It’s no secret that Procter & Gamble has struggled over the last few years (notwithstanding the most recent quarter). Revenue growth has been stagnant and below inflation. Profits have not faired any better with earnings more or less flat. This is despite years of productivity improvement programs and significant investments in advertising and promotion. The weak performance has resulted in the shares significantly underperforming the market and most peers over the last decade.
This lackluster performance has attracted activist investors, including Bill Ackman’s Pershing Square (2013) and Nelson Peltz’s Trian Partners (2017). Both of these firms have historically looked for companies that have unique characteristics (orphan businesses, conglomerate structures, underperforming operations, etc) where they can come in and be a catalyst for positive change.
These activist investors were attracted to P&G for their stable end markets, leading market positions, and attractive cash flow. Both Pershing Square and Trian issued presentations critiquing the company and proposing strategies for improvement, but it was Peltz who eventually got a seat on the board.
In their 94-slide long presentation on P&G, Trian Partners explicitly said they were not advocating for a break-up of the company through divestitures or spin-offs. Rather, they want P&G to improve operationally, regain market share, and reorganize the company’s operating structure.
With the recent organizational change announcement, it looks like Trian is getting their wish.
Traditionally, Procter and Gamble’s operations were structured as a “3-way matrix”. The matrix was comprised of Global Business Units (GBUs), Sales and Marketing Operations (SMOs), and Corporate & Global Business Services (GBS).
The Global Business Units are where the product categories sit (Fabric Care, Home Care, Baby Care, etc). The Sales and Marketing Operations are charged with sales and marketing responsibilities at a regional and local level. The Global Business Services consolidate corporate functions across the whole organization.
Source: Company Filings
The purpose of the matrix operating structure was to leverage P&G’s vast scale and minimize redundant operating costs by leveraging functions across the entire organization. However, this structure actually created redundancies and a lack of accountability throughout the organization while increasing complexity.
While P&G tried to fix some of the issues with the matrix over the years with “End-to-End” and “Freedom in a Framework” structures, none of these initiatives appeared to make a large impact.
The Trian White Paper does a nice job summarizing the historical operating structure.
At Procter & Gamble’s 2018 investor day, they announced a complete reorganization.
“We believe this is the most important organizational change we’ve made in the last 20 years. The design eliminates the 3-way matrix and moves to one axis: sector business units.”
David Taylor, Chairman & CEO at PG’s 2018 Investor Day
Starting July 1, 2019, P&G will operate through six Sector Business Units (SBUs) that will manage ten product categories.
- Fabric & Home Care
- Baby & Feminine Care
- Family Care & Ventures
- Health Care
Each of the SBUs will be led by a CEO with complete profit and loss responsibility and the autonomy to run the business as they see fit. This means that each SBU will have more control over their resources and be much more independent. P&G will also significantly reduce corporate resources by moving ~60% of the corporate roles down to the six business units. Decisions regarding sales, marketing, human resources, etc will now be solely made by the leaders within the SBUs.
Ultimately, this will push resources closer to consumers and increase accountability for performance (sales, profit, and cash flow).
“Importantly, the SBUs will determine the optimal level of services needed to efficiently support their businesses.”
David Taylor, Chairman & CEO at PG’s 2018 Investor Day
This new structure should help P&G make decisions faster and become more agile in the market without losing their scale advantages.
It appears that much of P&G’s historical problems were related to accountability. With the previous operating structure, there were too many people involved in the decision-making process and no one singularly owned decisions. This new structure will decentralize the business and give the Sector Business Unit CEOs the autonomy needed to act quickly while also holding them accountable for the performance of the business.
Another interesting aspect of this reorganization is that it allows P&G to more easily manage their portfolio of businesses. Since the segments will be less integrated, P&G could acquire, sell, or spin-off businesses much more efficiently. Some of P&G’s businesses are unique assets and have the characteristics of top performing spin-offs. These could be unique opportunities if the board ultimately decides that is the best way to create per share value.
Overall, this is probably the right step for the organization going forward. The consumer packaged goods industry has been structurally changed by e-commerce (unlimited shelf space) and social media (enables micro targeting of consumers by small brands). However, P&G has the resources to continually develop new products, advertise on all platforms, and get products to market across the globe and through every channel.
Change at a massive company like P&G with 92,000 employees will take time and will not happen in a linear fashion. With the shares rallying over the last few months and trading at over 20x forward earnings investors should be patient.