Should Procter & Gamble exit fragrance and color cosmetics?

By Simon Pitman

- Last updated on GMT

Related tags: Color cosmetics, Procter & gamble, Investment

Should Procter & Gamble exit fragrance and color cosmetics?
A lack of synergy between the different categories in Procter & Gamble’s portfolio may mean divesting from color cosmetics and fragrances to improve business performance, a leading analyst claims.

“Procter & Gamble’s results have been less satisfactory since the onset of the economic downturn, leading the company to undertake a number of measures, including streamlining its portfolio and launching a new restructuring programme in 2012,”​ said Euromonitor senior analyst, Oru Mohiuddin.

Although there has been a slight uptick in the company’s financial performance of late, its beauty and grooming has continued to underperform, with global revenues still sliding despite the fact that major competitors such as L’Oreal and Unilever are reporting beauty revenue growth at well above average market rates.

“Premium fragrances appear to be a misfit in Procter & Gamble’s portfolio, requiring a different distribution platform to its other products. Moreover, Procter & Gamble generates only 6 percent of its total beauty and personal care revenue from premium fragrances.”

Unilever exited fragrance and improved synergies

Mohiuddin also poinst to the example of Unilever in the fragrance category, which has a similar focus in the fast moving consumer segment, and until selling the business to Coty in 2005 also had a significant footprint in the premium fragrance business.

However, once Unilever exited premium fragrances the move helped the company to focus the business, containing to hair care and skin care, and in turn streamlining its portfolio and creating a common distribution platform with resulting synergies.

“In light of this, divesting premium fragrances, following Unilever’s example, could be the way forward for Procter & Gamble,”​ said Mohiuddin.

Unilever wins with its approach to supermarket distribution

Likewise, she also points out that Unilever has created a distinct advantage for itself by having a distribution strategy that focuses on supermarkets, covering all beauty pricing platforms and every sub-category.

“By narrowing its focus to supermarket categories, Unilever was better placed to establish a stronger presence while benefiting from greater distribution synergies,”​ she said.

As for the color cosmetics and mass facial categories, Mohiuddin names L’Oréal as the major competitor, and points to an increasing array of sophisticated products backed by a seemingly endless number of launches.

L’Oréal’s vast research and development resources have given way to a continuous stream of ground-breaking product launches targeting different life styles and age groups.

L’Oréal's R&D synergies give way to more product innovation

The Age Perfect Renaissance Cellular range for women over 50 and L’Oréal Paris’s Youth Code are good examples of this, while many of company’s launches have been able to make use of synergies by tapping into various technologies that have already been developed by the company’s vast R&D resources.

Conversely, Mohiuddin points out that Procter & Gamble has not been able to keep up with this type of resource sharing because it is having to balance its research and development across a highly diverse portfolio that includes laundry care, shaving, oral care and skin care.

As a consequence, Olay, the company’s leading facial care brand, has seen its share of the market fall in the US and even in the fast-growing China market, reflecting the fact that consumers’ are opting for brands where there is perceived to be a faster pace of innovation.

Color cosmetics loses out with a more fragmented market share

The same situation has been seen in color cosmetics, with Procter & Gamble’s Cover Girl and Max Factor brands losing market share in a number of key markets.

In view of this, Mohiuddin believes that in addition to considering divestment in the fragrance segment, Procter & Gamble may be well served to exit the color cosmetic category because it only represents around 6 percent of its total revenues and its reach beyond the US market is limited.

This would in turn give it greater resources to invest in the expansion and increased innovation roll-out of its facial care portfolio.

“Given that Olay is a globally recognized brand and its key colour cosmetics brand Cover Girl is mostly based in the US, it could consider divesting its colour cosmetics business and investing the proceeds in making its skin care brands more competitive.”

Related topics: Business & Financial

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