Industry Analysis:

Statistics and Facts on the Cosmetic Industryby Cory SchulzSince the early twentieth century, the production of cosmetics has been controlled by a handful of multi-national corporations. The global cosmetics industry is broken down into six main categories; skincare being the largest one out of them all, accounting for 33.8 percent of the global market in 2012.

The United States is the biggest cosmetic market in the world, with an estimated total revenue of about 54.89 billion U.S. dollars and employing about 53,619 people in 2012. The leading beauty cosmetic company in the United States in 2011 was Procter & Gamble, making up 14.2 percent of the market. Although dipping slightly, generating only29.5 billion U.S. dollars in net sales as compared to 29.9billion U.S. dollars the year before, the company continued to be the leading beauty cosmetic company during the 2012 fiscal year.

The cosmetic industry seems to be continuously developing, now more than ever with the advent of internet companies. About 7.2 billion U.S. dollars was generated by online shops and mail-order household sales in 2010. Cosmetic sales are estimated to continue to grow in both the United States and other global markets, as many consumers feel that beauty products help in acheiving social and economic goals.Photo: Jorge Barrios / Wikimedia / CC

Countries covered: Global

Market definition

The household and personal products industry consists of total revenues generated through the sales of household and personal products. The household products segment includes air fresheners, bleach, dishwashing products, furniture & floor polish, general purpose cleaners, insecticides, paper products, scouring products, shoe polish, textile washing products, toilet care products and others. The personal products segment includes baby personal care, feminine care, fragrances, hair care, make-up, male toiletries, oral hygiene, OTC healthcare, personal hygiene, skincare and others. The market is valued according to retail selling price (RSP) and includes any applicable taxes.

Any currency conversions included in this report have been calculated using constant annual 2010average exchange rates.,Introduction

Global Household & Personal Products industry profile provides top-line qualitativeand quantitative summary information including: market share, market size (value 2006-10, and forecast to 2015). The profile also contains descriptions of the

leading players including key financial metrics and analysis of competitive pressures within the market. Essential resource for top-line data and analysis covering the Global household & personal products market. Includes market size and segmentation data, textual and graphical analysis of market growth trends, leading companies and macroeconomic information.

Highlights

The household and personal products industry consists of total revenues generated through the sales of household and personal products. The household products segment includes air fresheners, bleach, dishwashing products, furniture & floor polish, general purpose cleaners, insecticides, paper products, scouring products, shoe polish, textile washing products, toilet care products and others. The personal products segment includes babypersonal care, feminine care, fragrances, hair care, make-up, male toiletries, oral hygiene, OTC healthcare, personal hygiene, skincare and others. The market is valued according to retail selling price (RSP) and includes any applicable taxes.

The global household & personal products industry had total revenues of $717.7 billion in 2010, representing a compound annual growth rate (CAGR) of3.9% for the period spanning 2006-2010.

The personal care segment was the industry's most lucrative in 2010, with total revenue of $535.4 billion, equivalent to 74.6% of the industry's overall value.

The performance of the industry is forecast to decelerate, with an anticipated CAGR of 3.5% for the five-year period 2010-2015, which is expected to drive the industry to a value of $853.1 billion by the end of 2015.

How is your industry segmented (by customer, by geography, by cost, etc.)? Why?

The primary market segmentation is the differentiation between the household products and the personal care products. Household products account for 25.4% of the international market share, while personal care products account for 74.6%.

The household products and personal care markets are then subdivided. Both markets are segmented by the amount of different types of products sold.

The household products is segmented into six different product types. Thesesix segmentations make up the 25.4%. The first is laundry detergent, which accounts for 32.2%. The second is general-purpose cleaners making up 7.7% of the market share. The next is dishwashing products holding 7.3% of the market. These are followed by air fresheners accounting for 4.5% and toiletcare at 2.5%. The last and largest segmentation, accounting for 45.8% of the market are classified as other products.

The personal care products segmentation accounts for 74.6% of the market share for the entire international industry, which is obviously a vast majority. This market is also subdivided into six different product types. The first is over-the-counter healthcare accounting for 27.5%, which is then followed by skincare at 16.9% of the market. These are followed by hair care products, which account for 10.5%. The next two are fragrances making up 7.8% of the market and make-up accounting for 7.4%. Also like thehousehold products market segmentation, products identified as other hold the largest market share of personal care products at 29.9%.

