THE WALL STREET
BUSINESS | September 26, 2012, 10:31 p.m. ET
P&G's Stumbles Put
CEO On Hot Seat for Turnaround
On Sept. 4, Robert McDonald,
chairman and chief executive of
Procter & Gamble Co.,
finally met the hedge-fund manager who began making his life
difficult this summer.
CEO Robert McDonald,
with P&G's new Tide detergent pods
William Ackman, left, has suggested that P&G's board search for a
replacement for McDonald.
William Ackman greeted him with a 75-page litany
of complaints about his three years at the helm of the
consumer-products giant—poor results, eroding investor confidence and
sagging employee morale, according to several people familiar with the
Mr. Ackman, whose Pershing Square
Capital Management LP had bought $1.8 billion worth of P&G stock in
June and July, capped the roughly 90-minute get-together in downtown
Manhattan, these people said, with a pitch aimed more at the two P&G
board members in attendance,
Boeing Co. Chief Executive James McNerney Jr. and
American Express Co. CEO
Kenneth Chenault: Strip Mr. McDonald of his board-chairman role
and search for a new CEO.
The board hasn't done either. But Mr. McDonald's
job could be at risk if the cost-cutting and product-refocus plans he
has announced don't deliver results, according to two people familiar
with the board's approach to the issue. P&G's stock, which had been
flat for most of the past two years, has climbed 12.9% since Mr.
Ackman's interest became public, hitting a 52-week intraday high on
Tuesday before closing Wednesday at $69.30. P&G's chief competitors,
however, have done better.
Mr. McNerney, the board's presiding independent
director, said that the entire board had reviewed and endorsed the
company's restructuring plan, and that it "wholeheartedly supports"
Mr. McDonald. He added that the board will "actively oversee the
plan's implementation to ensure its effectiveness." P&G's annual
meeting is scheduled for Oct. 9.
Cincinnati-based P&G, known for such brands as
Tide detergent and Pampers diapers, finds itself in an unfamiliar
position. It has stumbled recently in areas where it has long been
adept: understanding consumers, pricing products and getting new and
revamped products to market. Snafus marred the launches, for example,
of Tide detergent capsules and an overhauled line of Pantene shampoos
Profit has declined for three straight years,
and the company has reduced profit forecasts three times this year. In
recent quarters it has lost market share in a majority of what P&G
calls "product-country combinations," including oral care in China and
beauty in the U.S.
Some of the problems are rooted in decisions
made by Mr. McDonald's predecessor, A.G. Lafley, who stepped down in
2009. Mr. Lafley engineered the blockbuster, $57 billion acquisition
of Gillette in 2005, for example, which swelled P&G's size. And his
relentless focus on the domestic market left the company lagging
behind its rivals in fast-growing emerging markets.
It is up to Mr. McDonald, a former U.S. Army
Ranger who has spent his entire business career at P&G, to turn things
around. In February, he rolled out the company's first major
cost-cutting plan in years, with a goal of shedding 4,000 jobs and
saving $10 billion by 2016. In May, he imposed a "no-fly zone" that
cut spending on anything not directly linked to selling products. And
in June, he laid out a plan to focus on the company's 40 most
lucrative markets and products.
To mollify investors, P&G reversed course this
summer and said it would resume buying back stock. The board cut Mr.
McDonald's pay for the last fiscal year by 6%, and senior executives,
including the CEO, are on track to collectively earn less than 50% of
their three-year performance award targets.
The repair efforts have shown some results. In
the quarter ended June 30, P&G's profit came in better than investors
had expected, lifting its stock. But profit margins narrowed and
market-share losses worsened, with P&G losing ground in two-thirds of
its product markets over the three months. And the company's profit
forecast for the current quarter was lower than analysts were
Over the summer, Mr. McDonald regularly
acknowledged that the company's performance has fallen short. "These
results are not as strong as we'd like," he said during a June
investor conference. "None of these are excuses. It's our job to
overcome these—but we haven't always been able to do this."
