Sunday, June 09, 2002

Up next: Innovation, more cost-cutting




By Cliff Peale, cpeale@enquirer.com
The Cincinnati Enquirer

        The next phase of Procter & Gamble Co.'s recovery will start late this year when chairman and chief executive A.G. Lafley calls on Wall Street.

        His pitch to investors: With the company back to the form it displayed before a stock collapse in mid-2000, P&G can innovate and cut costs while growing profits by double-digit margins every year.

Byrnes
Bruce Byrnes, head of global health care and beauty care and one of P&G's new vice chairmen.
        But there is no need for a company-wide restructuring like the ones P&G announced in 1993, 1999 or 2001, Mr. Lafley said.

        And the company apparently is done for now with selling unprofitable or non-core brands.

        The trip will come at a crossroads for the Cincinnati-based giant. After getting $700 million in savings from its global restructuring this year, P&G will be on its own after 2004, forced to expand profit margins internally through sales and productivity gains.

        It still faces the same basic question that drove former CEO Durk Jager to put so many company dollars into new products and new technology: With already dominant market positions in brands like Tide, Crest and Pantene, how much more detergent, toothpaste and shampoo can P&G sell?

        “The restructuring savings have given them a two-year window to get the thing operating at peak efficiency,” said Jim Gingrich, a consumer-products analyst at Sanford C. Bernstein in New York.

        “The turnaround's not done. The ship's righted, but they've still got a lot to do.”

        According to a report from J.P. Morgan after a recent visit to Cincinnati, P&G will have to cut costs by roughly $300 million annually to reach its profit goals.

        Mr. Lafley acknowledged that P&G can't grow by cutting cost and that it needs to prove it can generate growing profits.

        “I think we're getting the top-line (sales),” he said in a recent interview. “I think that came a little faster.”

        Even after seeing its stock price rise by half in the last year to about $90 a share, the company still faces the unrelenting pressure from Wall Street to shrink costs and grow sales.

        The strategy that Mr. Lafley will unveil will mark the latest stage in P&G's recovery that started in June 2000, when Mr. Lafley replaced Mr. Jager as chief executive.

        The plan will include both cutting costs and increasing innovation programs that will produce more sales.

        • Costs: In early fall, P&G will decide whether to outsource some or all of its Global Business Services unit, like accounting and information technology.

        The formation of Global Business Services itself was a move to cut costs. Since the support-services unit was formed in 1999, P&G has reduced transactional costs, like data processing, payroll transactions and health-care benefits, an average of 20 percent.

        One of the key arguments of Mr. Lafley's team is that the 1999 restructuring, called Organization 2005, hasn't even put P&G at full efficiency yet.

        That restructuring still continues in other countries, such as Germany and Japan, where market development groups have only existed since 1999. It should be complete by mid-2003.

        “This management team is very self-aware. We know that it isn't over yet,” said Bruce Byrnes, head of global health care and beauty care and one of P&G's new vice chairmen. “We've still got people in relatively new jobs. We still think there's a ways to go yet before we realize the potential of the reorganization.”

        P&G also is about to get the full benefit of a multiyear plan to standardize its diaper manufacturing plants around the world.

        • Innovation: Big brands like Tampax tampons will roll out new extensions this year. That will be the fourth of P&G's biggest businesses — laundry, diapers, hair care and feminine care — to unroll big improvements since Mr. Lafley made that a priority two years ago.

        Other brands also are rolling out new products. Later this month, P&G will start shipping its new Ohm by Olay line of body-care products.

        The line is P&G's first skin-care foray that uses natural products like ginger and jasmine, and also includes new technologies such as a body mist.

        The company also could spread expertise from its newly acquired Clairol brands. In April, top officials declined to comment about the possibility of putting hair coloring under the Pantene name.

        And research-heavy units like P&G Pharmaceuticals continue to invest in new products. The unit's standard-bearer, the Actonel osteoporosis drug, could approach $400 million in annual sales this year.
       



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