Another method for evaluating the market of this industry is to analyze various regions of the world and how much of each of these products they consume. Europe represents the largest share of the market at 34.4%. The next largest consumer of these goods is the Americas accounting for 29.4% of the industry’s market. The Asia-Pacific region closely follows with 29.3%, which leaves 6.9% to the rest of the world. 

For much of its history, Procter & Gamble (PG) didn’t just launch new products, it created new product categories, from the first mass-produced disposable diapers to Crest teeth-whitening kits. That’s one reason P&G has more than 1,000 Ph.D.’s among the 8,000 employeesat its 26 innovation facilities around the world. “P&G islargely a branded science company,” says Larry Huston, former innovation officer at P&G who’s now managing director of 4inno, a consulting firm.Lately, though, there’s been a dearth of pioneering brands emerging from the world’s largest consumer-products company. Spending on research and development infiscal 2012 ended June 30 was $2.03 billion, or 2.4 percent of sales, the same as the prior year and downfrom 3 percent of sales in 2006. P&G’s most recent homegrown blockbusters—Swiffer cleaning devices, Crest Whitestrips, andFebreze odor fresheners—were all launchedat least a decade ago. Says Peter Golder, a professor at the Tuck School of Business at Dartmouth College: “P&G is

built on creating new categories, and innovation is in its DNA, but they need to rediscover it.”

Regaining its new-product mojo is crucial because P&G’s business strategy has long been to charge premium prices for cutting-edge products. A 150-oz. container of liquid Tide detergent is $18 at Target (TGT), for instance, 20 percent more than the retailer’s house brand. As rising commodity prices have increased the cost of most basic household products, cash-strapped customers may still be willing to pay more for true innovations but notnecessarily for the kind of product extensions and embellishments P&G has turned to.SLIDESHOW: A Heritage of Game-Changers

That’s created a challenge for Chief Executive Officer Bob McDonald, who has lowered profit forecasts three times since Jan. 1. He’s trying to cut $10 billion in costs by 2016 and reverse market-share declines in such key categories as U.S. detergents. McDonald is under pressure from activist investor William Ackman, who in July took a $1.8 billion stake in P&G and may seek management changes. Blockbusters have “dried up a bit,” acknowledges Bruce Brown, P&G’s chief technology officer.“We want to get back to more of that.”

McDonald earlier this year assembled a team of researchers, marketing managers, and senior executives from across the company to chart a bolder innovation course. The group spent 10 weeks analyzing P&G’s new-product pipeline and selecting the most promising ideas for development. But most won’t be ready for at least another year.

P&G’s 175-year history is filled with such consumer-product innovations as the first synthetic detergent (Dreft, in 1933), the first fluoride toothpaste (Crest, in 1955), and the first stackable potato chip (Pringle’s,which later dropped the apostrophe, in 1968). Researchers

typically have leveraged technologies already used in P&Gproducts to come up with entirely new ideas. For Crest Whitestrips, launched in 2002, they adapted bleaching methods from P&G’s laundry business, film technology fromthe food wrap business, and glue techniques from the paper business.

VIDEO: Can the Tide Turn for P&G?

In recent years, however, the company’s product pipeline has been mainly focused on “reformulating, not inventing,products,” says Victoria Collin, an analyst at Atlantic Equities in London. Among these are new scents of Tide for Eastern European markets and Secret deodorant’s Natural Mineral line. As a result, analysts say P&G has lost customers in the U.S. and other developed countries,who’ve switched to cheaper products made by such rivals as Unilever, as well as store brands.

When former CEO A.G. Lafley took charge in 2000, he sought to increase the rate of product development by collaborating with outside partners who could help with everything from packaging to product design. Working withoutsiders has enabled P&G to gain access to some important technologies, such as a wrinkle-reducing ingredient made by a French company, Sederma (CRDA:LN), that’s used in its best-selling Olay Regenerist skin cream.But Lafley also decentralized R&D, making business-unit heads responsible for developing new items. R&D chief Brown says that inadvertently slowed innovation by more closely tying research spending to immediate profit concerns. Between 2003 and 2008, the sales of new launches shrank by half. By the time McDonald became CEO in 2009, the number of what the company considered to be big product breakthroughs had fallen to an average of fewer than six per year as unit heads focused on short-term results and smaller inventions, says Brown.