Mr. McDonald is a detail-oriented executive
known for his work ethic. He wakes at 4:30 every morning for two-hour
workouts, a habit he has maintained as CEO even as he travels
extensively around the world. Since his earliest years at the company,
he has made a point of never heading home without clearing off his
When he was tasked with rehabilitating P&G's
operations in Japan after the 1995 Kobe earthquake, he learned enough
Japanese to chat with employees and retailers.
Mr. McDonald took over the top job in July 2009,
just as the financial crisis was putting a grim bookend on a strong
decade by his predecessor, Mr. Lafley.
The Gillette deal substantially increased P&G's
size, and when consumers turned more frugal, P&G's rivals cut costs
more swiftly than it did. That made it harder for P&G to maintain its
profit margins while cutting prices to help its products sell.
Under Mr. Lafley, the company had approached
expansion into developing markets with little urgency. P&G had focused
on creating more expensive versions of its household staples. U.S.
shoppers, then flush with cash, were willing to pay extra for Tide's
new scents, Olay's extra-moisturizing creams and softer Charmin toilet
Then the recession hit, and fast-improving
store-branded products left American consumers wondering whether P&G's
pricier brands were worth the cost.
Mr. McDonald rushed to boost the
company's presence in fast-growing emerging markets. He poured
resources into launching existing P&G brands in new markets, such as
Pantene shampoos in Brazil and Tide in India, and he took aim at
Colgate-Palmolive Co.'s global dominance in toothpaste.
Mr. McDonald didn't want the company to cede any
territory to its competitors overseas. "You're either active
everywhere or nowhere. There can be no in-between," he said during a
2010 visit to Brazil. "If you're in-between, you give them pockets of
inactivity, and they will use that money and spend it back against
The U.S. is P&G's most important market. It
delivers just over one-third of its sales, but an estimated 60% of
pretax profit. As Mr. McDonald worked to extend P&G's global reach,
problems intensified at home. With the U.S. economy weak, consumers
continued to switch to cheaper products, and P&G lacked its rivals'
array of midprice brands.
Mr. McDonald and his team initially promised
investors they would take a "surgical" approach to cutting prices.
Their determination to maintain P&G's premiums appears to have hurt
financially. The company has told investors that lower pricing by
competitors has contributed to sales shortfalls.
More recently, as the global economic crisis
began easing and rising commodity costs increasingly hit P&G, the
company ran into problems by increasing prices too aggressively, which
cost it market share in a number of areas, including powdered laundry
detergent, oral care and shaving. That setback led the company to
lower its profit forecast for its June fiscal year and to roll back
earlier price increases. By midsummer, P&G had regained some of the
ground it lost.
Product launches have been another trouble spot.
A year into Mr. McDonald's tenure, P&G tried to reinvigorate its
Pantene brand in the U.S., which Sanford C. Bernstein analyst Ali
Dibadj estimates is a nearly $2 billion business. Both P&G and
retailers say consumers had become lost in the tangle of varieties of
the products, and Pantene was losing ground to lower-priced rivals.
The new Pantene line was years in development. A
team of P&G's designers, marketers and scientists gathered at the
company's Clay Street innovation center in Cincinnati for weeks to
plot the relaunch. Researchers measured whether new formulations made
women feel better emotionally about their hair. To determine whether
Pantene's new television ads were stimulating enough, P&G measured the
brain waves of focus-group viewers.
The revamped Pantene hit shelves in 2010. It
soon became clear that the changes were too much for consumers.
Certain Pantene products eliminated from the lineup, such as the
2-in-1 shampoo and conditioner and large sizes popular with
cost-conscious shoppers, had more loyal users than P&G realized, so
sales fell, according to people familiar with the results.
Sanford C. Bernstein estimates that Pantene's
share of the U.S. shampoo market fell to 11.6% in September 2012, from
16.5% in January 2009—a huge setback in the consumer-products sector
in which minute market-share changes loom large.
P&G also ran into trouble in the laundry aisle.
