P&G re-focuses on core with $12 billion sell-off
P&G is continuing the process of drastically cutting its brand portfolio with the sale of a bunch of beauty brands in a juicy $12 billion transaction, according to this report. Coty inc. is reported to be buying Rimmel Cosmetics, Wella and Clairol haircare and the fragrance brands (Dolce & Gabbana, Gucci and Hugo Boss).
This transaction is just the latest in a series of sell-offs. The $2.6 billion Duracell battery business is slated for sale to Berkshire Hathaway later this year, lams petfood was sold last year and in 2012 P&G got rid of both Folgers coffee (to J.M. Smucker) and Pringles (to Kellogg's).
This will leave P&G with a beauty business mostly on hair and skin care brands like Pantene, Head & Shoulders and Olay, in addition the household and baby care businesses.
The first benefit for P&G is re-focusing on their core competence: understanding everyday consumer needs and creating great products to meet these needs. When I worked at P&G the challenge for any new product development initiative was simple to state, but hard to deliver against: be a significant blind-test winner against the current product and/or the key competitor. You can see how this works on the core brands like Pampers, Olay, Pantene and my old brand, Head & Shoulders. However, this sort of product performance is not really the key to success in fragrances, where its all about image and lifestyle. And there is perhaps a limit to how much product improvement people are interested in, or at least interested in paying for, in batteries.
The second benefit for P&G is focusing on the distribution channels it knows best, which is mass retail. As the report says, "While Wella is a hair care brand, analysts have thought its distribution model – selling product in beauty salons instead of mass retailers – is an odd fit for P&G." The same argument applies to the fragrance business which depends on department store sales rather than supermarkets.
The third and most important benefit, especially for P&G's shareholders, is to focus on the fastest growing brands in its portfolio. This is partly to do with selling off brands that are perhaps in slower growth categories. But it is likely that the further a brand is from the company's core competences, as outlined above in the first two points, the less well it will grow.
In conclusion, P&G seems to be trying to remember and refresh what made it famous in the first place, re-focusing on the core brands it knows how to manage really well. Time will tell if the slimmer P&G is able to run faster and grow quicker as hoped.