Industry Analysis Procter & Gamble (NYSE: PG) started from humble beginnings asa small soapand candle company in 1837, and has since grown into a multinational corporation withhundreds of product lines. The company is the largest firm inthe personal productsindustry of the consumer goods sector. Top competitors for Procter & Gamble includeJohnson & Johnson (NYSE: JNJ), Kimberly-Clark Corp. (NYSE: KMB), Colgate-PalmoliveCo. (NYSE: CL), Avon Products, Inc. (NYSE: AVP), and Unilever (LSE: ULVER.L). The personal products industry is highly competitive. Top companies must rely on brand recognition and product innovation to gain market share. The industry isanalyzed thoroughly using the five factor model. The first factor in the model evaluatesrivalry of existing firms. The collective result is that rivalry is high. The next factorlooks at the threat of new entrants, and reveals that substantial barriers exist whichkeep the threat of new entrants low. Next is threat of substitute products, which showsthat brand recognition will keep customers’ loyal, but readilyavailable comparableproducts make the threat moderate. Analysis of the bargainingpower of buyers revealsthat buyers have moderate power because retailers need to carry certain products atcertain prices to draw customers, in other words, the buyers (retailers) and suppliers(personal products firms) are equally reliant on each other. Bargaining power ofsuppliers reveals that suppliers have less power the bigger the buying firm is.

Italian laundry care market dominated by Henkel SpA and Procter & Gamble

Industry Sector

Consumer Goods

Published 25 June 2013

Author Mike KingType of News

Market

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The Italian laundry care market has continued to fluctuate over the past five years, registering a positive current value growth of 3% in 2012.

The development of concentrated liquid detergents was soon accompanied by the development of concentrated fabric softeners. The rationale is that consumers are using fewer products for the same number of wash loads and the products use less packaging and have lower transportation costs.

The economic crisis continued to affect consumers' decisions when purchasing laundry care products as they sought cost savings for their own household budgets and showed less demand for certain product types which are not considered essential such as categories in laundry aids.

Instead of particularly favouring cheaper alternatives such as private label products, this led to a decrease in volume, in the sense that customers rationalised their spending through buying less of the product although maintaining the average quality they were used to.

Consumers in Italy have continued shifting from powder to liquid and from standard liquid to concentrated and capsule detergents. In 2012 laundry product value sales grew by 3% whereas volume decreased by 4%.

Growth has been mainly triggered on one hand by liquid tablet detergents, introduced in 2011 and increasing in 2012 by 85% in current value sales and 81% in volume, and by the outstanding performance of concentrated liquid detergents.These growth rates generated in laundry detergents overall a 6% value increase and 5% volume decrease in 2012.

Other categories have not performed so strongly; for example, fabric softeners continued to suffer from rationalisation in volume and, even though the new concentrated formulas were appealing, not enough communication was carried out to make customers perceive the real added value of concentrated formulas, with the result being many consumers continuing to buy standard formulas but in less quantity.

In 2012, the Italian laundry care category remained highly concentrated with thefirst two leading companies covering a 50% value share. Thanks to its investments in innovation, advertising and thanks to a pronounced eco-orientatedapproach, Henkel SpA, after years of sharing the leadership with Procter & Gamble, took the sole leading position in 2012, reaching a 27% value share.

Procter & Gamble soon followed with a 23% value share, losing its leadership mainly because Dash Ecodosi, which was the first and only liquid tablet detergent product available in Italy in 2010, faced pressure when Henkel introduced the new Dixan standard and concentrated liquid formats.

Statistics and Facts on Henkelby Cory SchulzHeadquartered in Düsseldorf, Germany,  Henkel is one of the largest household and personal care manufacturing companies in the world. The company operates in three distinct business sectors: home care, personal care and adhesives and is best knownfor the following brands: Purex, Pril, Dial, Loctite, UniBond and Schwarzkopf. In 2012, theHenkel Group generated a global revenue of about 16.51 billion euros. In that year, theadhesive technologies sector generated approximately 8.26 billion euros of the company's total revenue; which amounts to about 50 percent. In 2012,  Henkel employed about 46,610 full-time employees  throughout the world, a figure that has been gradually declining since 2008.

Henkel's two main competitors are Unilever and Procter & Gamble. However, the adhesive, sealant and surface treatment sector for consumer and industrial purposeswill continue to allow Henkel to increase its revenue, especially as the company has been reinforcing its position in emerging markets.

PROCTER & GAMBLE - STATISTICS & FACTS

 

Statistics and Facts on Procter & Gambleby Cory SchulzProcter & Gamble, also known as P&G, is the biggest consumer goods company in the world. It mainly manufactures laundry and cleaning supply products as well as products in the cosmetics and personal care sector. The company's roots date back to the year 1837 when it was founded by William Procter and James Gamble in Cincinnati, Ohio, where the company's headquarters still remains.

