The biggest victim of the cataclysmic changes in contemporary American retail and media is not a chain of stores; or a movie studio, but a soap maker. The company most impacted by the decline of traditional retail, and old-fashioned media is Proctor & Gamble (NYSE: PG).
P&G, as it is popularly known had a business model perfectly tailored to the media and retail landscape of the 20th Century. Proctor & Gamble made branded, prepackaged products that were sold in stores on Main Street, and promoted on radio and later TV. It was P&G that invented the concept of “branding” and added the phrase “soap opera” to the English language.
Despite that storied history, P&G finds itself struggling to survive. The company that once shaped popular culture and dominated retail is struggling with collapsing revenues.
The Incredibly Shrinking Revenues
Proctor and Gamble’s revenues have shrunk for each of the last five years, financial data relayed by Stockrow indicates. The rate of shrinkage has varied but the amount of revenue loss has been dramatic.
P&G reported $82.006 billion in revenues on September 30, 2012, and $65.05 billion on 30 September 2017. According to Stockrow, P&G lost .37% of its revenues between September 2016 and September 2017, 7.7% of its revenue between September 2015 and September 2016, 4.91% of its revenues between September 2014 and September 2015, 7.13% of the revenues between September 2013 and September 2014, and 2.3% of the revenues between September 2012 and September 2013.
What is most interesting; from a value investment statement, has been that the company has made a lot of money despite the loss of revenue. P&G reported $15.326 billion revenues in September 2017, $10.508 billion in revenues in September 2016, $7.036 billion in revenues in September 2015, $11.643 billion in revenues in September 2014, $11.312 in revenues in September 2013, and $10.756 in revenues in September 2012.
The fascinating aspect here is that Proctor & Gamble’s revenues shrank by $16.948 billion, yet its net income grew by $4.57 billion in five years. Value investors will like this, here is a company that generates less revenue but makes more money.
Proctor & Gamble actually reported a growing margin of 49.99% in September 2016. Over the five years, I surveyed P&G’s margin never fell below 47%, in fact, it actually rose to 50% in one year (2013).
Why is P&G’s branding still working?
The obvious inference here is that the high markup P&G can charge on some of its premium products; such as Tide, makes up for the loss of revenue. The company’s traditional branding is still working despite the vast changes in culture, technology, commerce, and family life sweeping the nation.
Tide is still the best selling liquid laundry detergent in the United States with $1.0592 billion in sales in 2017, Statista reported. Another P&G product Gain was number two with $582.7 million in sales, and Tide Simply Clean and Fresh (a bargain basement copy of the main brand) was third with $287.1 million in sales.
Explaining Tide’s popularity is difficult after all most of the soap operas, which were sponsored by P&G were canceled several years ago. Many of the neighborhood stores through which Tide was sold are long gone, and few Americans clip coupons from newspapers or get newspapers for that matter.
A strong possibility is that Tide’s popularity is the product of folk memories of simpler and better times, or simply force of habit. Many Americans use Tide because that was what “mom or grandmother” used. Few of them stop to ask why mom or grandma used Tide.
Why Mom Used Tide
Mom; and grandmother, used Tide because of a very sophisticated marketing strategy called branding. P&G, and other consumer products companies, invented branding over the course of the first few decades of the 20th Century out of necessity.
The first brands appeared because of the old-fashioned mom and pop store. There was an ugly, and very dark side, to that cherished institution few people care to remember.
Originally, corner and country stores sold almost everything in bulk from bins. The problem with that was there no way to know if you were getting the real thing. There was no way to tell if Mr. Hooper was mixing sand with the bulk soap he was selling. Mr. Hooper who operated at a low margin; but had to pay a mortgage and extend credit to cash-strapped customers, had every incentive to engage in such fraud.
Companies like P&G solved that problem with a sealed container (a box) that was branded. People who bought Tide knew they were getting the real thing that came straight from Proctor & Gamble’s factory in Cincinnati.
P&G reinforced the brand’s reputation with clever use of media. The company invented soap operas by sponsoring mushy radio melodramas that appealed to bored housewives; the people most likely to buy soap. It also advertised heavily in newspapers and later on television.
Can Tide and P&G Survive in the Age of Amazon?
This was why Tide survived when Americans made the transition from shopping at the corner store; to shopping at the supermarket, to shopping at Walmart. The brand survived because it was firmly imprinted in the nation’s consciousness as the country’s premier laundry detergent.
The trillion-dollar question today is can brands make the transition from Walmart to Amazon or Walmart.com? Will Millennials and Generation Z; many of whom have never seen a soap opera, put the same trust in Tide as their parents and great parents?
The answer so far seems to yes, Tide can survive. The online marketplace is conducive to strong brands and well-known products. People think Tide when they think laundry so it is the first word they type when searching for detergent on Amazon or at Walmart.
This gives P&G an advantage and an opportunity to raise prices. Online shoppers are less likely to notice cheaper alternatives for sale, than persons who are perusing the aisles. For example, a 61 count tub of Tide PODS 4 sells for $18.98 at Amazon, the same product is usually around $15 at supermarkets.
Another advantage P&G has is that shoppers do not see cheaper private label products which some retailers like to push online. The disadvantage is the fading of folk memory or the possibility that Amazon will start pushing a private label product that looks like Tide.
A problem for P&G is that it has found no media has pervasive or as effective as the old ones. Proctor & Gamble cut its digital advertising budget by $100 million July 2017, citing ineffectiveness of the medium as a pretext, Ad Week reported. The company also yanked its ads from Alphabet’s (NASDAQ: GOOGL) YouTube for similar reasons last year.
This means Proctor & Gamble is now in the midst of an experiment. The experiment is, can a brand be sustained without massive amounts of advertising. Nobody really knows the answer but the future of P&G is riding on the outcome. That makes Proctor & Gamble a far riskier investment than it was, because the value of its main assets; the brands, is either slowly disappearing or growing in the Age of Amazon.