May 30, 2013

Alan Lafley returns to lead Procter & Gamble

photo: Procter & Gamble
The king is dead, long live the king: Alan Lafley enthroned again at P&G
Did he ever leave? When Alan G. Lafley looks down from his office at Procter & Gamble headquarters in downtown Cincinnati, he can view once more the serene, wisteria-hung plaza where staff love to munch sandwiches over lunch.

But the old and now new Chairman, President & CEO of the giant consumer goods maker has returned from retirement to a company in semi-crisis.

Why has “A.G.” now replaced Robert McDonald (59) – the very man he chose as his own successor less than four years ago? 
Probably, mild-mannered Lafley has been amused at most of the media commentary since last Thursday which runs broadly as follows: Lafley did a good job at P&G, but made a mistake premiumising the brands; Bob McDonald then did a bad one, putting cost savings into innovation and marketing; So McDonald's days were numbered when activist investor Bill Ackman acquired a $2bn stake in the company last July; but P&G, with its promote-from-within culture, couldn’t find a successor and had to resuscitate senior citizen Lafley (66 next month).

All this needs to be taken with a healthy dose of scepticism.

Debunking the myths

Firstly, Lafley didn’t do a good job at P&G, he did an excellent one. Look at the metrics! From 2000 to 2009 he revived the fortunes of the then troubled maker of brands such as Pampers, Crest and Tide.

Lafley spearheaded expansion into emerging markets and extended a stable of prosaic household brands to embrace the sexier, higher-margin segments of beauty and grooming.

His purchases of Clairol in 2001 (for $5bn), Wella in 2003 ($2.8bn), and Gillette in 2005 ($57bn) may have lacked organic growth later on in the recession, but they were bold and visionary moves which transformed the company.

And even his much maligned brand premiumisation strategy of charging higher prices for innovative products was only part of a broad marketing palette with a whole range of pricing points.

Not bad Bob

Secondly, former West Point man Bob McDonald didn’t do a bad job on the field of duty; he did a good one. Results were just fine for the second half of last year, and even earnings (+6 per cent) for the first quarter of this year, which are claimed to have spelt his downfall, weren’t below company forecasts.

Forward earnings have increased over the last two years from an average multiple of around 15 to just below 19, while earnings per share are expected to rise around 5 per cent in the fiscal year to the end of June.

Over the past twelve months, P&G's share price hasn't done as poorly as portrayed in the media although it has clearly lagged star performer Reckitt Benckiser.

Still, it has risen 26 per cent — more than Colgate-Palmolive and nearly matching Unilever, which has been in catch-up mode. A market cap of $177bn, not including €56bn of own shares, exceeds that of Unilever, L'Oréal and Colgate combined. Meanwhile, dividends have increased for the 56th year in a row.

Shares hit historic level

During McDonald’s four-year tenure, shares rose over 40 per cent to the highest level in the company's long history. This is especially impressive considering the bad card he was dealt in the global economic crisis.

Admittedly, average annual sales growth of around 2 per cent look paltry compared with the Lafley era (8%), but it is at least doubtful whether others could have done any better in a scenario where American and European consumers traded down.

The criticism that Bob McDonald invested the savings from his $10bn cost cutting programme in marketing and innovation instead of feathering the bottom line, smacks of short-termism.

It takes time for such investments to work the scale of a behemoth like P&G, totalling revenues last year of $84bn. But wait, Uncle Vanya, wait!

P&G, with an estimated 40 per cent of total sales in emerging markets, has been criticised for lagging peers Unilever (55%) and Colgate (50%). However, these equal those of Beiersdorf and beat those of L’Oréal (38%), Kimberly-Clark (36%) or Clorox (14%).

Also, a strong base in mature markets is a solid anchor in times of trouble. Is Wall Street really so sure that there will never be another crisis in Asia or Latin America?

Latest news: Ackman is mortal

Thirdly, Mr Ackman is not infallible. His call for management change at P&G needs to be seen against his ill-fated decision to appoint Ron Johnson as head of US department store group JC Penney.

Ackman also seems to have bet $1bn the wrong way on the share price of nutritional supplement company Herbalife.

At the end of the day, it is far easier to slam lacklustre sales growth, low manufacturing productivity, and relatively high cost levels than to provide a realistic and sustainable alternative.

Bill Ackman has pointed to the big difference in net margins between the detergent & household cleaning division (10.7 per cent) and the grooming (Braun and Gillette) division (21.7 per cent).

If Ackman means by that splitting P&G into separate companies, then he is thinking quick bucks on the share price and not the long-term cost for the company of building two organisations.

Fourthly, P&G has a deep bench of management talent to draw from. Like GE, it is considered a recruitment bed for many other leading global companies.

Most important of all, Lafley’s second captaincy at the helm of P&G is an excellent interim measure which will give the company a few years’ breathing space from the hounds of Wall Street. And a management legend isn't a bad firewall against inflammatory investor activists.

Herculean task

So what are Lafley’s main challenges in marketing 80-odd brands to 4.6bn customers a day in 200 countries while motivating and coordinating 40 "Global Leaders", more than 100 Vice Presidents, and 126,000 employees?

His first problem is surely Ackman and his ilk, but only in combination with P&G’s present share and management remunerations structures.

It shouldn’t be forgotten that the man who runs US hedge fund Pershing Square has a stake of only around 1 per cent in P&G. This ought to be irrelevant, but isn’t for structural reasons. So the tip of the tail continues to wag the dog.

P&G is proud of its profit-sharing trust program which makes a considerable number of its employees and retirees owners in the company. At around 6 per cent the trust has the highest percentage of stock held by staff of any Fortune 500 company.

This is all very laudable as regards staff motivation and shareholder democracy. However, it also means that managers have much of their wealth tied up in company stock and that they are too willing to lend an ear to outsiders, such as Ackman, who promise a quick fix on share prices.

It is difficult to promote a sustainable vision at the top when senior management is constantly agitating in favour of solutions which may boost the share price short-term, but which ignore long-term implications.

Wanted: A Chairman with spunk

Lafley’s second problem is corporate governance. As Chairman, President & CEO, his position will continue to raise eyebrows at least in Europe.

Such a conglomeration of corporate power makes for quick decisions and reduces pay costs, but lacks checks and balances. The European system where the CEO runs the board and the Chairman cares for the share price is not without its attractions.

Imagine unassuming Lafley quietly getting on with running the company, while a feisty, pugnacious Chairman enjoys a good ding-dong with the Ackermans of this world!

“We were most entertained by Bill’s presentation and would like to invite him to give our Board an annual briefing. Oh, by the way, we have just filed an enquiry with ...”

Finally, Lafley-Reloaded’s biggest challenge will be what it was for Bob McDonald and other former CEOs: How to promote growth on saturated and complicated western markets while expanding into what P&G calls “white places”, new product areas and developing economies?

Your turn, A.G.

Related article in German: By Mike Dawson in LZnet: "P&G holt einen hervorragenden Firmenarchitekten zurück"

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