Proctor & Gamble’s Research Woes Take a Toll on Profits

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Innovations in the 175-year history of Proctor and Gamble (NYSE:PG) brought to consumers the first synthetic detergent in 1933, the first fluoride toothpaste in 1955, and the first stackable potato chip in 1968. The company has created not only new products, but new product categories. As of 2012, they have 25 billion-dollar brands.

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But the flood of pioneering brands developed by the world’s largest consumer-products company has slowed to fewer than six big product breakthroughs per year. P&G’s most recent successes, Swiffer cleaning devices, Crest Whitestrips, and Febreze odor fresheners, all went on sale at least a decade ago.

After former CEO A.G. Lafley, who took charge in 2000, decentralized product research and development, innovation slowed; his policy tied research spending more closely to profit concerns. Spending on R&D in 2012 amounted to only 2.4 percent of sales, or $2.03 billion, down from 3 percent of sales in 2006. Proctor & Gamble have turned to reformulating old products over creating new products. And with reformulation not innovation as a guiding policy, the company’s long-standing business strategy to charge premium prices for cutting-edge products has failed.

Cash-strapped customers may be willing to spend more on Proctor & Gamble’s truly innovative products, but not on the company’s name alone. For example, at Target (NYSE:TGT), a 150-oz container of liquid Tide detergent costs 20 percent more than the house brand. Because of pricing, P&G has lost customers in the U.S. and abroad to store brands and fellow consumer goods company Unilever. Further competition comes from the manufacturer of Huggies diapers and Kleenex tissue, Kimberly-Clark (NYSE:KMB), which has increased R&D spending by double-digits from the last year.

Regaining Proctor & Gamble’s momentum has been a challenge for Chief Executive Officer Bob McDonald, who has lowered profit forecasts three times since the beginning of the year. McDonald, who acknowledged the inadequacy of the company’s R&D spending, has centralized 20 to 30 percent of the company’s research efforts, in hopes of reversing market-share declines in such key categories as U.S. detergents.

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