P&G earnings takeaways: Price hikes coming, but so are agency cuts – Info Advertisement

Here are key takeaways from today’s earnings report:

Sales were light, prices were slashed

Overall sales for the quarter were $16.5 billion, up 1 percent organically, just short of where P&G could have rounded up to its target 2 percent. Unit volume was up 3 percent, as price cuts came primarily in the form of trade promotion. Commodity and transportation costs were up more than expected, yet P&G still hit its earnings target. So guess where the savings came from? Read on.

Agency fee cuts will continue

Yes, agency, production and other marketing-services costs took an unspecified hit, though lower U.S. corporate taxes and internal overhead reductions also helped. Marketing-services cuts and internal overhead reduction saved P&G a combined $130 million for the quarter.

On a conference call, Chairman-CEO David Taylor said P&G has cut agency and production costs by $1 billion annually over the past four years. It’s expected that another $200 million will be cut over the next two fiscal years to meet prior stated targets, though there’s no guarantee P&G won’t exceed that goal.

Price hikes are coming

P&G announced price hikes coming for Pampers, Bounty and Charmin – suggesting a price war being waged amid rising costs this year may draw to a close. But there’s limited relief. The price hikes won’t start taking effect until October. And P&G’s results show price battles in such areas as toothpaste and razors continue.

Media spending continues to rise

While P&G continues to find ways to spend media dollars smarter — including handling more media buying in house and enforcing third-party measurement on digital players – it’s still spending more. On a media call, Chief Financial Officer Jon Moeller said advertising spending was up 4 percent in the fourth quarter despite agency fee cuts. For the year, he said overall ad spending was about flat, which would put it at around last year’s $7.1 billion globally.

A reason to feel sorry for P&G

It’s hard to work up much sympathy for a global packaged-goods behemoth with $65 billion in global sales and the world’s biggest ad budget. But RBC Capital analyst Nik Modi pointed out in a question that while P&G is working on building or maintaining margins, it’s up against small competitors that make no profit whatsoever yet have access to a seemingly limitless supply of venture capital. That would particularly be true in P&G’s most profitable business, razors, where it’s been losing ground to the likes of Harry’s, which has yet to turn a profit but recently expanded into Walmart on the strength of a new $112 million capital infusion. It’s a replay of the story that has played out in media and e-commerce as investors chased growth with little regard for profitability, and incumbents suffered.

“What you say is very real,” Taylor said to Modi. “And the harsh reality is that there are some people coming into categories that are aggressively spending. What we’re choosing to do is to make sure we’re being more competitive and protecting our businesses.”