In 2012, the company's sales amounted to 83.3 billion U.S. dollars worldwide. This revenue was generated as a result of Procter & Gamble's numerous billion U.S. dollar brands within the consumer goods industry. In 2013, four of the company's

brands were ranked within the top fifteen personal care brands in the world; the leading one beingGillette, which had a brand value of about 17.82 billion U.S. dollars.

Procter & Gamble is also one of the biggest spenders in the world when it comes to its advertising campaign.  In 2012, the company spent approximately 9.35 billion U.S. dollars. In the United States alone,  Procter & Gamble spent 261 million U.S. dollars promoting its Cover Girl brand.

As of 2013, Procter & Gamble has rebranded itself as PGE (Procter & Gamble Entertainment) with a new logo and an emphasis on multi-platform entertainment production.

BRAND VALUE OF THE LEADING PERSONAL CARE BRANDS WORLDWIDE 2013 

While P&G is widely recognized for its marketing might, its legacy as an innovator is equally rich. Over its 175-year history, the Cincinnati firm has consistently created new categories of consumer goods -- from the firstdisposable diaper (Pampers) to the first toothpaste with fluoride (Crest) to the first synthetic laundry detergent (Tide).

The problem of growthBut in March of 2000, a slight decline in P&G's sales and an earnings warning sent its stock price tumbling. By June, P&G named a new CEO, A.G. Lafley, who brought in fresh thinking about corporate strategy and welcomednew perspectives on innovation. When an internal analysis revealed that only 15% of innovation projects were meeting success targets, senior executives began searching for ways to turn around this key metric.

During this time, a number of top P&G leaders were exploring ideas in The Innovator's Dilemma, the groundbreaking book by Innosight co-founder Clay Christensen. And not long after, P&G began collaborating with an Innosight team to build innovation capabilities that would spawn new brands and business models. The idea was to institute a process that was analogous to a factory -- making innovation systematic, repeatable and reliable.Innovation assembly linesVia its new Connect & Develop program, P&G stepped up the sourcing of raw materials -- in the form of product ideas from outside the company. "It didn't matter where the ideas came from," says Nathan Estruth, vice president of P&G FutureWorks. "We had to systematize a process to find them, to partner, to bring them in, and to turn raw ideas into innovations in our growth factory."

A key part of improving its innovation success rate was setting up "innovation assembly lines" by seeking growth from four major categories ofinnovation:

1. sustaining innovations to improve on existing products (i.e Gillette Fusion)

2. disruptive innovations that bring high-end services to mass markets (i.e Crest White Strips)

3. transformative innovations based on performance breakthroughs (i.e Olay Pro-X)

4. commercial innovations to enhance the consumer experience (i.e BrandSaver events)

Small bets labsInnosight's "emergent strategy" approach of testing and refining market approaches was applied to a string of new product ideas.For instance, P&G had tapped into university research for a potentially transformative innovation: a probiotic supplement to improve digestive health. But there was a large degree of uncertainty as to whether the new dietary product, called Align, was a worthwhile opportunity.

Instead of committing to a national retail launch, P&G created a website and promoted Align in just three mid-sized metro areas. "We placed a small

bet," says Bruce Brown, P&G's Chief Technology Officer. "And that was one of the smartest things we did in terms of rapidly progressing the Align brand."P&G also conducted a small-scale market trial for the concept of attaching the venerable Tide brand to a new consumer experience. Deploying "jobs to be done" research, P&G found that there was high dissatisfaction with existing dry cleaners and potential room for a national brand.Tide Dry Cleaners was initially launched in just two or three locations. That allowed P&G to refine the customer value proposition and the operatingplan before it began to scale to more locations.

Innovation transformationAll in all, thousands of P&Gers applied its improved innovation framework to scores of new projects and products. "Innosight has been a close partnerin P&G's innovation transformation," said A.G. Lafley, who retired in 2010.

P&G's growth factory initiative was detailed in a June 2010 article in the   Harvard Business Review  by Scott Anthony and Bruce Brown.The result is that P&G has dramatically improved its innovation success rate, moving from about 15% to over 50%, meaning about half of its new product efforts are meeting benchmarks for success. That has helped boost overall corporate performance. Over the decade, P&G's revenue more than doubled, and profits quintupled.

The commitment to growth through innovation has continued under P&G's current CEO Bob McDonald, who says, "We know from our history that while promotions may win quarters, innovation wins decades."

But it's more than just the numbers. "There is a confidence inside P&G," says Estruth, "that the systematic approach enabled by Innosight will continue to drive our growth factory, and help us meet our goals for many years to come."