The company announced plans in April 2011 for a new type of Tide
detergent that would come sealed in single-use pouches. But the launch
was delayed twice because of manufacturing problems. By the time Tide
Pods hit the shelves in February, P&G's competitors had developed
their own detergent pods to launch at the same time. Supply problems
forced P&G to launch Tide Pods "shelf-only," meaning the company
couldn't stock the big displays used to capture shoppers' attention.
Then another problem popped up. The packaging
for Tide Pods looked like a candy bowl and the bright blue-and-orange
pods looked enough like candy that some children ate them—a problem
faced by some competitors as well. That prompted the American
Association of Poison Control Centers to issue a warning about all
P&G's researchers early on recognized the risk
of accidental ingestion, and the company included warning labels. In
the end, P&G retooled the packaging to add a double-latch to the
Sales eventually picked up. Tide Pods accounted
for more than two-thirds of all laundry-pod sales through July, and
all brands of pods accounted for 6% of the laundry-detergent market,
according to P&G's annual report.
In conference calls with investors and analysts,
P&G executives have acknowledged that other supply-chain issues since
January 2011 have led to product shortages, hurting brands including
Fusion ProGlide razors, Old Spice body wash, Iams pet food, Crest 3D
White and Olay skin creams.
Closely watched surveys of retailers conducted
by WPP PLC's Kantar Retail, a consulting firm, have consistently given
P&G No. 1 rankings in many performance categories. Kantar's latest
survey, released last November, shows that although P&G has retained
its top ratings, its approval levels have slid in nearly every major
category including supply-chain management, clarity of strategy and
most-important consumer brands.
Some former P&G executives have been critical of
Mr. McDonald's management style. His predecessor Mr. Lafley held
informal meetings on Mondays at 8 a.m. to hear from seven to 10
executives about the state of the company. Under Mr. McDonald,
attendance over the past year has swollen to more than two dozen, and
meetings that used to take 45 minutes now stretch to as long as two
hours, and few decisions are made, according to former executives who
attended the meetings under both executives. A P&G spokesman said the
meetings are now monthly.
There has been a recent exodus of executives at
a company known for its ability to retain talent. They include finance
executive Christopher Peterson, who left to become chief financial
officer at Ralph Lauren Corp.; Stephen Schueler, general manager for
P&G's global retail operations group, who joined Microsoft Corp.; and
Sameer Singh, P&G's vice president of media for Asia, who joined
In May, a month after the company announced
another disappointing quarter, Chief Financial Officer Jon Moeller
told investors the company would put the brakes on the all-out global
expansion effort. In June, at an investor conference in Paris, Mr.
McDonald said the company would focus on the 40 product markets
responsible for about half of P&G's sales and nearly 70% of its
Around the same time, Mr. Ackman,
who has led campaigns for management or strategy shifts at
J.C. Penney Co. and Canadian Pacific Railway Ltd., began shifting
funds that he had invested in
Citigroup Inc. into P&G stock. P&G is an unusually large target
for activist investors like Mr. Ackman, whose usual game plan is to
build a stake in a company, then use his standing as a big shareholder
to agitate for changes that might boost the value of his holdings. As
of August, his P&G stake amounted to only about 1%.
Some other investors have voiced support for the
pressure he is putting on management.
"He has moved the ball, he's propelled them
higher," said Matt McCormick, a portfolio manager with Bahl & Gaynor
Investment Counsel in Cincinnati, which owned 4.9 million P&G shares
at the end of June, according to FactSet. "There's no question that he
has agitated for changes, and those results have been in the share
In mid-August, Mr. McDonald outlined his planned
fixes at a town-hall gathering for P&G employees at its Cincinnati
headquarters. According to employees who attended, he acknowledged
some mistakes, praised the company's still-dominant brands such Head &
Shoulders shampoo, then took questions.
The moderator opened by asking Mr. McDonald if
he had the board's support to remain CEO and about the latest
developments with Mr. Ackman.
"We don't need an activist investor to tell us
what's right," he replied. "We have more of an interest than anybody
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