Case study 7:Proctor and Gamble’s Battle with Nelson Peltz

EPGP-303-13A- SM Group 10

Contributors:

EPGP-13A-007 ADITI VATSA

EPGP-13A-003 ABHIRAJ SINGH

EPGP-13A-019 ANKIT MITTAL

EPGP-13A-010 AKSHAY NANGIA

EPGP-13A-073 NITHUL K P NARAYANAN

What are the major determinants of profitability in the global FMCG industry?

The major determinants of profitability in the Global FMCG industry are:

● Presence in Emerging Markets: Entering into emerging markets and maintaining a strong lead is an effective
profitability/ performance indicator for a company. Growing income and middle class in India and China offers huge
opportunity to FMCG Companies.
● Product Portfolio: As opposed to diverse product portfolio in the past, companies now focus on certain products only
which readily sell, thereby trimming product offerings.
● Familiarity with local markets: Customizing and localizing products according to the local consumer needs and
preferences is a key performance indicator in emerging economies.
● Product/ Brand acquisitions: Identifying the trending and popular products and striving to increase sales either by
acquisitions of popular brands or products or developing them in-house is an indicator to measure profitability in the
FMCG industry.
● Shelf Space: Products occupying prime slots in retail stores will have more visibility and therefore more buyers.
Companies should make sure there products are given prime slots.
Contd...
What are the major determinants of profitability in the global FMCG industry?

Contd...

● Supply Chain: The supply chain and distribution channels chosen by an FMCG company are major determinants or
indicators of a company’s performance in the market. Disruptive players like Amazon has allowed new entrants to
directly offer new entrants to directly offer personalized products in niche markets.

How have they changed over time?

● Local brands give tough competition to MNCs: the Brand Footprint Report showed that local brands were nearly
65% of the market. As much as the FMCGs tried penetrating the local and smaller markets, they had to face tough
competition from the local players. The local brands were successful because of the demography knowledge that they
possessed.
● Focus on supply chain optimization due to disruptions brought in by Amazon: This e-commerce giant has a very
strong hold on the supply chain and has features like subscribe and save with a very cost effective pricing and this
provides a strong hook for the customers.
How have they changed over time?

● Understanding of local customers: Availability of consumer data helps brands to know there consumers well and to
predictive analysis
● Emergence of alternative distribution platforms and this gives small brands a better reach and share of voice.
● The rise of sustainable and environment friendly products have given rise to a new product portfolio and caters to
the likes of GenZ and millennial population.
● FMCG companies have witnessed major shift in the importance of retail shelf space versus emerging distribution
methods using digital platforms.
● Many companies had started to compete fiercely for the subscription service. Firms had started to consider more
digital, direct-to-consumer models as a part of testing their subscription services.
What are the historical sources of distinctive competence that helped P&G build and maintain a formidable
market position? Are these sources of advantage still viable in the medium-term future?

The various sources of distinctive competence that helped P&G build and maintain a formidable market position are:

● Distribution system:

P&G has a very lost cost of distribution due to its strong and efficient distribution network. They have collaboration with distributors
like Target, who constantly push them which in-turn helps them in maintaining their supply chain network.

● Innovation and R&D:

P&G spent a huge amount of money each year (more than ~$2.2 billion) on innovation and R&D for continuous improvement of its
current line of products and to introduces new brands and products regularly. Nearly all organic growth over the last decade have
come from improved products and newer brands of the company. P&G also collaborates with many research partners who help them
to constantly innovate and grow.

● Consumer understanding and research:

P&G invest heavily on regularly improving their consumer experience to all their consumers across the globe. They have

Contd...
What are the historical sources of distinctive competence that helped P&G build and maintain a formidable
market position? Are these sources of advantage still viable in the medium-term future?

hundreds of millions of consumers across the world and P&G invests heavily on market research and development to expand and
maintain their consumer base.

● Brand and product width:

P&G has a large number of brands and products under its brand name which help it in maintaining it strong and formidable market
position. It covers almost all demographics across different age groups, genders and cultures. P&G also has its operations across
various countries across the globe and has dominant presence across many market segments in the FMCG industry like Beauty and
personal care and hygiene and Homecare.

● Financial Position:

P&G has maintained a very strong financial position over the years which has helped them in developing and expanding their business
very effectively. P&G has maintained a very good financial position over the years through many acquisitions and takeovers. P&G has
acquired many companies to have competitive advantage over its rival companies over the years, for example the acquisitions of
Gillette and Dollar Shave Club. P&G’s strong financial position also allows them to spend a large sum on innovation and R&D.

All the mentioned sources of advantage followed by P&G are still viable in the medium term future.
What are the main dimensions of strategic change that you would recommend P&G to consider?

The main dimensions of strategic change that we would recommend P&G to consider are:

● Diversification into new and emerging markets

P&G should look to diversify and shift their focus towards newer and emerging markets since the sales projections due to
rising incomes for such markets is very optimistic. The developed economies currently served by P&G are expected to show
a plateau growth in the coming years. Acquiring local players and catering to local needs should be the ultimate goal for P&G
in the coming years.
● Digitalization and adoption of digital platforms
P&G should shift its focus towards increasing their sales online and on other digital platforms. Adopting digital methods of
sale would help it in boosting their revenue by considerable amounts going forward. The asain market has a high value of
digital penetration and a significant portion of sales are generated on e-commerce platforms.
● Exploring new and alternate distribution platforms
Exploring new distribution platforms like Amazon and investing into integrating voice based digital technologies (like Alexa)
would be very beneficial for a company like P&G. This will be a very good addition to the existing retail based model for
Contd...
What are the main dimensions of strategic change that you would recommend P&G to consider?