Household Care & Personal Products

The Household Care & Personal Products sector covers a wide range of products including detergents and surfacecleaners; toilet, facial and household facial tissue; sanitary protection and diapers. Oral, personal cleansing and haircare products are covered in PersonalCare alongside Beauty; OTC healthcare products in Pharmaceutical & Healthcare.

The Top Household & Personal Care Companies in 2012 by sector revenues

$43.7bn $16.1bn $11.7bn $10.6bn $9.5bn $8.8bn

$5.9bn $5.0bn $4.8bn $3.7bn $2.5bn $2.0bn

$2.0bn $1.6bn $1.4bn $0.9bn $0.7bn $0.6bn

Source: company reports & estimates. Revenues from household care & personal care products but excluding beauty, oral care, healthcare.

The Top Laundry Care Manufacturers Worldwide in 2011 bymarket share

 Procter & Gamble (26.5%)  Kao (2.8%)

 Unilever (15.0%)  Lion (2.0%)

 Henkel (8.7%)  Sun Products (1.8%)

 Reckitt Benckiser (4.4%)  Church & Dwight (1.6%)

 Colgate-Palmolive (3.2%)  Nice Group (1.4%)

Source: Household & Personal Products Industry

The Top 10 Laundry Detergents in the US in 2011 by sales

liquid powder

 Tide  Tide

 Arm & Hammer (Church & Dwight)  Gain (Procter & Gamble)

 Gain (Procter & Gamble)  Arm & Hammer (Church & Dwight)

 All (Sun Products)  Surf (Sun Products)

 Purex (Henkel)  Ariel (Procter & Gamble)

 private label  Roma (La Corona)

 Xtra (Church & Dwight)  Foca (La Corona)

 Wisk (Sun Products)  All (Sun Products)

 Cheer (Procter & Gamble)  Cheer (Procter & Gamble)

 Era (Procter & Gamble)  private label

Source: SymphonyIRI, 52 weeks ended Oct 2011, ex Wal-Mart

Leading Bathroom Tissue & Paper Towels Brands & Marketers

 Charmin  Procter & Gamble

 Andrex  Georgia-Pacific

 Kimberly-Clark  SCA Hygiene

The Top 10 Detergent Brands Worldwide in 2000

 Tide (Procter & Gamble; worldwide sales of $3.0bn)  Attack (Kao $505m)

 Ariel (P&G $2.7bn)  Skip (Lever Faberge $502m)

 Omo (Lever Faberge $2.2bn)  Lever Faberge's Persil ($492m)

 Surf (Lever Faberge $767m)  Dash/Daz (P&G $482m)

 Henkel's Persil ($763m)  Purex (Dial Corp $480m)

Source: Euromonitor

The Top 10 Laundry Detergents in France in 2004 by market share

 Ariel (21%) (Procter & Gamble)  X'tra (7%) (Henkel)

 Skip (14%) (Lever Faberge)  Mir (6%) (Henkel)

 private label / MDD (9%)  Persil (6%) (Lever Faberge)

 Le Chat (7%) (Henkel)  Omo (5%) (Lever Faberge)

 Dash (7%) (Procter & Gamble)  Super Croix (4%) (Henkel)

Source: CB News / AC Nielsen

Other Household Care Companies & Brands Profiled in Adbrands

 Colgate-Palmolive  Church & Dwight

 LG Household & Healthcare  SC Johnson

 Bayer  The Clorox Company

Industry Peers PG

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WHAT

This represents P&G's global market share for fabric care.

HISTORICALS & FORECAST

P&G's Global Market Share for Fabric Care declined from 31.1% in 2008 to 29.1% in 2009. Market share remained at the same level in 2010 before rising to the 30% mark again in 2012. Themarket share loss in 2008-10 was primarily due to a decline inunit volumes, accentuated due to pricing increases. This was taken to offset higher commodity costs and unfavorable currency devaluations.

The company is increasing its focus on offering an improved product-mix. Bulking up its low-price segment portfolio with packaging initiatives such as Tide pods has helped it boost organic sales marginally in 2012. Despite these initiatives, the company's price structure remains well above those of competitors. The division continues to depend on the premium-priced Ariel and Tide product range for a major bulk of revenues. This is likely to hamper the company's growth in a recessionary environment, where even consumers in developed economies are becoming increasingly price-conscious.

Going forward, we expect the company's efforts at reworking its pricing and packaging strategy to pay rich dividends, helping it marginally increase market share, especially in keyregions such as North America.

