Saturday, June 16, 2001

P&G will trim fat substitute

Company's 1st loss in eight years also dooms Olay cosmetics

By Cliff Peale
The Cincinnati Enquirer

        NEW YORK — Procter & Gamble Co. will shrink or kill brands such as Olean fat substitute, Olay cosmetics and Dryel home dry cleaning to cut costs and boost profits in the coming year, P&G's president said Friday.

        The company will lose money this quarter because of restructuring charges — the first loss by P&G in eight years.

        The news about Olean was perhaps the most surprising, since P&G had put nearly 30 years and a reported $500 million behind it.

        Olean was “an experiment that had a very small market,” said president and chief executive A.G. Lafley, who was here to speak at a conference for Wall Street analysts. “It is a truly unique ingredient. It does deliver. We kept trying to push forward and we just said, "Enough is enough.'”

        Mr. Lafley said the move to shrink Olean and other lagging brands would help:

        • P&G meet its sales and earnings goals for the fourth quarter and the fiscal year that starts July1.

        • Promote strong growth in the long term.

        “We will not be as patient or persistent as we have been with underperformers,” Mr. Lafley said. “We're returning to sound P&G strategy and discipline.”

        The scaling back of underperforming businesses will cost Cincinnati-based P&G $900 million in charges, more than previous estimates and most of it against fourth-quarter earnings.

        Added to charges for cutting thousands of jobs, and the total charge of $1.2 billion will drive the company to a net loss this quarter, P&G said.

        P&G said profits, excluding the charge, would be in line with analysts' estimates of 58 cents to 60 cents a share, according to First Call/Thomson Financial.

        The Wall Street analysts were looking for aggressive action from Mr. Lafley, who has just finished his first year at P&G's helm. In a two-hour presentation to them, he said P&G can meet its goals of double-digit profit growth and sales growth of 4 percent to 6 percent by fiscal 2003.

        He also said P&G would set realistic goals and meet them, which should prevent the earnings surprises that have driven the company's stock price down.

        “Bottom line, we're doing what we said we would do,” he said.

        Answering questions from reporters after the meeting, Mr. Lafley used Olean as an example. Although P&G has spent decades and hundreds of millions of dollars developing the brand, he acknowledged that “not enough American consumers voted for snacks containing Olean.”

        Olean is P&G's brand name for its controversial fat substitute, olestra — made in the company's sprawling Ivorydale complex.

        P&G uses it in its own Fat Free Pringles and sells it to Frito-Lay for that company's WOW chips. P&G will continue to make enough of the product to fulfill its obligations to Frito-Lay.

        P&G had originally projected annual sales of $1 billion for olestra, which it introduced in 1998, because of increased health consciousness among consumers. But results have fallen far short of those expectations, in part because of accusations — denied by P&G — that olestra causes digestive problems.

        Rita Freedman, an analyst at PNC Advisors in Philadelphia, called Friday's news “encouraging” and said she was dismayed that the stock dropped (it closed down $2.26 to $62.60). She said she's “neutral with a positive bias” on the stock, pleased with the moves Mr. Lafley has made but disappointed that market shares haven't improved.

        Dumping underperforming brands is smart, she said. And P&G's recent purchase of the technology for moist toilet paper shows the company is willing to buy technology it hasn't invented. “It makes more sense to me than rolling the dice on something and being late to market,” she said.

        But all that makes Ms. Freedman wonder about the company's plans for its pharmaceutical business, which she thinks isn't large enough to be as profitable as P&G hopes. “They don't have the infrastructure for marketing” drugs, she said. “My sense is that maybe down the road (Mr. Lafley) will get rid of it.”

        Other brand downsizings will include Olay cosmetics, which P&G will phase out to concentrate on its Cover Girl and Max Factor businesses, and Dryel, which will be pulled out of markets outside the United States, Mr. Lafley said.

        In addition, P&G will:

        • Scale back Secret deodorant in Western Europe.

        • Scale back paper tissue and towel markets in some developing counties to focus on North America and Western Europe.

        • Reduce capacity in laundry care worldwide.

        In the long term, Mr. Lafley said, he is optimistic that P&G could continue to cut costs and increase the market share of its biggest brands. He said the company has increased its available cash by $1 billion over the last year, and he said brands like Tide laundry detergent and Folgers coffee had increased market share.

        And newer brands like Actonel osteoporosis drug, Crest Whitestrips and Charmin Fresh Mates moist toilet paper should contribute, he said.

        He also said the company's $4.95 billion acquisition of the Clairol hair-color business and its joint venture with Coca-Cola Co. should pay dividends quickly.

        For the next year, P&G's growth in sales of core brands is expected to increase between 2 percent and 3 percent. The remainder of P&G's revenue growth will come from pricing, changes in its product mix, and new brands or acquisitions, the company said.

        Staff writer John J. Byczkowski contributed.


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