Contd...
the company. These distribution platforms will help boost revenues. As per finding in the case, almost 50% of the searches
will be done online and will be carried out through voice.
● Re-orienting branding and advertising
P&G should look towards re-orienting their branding and advertising by aligning it towards the themes of environmental
stewardship and core values since the current consumer population is shifting focus towards sustainability and more health
and well-being based products. The consumers preferences have shifted from the traditional ones towards more
environment friendly products. This shift in consumer focus must be taken into account by P&G to ensure future sale and
progression.
● Limiting R&D expenditures
P&G should look to limit and rationalize their expenditures in the R&D function in the interest of shareholder value. Fixing
R&D as a fixed proportion of the sales can ensure limited and appropriate expenditure on research and development and
will bring the company at par with its rivals and competitors.
Evaluate the position of Trian (Nelson Peltz) as well as the response of David Taylor and the management of P&G.

Trian’s key concerns were:

● Lack of innovation: To combat the absence of market share growth in new areas, Trian advocated kicking off
innovation to establish local brands. He also recommended that P&G should use digital platforms and transform its
organizational structure to a holding company with three independent business divisions. He believes that the
corporation needed to reestablish its sense of urgency to reclaim market share that it had lost as sales growth lagged
competitors. For the past ten years, P&G has been losing market share. According to market trends, the clients that
P&G is losing will not return since they have so many other options.
● Lack of market share growth in emerging markets: Mr Peltz believes that the corporation needs to create new, smaller
brands to promote to a younger audience, either through internal research and development or acquisitions; recruit
more outside leaders to bring in fresh viewpoints; and streamline down, eliminating its "matrix" corporate structure.
Mr Peltz invested nearly a fourth of his fund in P&G in February, purchasing a $3.5 billion stake in the firm with a
market value of $232 billion.
Evaluate the position of Trian (Nelson Peltz) as well as the response of David Taylor and the management of P&G.

● Discrepancy in Information flow: Another accusation was that P&G is not providing shareholders with the complete
picture. He noted that sales have increased by 3% overall under David's tenure. Their colleagues have increased by 6%,
while the market has grown by 7%. They'll also tell you that since he took over as CEO in November of 2015, the stock
has risen by 24%.
● Inflexible Organisation structure: Another issue was the structure of the organization. company's complex "matrix"
structure, which includes ten discrete worldwide business units and another six "selling and market operations"
divisions, has hampered its growth. Nobody had a proper accountability incase something goes wrong and units were
operating as independent units and had little to low information about what was going on in the other side.

According to Nelson Peltz P&G board is showing a lot of corporate governance problems. His three main claims were: P&G
has not worked out how to cater to the customer demand for smaller brands, has fostered insular corporate culture and
needs to be Structured
Evaluate the position of Trian (Nelson Peltz) as well as the response of David Taylor and the management of P&G.

David Taylor and the management of P&G had the following response to Nelson’s arguments:

● Under current CEO David Taylor, P&G claimed it was building on its core abilities in consumer understanding, branding,
product and market innovation, and go-to-market capabilities
● It also stressed about its #1 position in the U.S., its biggest market across 12 different brands, ranging from Always to Venus,
underscored that its innovation prowess remained intact. It also argued that its blockbuster brands had already spawned
several sub-brands that had proven to be important hits in the market (e.g., Always Discreet, Tide with Downy, Pampers
Pants).
● Highlighting the sales growth in China from -5% to mid-single digits.
● Stock price performance
● Outperforming peers in total shareholder returns
● The management also highlighted Peltz’s unimpressive record at previous companies that he had targeted and how P&G had
already made significant strides in almost all the areas that Peltz had noted as serious concerns
How would you vote in the proxy battle? How would you defend your choice?

Our vote in proxy will go to Trian (Nelson Peltz) due to the following reasons:
● According to Kantar Worldpanel’s Brand Footprint Report for 2018, 17 FMCG brands were chosen by customers over a
billion times each in the preceding year. Six of these 17 billionaire brands were Unilever brands, while P&G had just
one: Downy in fabric care. This highlights the poor footprint P&G had despite all the claims around R&D, consumer
understanding etc. Hence, Trian pointed out the issue with market share erosion and anemic organic growth despite
spending $1.9bn.
● The white paper also questioned the bureaucratic culture aided by a complex organization structure, and a board that
seemed to reward management despite continued poor performance and it was evident that no action was being
taken on this front. Corporate governance issues like top management being paid high without any change in ground
reality despite the market going out of hand, no bold decisions were taken by the board.
● The company continued facing challenges in huge markets like Asia, especially India and China despite having
opportunities there. The expansion, growth rate were minimal and not promising. Hence according to Nelson, the
innovation machine needed a restart.
● P&G found its size to be both an advantage and a disadvantage. While its size gave it tremendous market reach and
bargaining power in retailer channels, it had a negative impact on decision-making. Nelson provided strong remedy to
this issue by breakup of the company into a holding structure with three separate business entities representing (1)
beauty, grooming, and healthcare, (2) fabric and homecare, and (3) baby, feminine, and family care which will help the
company tackle this challenge.