FORECAST RATIONALE

Trefis considered the following factors for its forecast

1. Higher pricing structure than competitorso The division earns a major bulk of its revenues from the Ariel and

Tide brand of products, which are generally priced at a premium. Thecompany's overall higher price structure deters customers in an increasingly price-conscious environment.

2. Stagnant developed markets

o P&G is a market leader in developed markets like US, Western Europe and Japan. However, these markets are competitive and have limited growth potential on account of saturated consumer demand and relatively lower population growth rates. On the other hand, competitors such as Unilever have a stronger foothold in high-growthregions such as India. This is expected to negatively impact the company's future share in the world market.

3. New product launches to cater to diverse purchasing capacitieso P&G has been expanding its portfolio both horizontally and

vertically. with Tide Stain Release and Ariel Professional in the laundry category, and Bounce Dryer Bar in the fabric enhancer category.

o In Western Europe, it has launched premium tier products with Ariel Excel Gel, a new-to-the-world gel that is consumer preferred by a margin of 2 to 1. In Japan, it has launched the laundry brand, Sarasa priced at a 15% premium versus the category average. This is designed for consumers who want a laundry detergent that cleans well, but also provides natural and gentle benefits.

o P&G has introduced Ace in Colombia and Tide Naturals in India during2010. Tide Naturals is priced 30% lower than the regular Tide, enabling it to reach a much broader spectrum of Indian households. Ace is a mid-tier laundry brand that complements Ariel’s stain removal capabilities and Bold's softness characteristics.

EXPLANATION OF HISTORICAL DATA

VALUATION HIGHLIGHTS

1. Fabric, Home and Pet Care constitutes 28% of the Trefis price estimate for Procter & Gamble's stock.

2. Beauty constitutes 21% of the Trefis price estimate for Procter & Gamble's stock.

3. Baby & Family Care constitutes 20% of the Trefis price estimate for Procter& Gamble's stock.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

P&G's Fabric, Home & Pet Care EBITDA Margin: EBITDA margins for the Fabric,Home & Pet Care division improved from 24% in 2008 to 26.5% in 2009 due to lower commodity costs and manufacturing cost savings. It gradually declinedto 18.8% in 2012 mainly due to the higher commodity cost environment and anunfavorable product mix resulting from the disproportionate growth of developing regions and mid-tier products, along with higher SG&A costs. Going forward, we expect P&G to witness continued decline in margins in theshort term, with potential recoveries in the long-term. There could be a 10% upside to our price forecast if the margins reach the 2009 levels of

25-26% by the end of the forecast period due to cost cuts and lower input costs.

P&G's Beauty EBITDA Margin: Beauty EBITDA Margins improved from 25.5% in 2008 to 25.8% in 2009 due to lower commodity costs, cost cuts, as well as afavorable product mix and exchange rates. It gradually declined to 19.5% in2012 mainly due to the higher commodity cost environment. Going forward, weexpect P&G to witness continued decline in margins in the short term, with potential recoveries in the long-term. There could be a 7% upside to our price forecast if margins reach the 2009 levels of 25% by the end of our forecast period due to cost cutting and lower input costs.

BUSINESS SUMMARY

Procter & Gamble (P&G) is a global company with operations in over 180 countries. P&G manufactures and sells consumer goods across multiple product segments that are part of the larger beauty, grooming, health care,snacks, pet care, household care and baby care reportable business segments. As of 2012, 24 of P&G's brands have more than a billion dollars in net annual sales.

P&G sells its products directly to mass merchandisers, grocery stores, membership club stores, drug stores and high-frequency stores. Sales to Wal-Mart stores and its affiliates represent approximately 15% of P&G's total revenues.

P&G has built significant scale by acquiring popular brands such as Gillette, Duracell, Wella Professional, Iams and Ambi Pur. In July 2011, P&G entered into a partnership with Teva Pharmaceuticals in consumer healthcare to bring together both companies' existing OTC medicine businesses andcomplementary capabilities. It has also divested its Pringles snacks business to the Kellogg Company for $2.7 billion in cash. The transaction marks the final part of P&G’s exit from the food business to focus on the high-growth, high-margin personal care brands.

P&G's easy access to capital resources offer it capabilities to invest heavily on research and development (R&D) programs, brand building, marketing campaigns, direct-to-consumer advertising and market research. P&G has a presence internationally with an established network of retail channels that provide it a route to leverage high growth in emerging markets by easily reaching the end consumer.

