion-dollar brands who are leaders in traditional brick and mortar retail, but that hasn’t translated to across the board e-commerce success. Crest dominates online, but the company is struggling, even losing, with diapers and bath tissue. How does P&G think about that the market?

Moeller’s answer pointed to the bigger picture.

And we don’t see a lot of — there is some, but we don’t see a ton of differentiation between our ability to succeed in an e-commerce format and a offline format, when we execute our strategies and when our products in categories where performance drives brand choice are truly superior. So that’s our focus. We look carefully at overall share progress online versus offline and margin progress online versus offline. In an aggregate, which is always dangerous of course operationally, we move to lower levels of aggregation, we’re indifferent between online and offline shopping, which is exactly where we want to be. I mentioned we grew e-commerce sales 50% in the quarter that we just completed, e-commerce sales are now probably 11% to 12% of our total. So they are important and we’re just as focused on being successful in that channel as we are the others.

Essentially, e-commerce is important, but it’s just 12 percent of P&G’s total volume. Proctor and Gamble wants to be wherever household products are sold. I’m very curious to see if this statement “When we execute our strategies and when our products in categories where performance drives brand choice are truly superior. So that’s our focus.” holds true. I’m not convinced that brand power is as vital in a land of online monopolies as it is in traditional retail.

3. P&G is keeping an eye on DTC, but it’s a balancing act

Direct-to-consumer (DTC) is a huge push within the fast-moving consumer product’s world. One of the issues is that it is really hard to be profitable within the space. P&G should know. Earlier this year Proctor & Gamble purchased female-centric shaving company, Billie. Much of the coverage was about the exciting DTC possibilities.

I disagreed.

I wrote after the official announcement:

You’ll notice that there isn’t much here about Billie’s direct-to-consumer capabilities, a major talking point of early coverage and the whole reason Unilever acquired Dollar Shave Club. Instead, Moeller describes the benefits of plugging Billie into P&G’s established manufacturing and sales organization. In fact, the only reference to online distribution is about P&G’s own established abilities (The company’s Venus brand has a D2C service.) Apart from individualized marketing, he talks about it as he would any other brand acquisition… With P&G to buy Billie, the plan isn’t to build an online direct-to-consumer giant, it’s to add a young digital native brand to its traditional brick-and-mortar line-up.

In my view, Moeller confirmed this thinking in his comments of DTC.

Within that, DTC clearly can play a role. As you mentioned, in some of our businesses, it’s already a significant part of the operating model. It’s – it allows us to get closer to consumers to understand, to have an even better understanding of their needs and their habits, including their purchase habits, and that all can be very complementary and important in the broader context. So, you will see us continue to increase our DTC presence, but again, not at the preference of – or the de-prioritization of any other channel of trade.

Notice how there wasn’t anything about it being a growth driver, but rather, ancillary benefits.

4. P&G is preparing for a coming battle for razors

Gillette has long-been a cash cow for P&G. An influx of hip, and low-cost competitors have entered the market. It saw its market share drop from 70% to around 50% in just a few years. Earlier this year, Unilever announced that Dollar Shave Club, perhaps the biggest challenger, was pivoting to an omnichannel brand—with Walmart as its first major retail distribution. P&G didn’t address the competition specifically, but it outlined how it would combat the move to brick-and-mortar.

  1. Product Innovation: SkinGuard line of shaving aids for men with sensitive skin.
  2. Moving into the premium space with King C. Gillette.
  3. Expanding into dry shave.

Image via Flickr

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