The North American markets continues to contribute about 40% to the net sales of Procter & Gamble followed by developing markets (32% of net sales)and Western Europe (21% of net sales). Sales from developing markets are increasing as P&G is rapidly expanding in these markets. P&G has been aggressively pursuing expansion and deeper market penetration in the emerging markets with significant investments. With a target to acquire onebillion new customers by 2015, it will add 20 new manufacturing units in Brazil, China and Eastern Europe over the next few years. This growth wouldinclude a $1 billion investment in China to expand operations.

In February 2012, P&G announced plans to save $10 billion in costs by 2016,which would include a $1 billion reduction in marketing costs and $3 billion in overhead expenses. It plans to eliminate more than 4,000 jobs and rationalize its massive marketing budget in an effort to streamline itsrelatively bloated cost structure that has so far weighed on its profits. It is likely to execute 1,600 job losses in the current fiscal year. These cost cuts will significantly help the company improve its margins over the next few years.

SOURCES OF VALUE

We believe 1) Detergents (Tide, Ariel) & Household Cleaning (Down & Cascade), and 2) Gillette (Mach3, Fusion, Venus) & Braun are the most valuable segments for P&G for the following reasons:

Detergents market share is smaller but the market size is twice that of grooming products

Procter & Gamble leads the $65 billion global detergents market (including laundry detergents like Tide & Ariel) with close to a 20% market share, making its products easily the most popular and most widely available laundry detergents globally, especially in the US. The Tide, Downy & Gain brands have a near monopoly in the US detergents market with close to a 60%share.

In comparison, P&G’s share of the $16 billion global grooming market (including Gillette & Braun brands) is 50% as of 2012. Gillette has gained substantial brand equity from years of heavy investment into R&D and advertising campaigns such as the title sponsorship of football world cup from 1960 to 2006. A high market share, coupled with brand recognition among consumers worldwide, offers Gillette an opportunity to expand its other shaving and male grooming products and increase its overall market share of the grooming market in the future.

Higher profit margins for grooming (Gillette & Braun) brands higher compared to Beauty, Fabric & Home Care, Baby & Family Care

In 2012, Gillette (Mach3, Fusion, Venus) & Braun had EBITDA margins of close to 30%. This is higher than the 22% margins generated for P&G Laundry, Beauty, and Baby & Family Care brands, which generate more than 70% of the company's sales. This is driven in part by low manufacturing cost of razors and blades sold.

P&G's razors & blades product segment has a market share of 40% in the overall grooming market and is also the fastest growing segment with an annualized growth rate of 8% since 2001. P&G's global male blades and razors market share is approximately 70%. Trefis believes that the increasing demand from emerging markets, increasing awareness for health and wellness among male consumers, and an increasing number of advanced products are expected to bolster future growth of manual razors and blades.

Gillette which has the highest market share will accrue a large portion of this incremental growth in the grooming market.

The presence of low-cost competition from generics gives Gillette an incentive to innovate and introduce better products such as Fusion (a 6 blade razor). This gives it an opportunity to charge higher prices by expanding into the premium product segment, thereby increasing its revenuesand operating margins in the future.

KEY TRENDSTarget to cut $10 billion in costs by 2016

In February 2012, P&G announced plans to save $10 billion in costs by 2016,which would include a $1 billion reduction in marketing costs and $3 billion in overhead expenses. It plans to eliminate more than 4,000 jobs and rationalize its massive marketing budget in an effort to streamline itsrelatively bloated cost structure that has so far weighed on its profits. It is likely to cut 1,600 jobs in the current fiscal year. These cost cuts,although very ambitious, should significantly help the company improve its margins over the next few years.

Measured expansion in emerging markets to focus on regaining market share in developed markets

In light of declined earnings and recent market share losses in its core markets, P&G has decided to slow down its expansion across the emerging markets in order to refocus resources on stabilizing its market share growth and operating margin performance in its developed markets. Even though expanding the geographical and product footprint across emerging markets is critical for the growth of consumer giants, a high commodity cost environment, expansion costs and supply chain shortages made P&G's fast-paced expansion more difficult and costly than previously expected. Competitors like Unilever fared better amid the same challenging market conditions.

Emerging markets currently account for about 37% of P&G's annual sales, up from 20% in 2000. P&G had set a target of acquiring one billion new customers by 2014-15 through expansion to new markets and plans to add around 20 manufacturing facilities in emerging markets such as Brazil, China and Eastern Europe by 2015. In the current scenario, it is likely to proceed with a more measured approach. It has now decided to focus on the health and competitiveness of its core and most profitable businesses, starting with its top 40 country-product categories (out of a total 1,000 categories) that account for more than half of the company's sales. The next step is to strengthen its position in its 10 largest emerging markets,including China, India, Indonesia, Brazil and Russia.

P&G will however not exit from any country-product category already entered. In addition, any further expansions are likely to be more measured, with a focus on 'self-funded' expansion.

Nonetheless, as developed markets near saturation, emerging markets continue to grow in the high single digits, compared to low growth in developed markets. This makes them attractive for sales volume growth and market share expansion. New innovations and product launches with broad-based marketing support can quickly create significant opportunity in emerging markets. For instance, China's diaper market for Pampers has grownfrom $200 million to $2.8 billion (14x) within the last ten years. Even today, the average consumer changes a diaper less than once per day in China and India, compared to twice per day in Brazil and four times per dayin the U.S.

P&G estimates that it generates annual sales of about $96 per person in theU.S, $20 per person in Mexico, $4 per person in China and just $1 per person in India, Sub-Sahara and Indonesia. Increasing per capita spend in these four big markets to the level of Mexico would add more than $60 billion to annual sales. A BCG study estimates China is likely to add about250 million consumers to its middle and affluent class over the next decade, roughly the same as in the U.S.

Huge R&D budget and product innovation

P&G annually invests about $2 billion in research & development, 60% more than its closest competitor, Unilever and more than most of its competitorscombined. It 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 Gillette Fusion ProGlide, Crest 3D White, Laundry additives and the Pampers thinness and absorbency upgrade. Trefis believes that innovation, particularly in the premium categories, isthe key to driving profitability as P&G already has significant scale and ahigh level of concentration in developed markets like the US, Western Europe and Japan.

Sustained marketing efforts to defend market share

P&G continues to invest heavily on advertising and promotion of its brands.Trefis believes P&G's advertising and marketing capabilities are important growth drivers for sales as they help maintain brand novelty and defend thehigh market share position that P&G enjoys.

Procter & Gamble Has Big Plans For China AndEmerging Markets Growth

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Cincinnati's Procter & Gamble is one of Ohio's largest companies in terms of revenue. (Photo credit: Wikipedia)

With the aim to penetrate deeper into the fast-growing Chinese market, Procter & Gamblerecently began the construction of a new manufacturing facility in Guangzhou, China. It has also announced plans to reducecosts by $10 billion by 2016 and invest more in the emerging markets. It is likely to add 20 new manufacturing units in Brazil, China and Eastern Europeby 2015. This means more challenges for its largest competitor Unilever, which is still catching up.See full Trefis analysis for P&G here

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$1 Billion Into Chinese Market By 2015P&G’s Guangzhou plant   will begin operations in latter half of 2013, starting with the production of its baby

care products such as Pampers. The facility is expectedto add $490 million of annual production value for P&G.The plant is part of P&G’s $1 billion investment targetin China by 2015, and is expected to be one of the largest manufacturing facilities in Asia.

China is P&G’s second largest market worldwide and is hotly contested for market share with Unilever, which has also started constructing a new plant in China’s Tianjin this month to manufacture liquid laundry detergent and fabric softeners.

Plans To Cut $10 Billion in Costs By 2016In the annual Consumer Analyst Group of New York conference, P&G’s CEO Bob McDonald disclosed that the company plans to reduce costs by $10 billion by 2016, which would include $1 billion reduction in marketing costs and $3 billion in overhead expenses. This would provide the company further resources to invest in emerging markets. It also recently sold its Pringles potato chips business in a $2.7 billion deal with Kellogg Company, marking its final exit from the food business to focus on high-growth, high-margin personal care brands.Pushing Further Into Emerging MarketsAs developed markets are nearing saturation, under penetrated, higher growth emerging markets are attractive for sales volume growth and market share expansion. P&G has set a target to acquire one billion new customers by 2014-15. It plans to add around 20 more manufacturing facilities in emerging markets such as Brazil, China and Eastern Europe.

Procter & Gamble Has Big Plans For China AndEmerging Markets Growth

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P&G’s aggressiveness and investments in emerging markets such as China would mean more challenges for Unilever in these markets. Localized production would mean quicker product launches and roll-outs with greater flexibility and lower cost base. P&G’s added aggressiveness with cost cuts and a deeper push into emerging markets has certainly provided P&G an edge over Unilever, which is still catching up.

The current Trefis price estimate for P&G’s stock is $71.50, a 5% premium over the market price.