Last fall, Procter & Gamble Co. Chief Executive David Taylor, waging the costliest board fight in history, took the stage at the company’s annual shareholder meeting and vowed the maker of Tide and Pampers had made “dramatic changes” and was headed to “new heights.”
But a year after its duel with activist investor Nelson Peltz, the Cincinnati consumer-products giant has stagnated, stymied by competition, rising materials costs and its own bureaucracy, according to executives, analysts and people familiar with the business. Mr. Peltz joined P&G’s board March 1, invited on by P&G after the company won the shareholder vote by only a razor-thin margin.
P&G investors have lost 8.8% over the past year, including dividends, while the S&P 500 has climbed 18.4% and touched new heights. Over the past decade, the S&P has returned 198% including dividends, while P&G has returned 65%.
P&G’s near-loss to Mr. Peltz was a reality check for the company, which had long enjoyed an investor base supportive of company management and willing to ride out tough times. Mr. Peltz’s arrival on the board has lessened some of the immediate pressure on P&G, analysts and investors say, but shareholders’ patience may be limited following a decade of spotty results, CEO turnover and near-constant restructuring.
The company’s morass is further proof there is no quick fix for big consumer brands in mature markets, more of which are struggling to compete and grow amid seismic shifts in retailing, advertising and shopper preferences. From Kraft Heinz Co. and Campbell Soup Co. to P&G rivals Unilever PLC and Kimberly-Clark Corp., the biggest names in consumer products have been forced to rethink and resize their businesses, often under pressure from investors and, in some cases, influential activists like Mr. Peltz.
“I certainly can’t say there is any evidence that things are different at P&G,” said SunTrust analyst Bill Chappell. “It feels like the same P&G: ‘Don’t worry, next year will be better.’ Then disappointing results, then, ‘Don’t worry, next year will be better.’ ”
At P&G, one of Mr. Taylor’s biggest ideas — a plan to acquire Pfizer Inc.’s consumer-health business with brands such as Advil, ChapStick and Robitussin — was sidelined earlier this year by a contingent of directors, including Mr. Peltz, and also skeptics within the company, according to people familiar with the situation.
The board believed the Pfizer unit, with a valuation as high as $10 billion, was too pricey. Instead, P&G struck a smaller deal in April, agreeing to acquire the consumer-health business of Germany’s Merck KGaA for $4.2 billion. That deal will add vitamins and food supplements mostly sold outside the U.S. to the P&G unit that includes Crest toothpaste and Vicks cold medicine.
The changes P&G has undertaken to overhaul how it invents, markets and sells its products have yet to show up in results. P&G’s “organic” sales — a closely watched metric that strips out currency moves, acquisitions and divestitures — rose 1% in the fiscal year ended June 30, below the company’s goal of 2% to 3%. The company is losing share in 24 of its top 50 product categories and geographies, though that number is an improvement from a year ago.
“We’re making progress, but we’re still not where we want or need to be, ” a P&G spokesman said. He said P&G’s results improved as the year wore on and the company is more focused on growing by developing new brands and products than on taking share from rivals.
In the past year, P&G U.S. sales are up 1.2%, in line with overall industry growth, according to Nielsen data provided by Wells Fargo. Performance of the biggest brands have been mixed. For instance, the company’s liquid laundry detergent sales rose 2.3% compared with a year ago, while sales of laundry pods jumped 4.2%. But the Gillette razor business continues to lose ground, despite slashing prices in early 2017.
“I just couldn’t come back to them,” said Randy Merrill, a 70-year-old retired lawyer from Atlanta. He used Gillette razors until a few years ago when he tried Schick razors and found the five-blade cartridge was cheaper and worked better than Gillette’s three-blade offering. “I’m a stockholder and I voted for P&G in [the Peltz] fight. I’m disappointed.”
Mr. Peltz, who declined to comment through a spokeswoman, argued in his campaign last year that the company had settled for “mediocrity” and needed to restructure its operations. The billionaire had previously waged proxy fights and taken board seats at Heinz, industrial conglomerate Ingersoll-Rand PLC and money manager Legg Mason Inc.
In targeting P&G, Mr. Peltz’s Trian Fund Management LP tapped mounting frustrations among shareholders, including P&G’s large investor base of current and former employees. Mr. Peltz argued that P&G suffered under a “suffocating bureaucracy” and a board that failed to hold management accountable. He also said the company was overly reliant on aging, big-name brands and needed to focus on trendy, niche product lines.
“We understand completely that [consumer products] is one of the more difficult categories to complete in,” said Jim Russell, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati, which advises hundreds of P&G executives, rank-and-file workers and retirees. “We’re hopeful that Procter is up to the task.”
Mr. Taylor, while generally unflappable, showed frustration amid the fight with Mr. Peltz, sometimes in the form of direct barbs aimed at Mr. Peltz and other times in the way he’d bounce restlessly while addressing investors’ criticisms.
Mr. Peltz, who dropped out of college in the 1960s and got his start loading peaches and strawberries onto trucks for his family’s food-distribution company, takes issue with being called an “activist” investor, instead preferring to be seen as an ally to struggling companies and their shareholders. But he hasn’t shied away from challenging the strategies of iconic companies, including PepsiCo Inc. and General Electric Co., sometimes through sharply worded white papers.
The men, who met and spoke over the phone in what proved to be an unsuccessful effort to avoid the proxy fight, shook hands at the closing of P&G’s shareholder meeting last year. There, Mr. Taylor declared victory over Mr. Peltz, but Trian believed the vote was too close to call. Mr. Peltz congratulated the CEO.
“We’ll talk,” Mr. Taylor said.
“We’ll talk but we don’t listen,” Mr. Peltz replied.
Mr. Taylor responded, “No, no, no, that’s not true.”
P&G executives say there are signs of change, and the company is winning over more millennial shoppers with its big-name brands and stronger online sales. It has streamlined the organization and is more closely aligning pay with company performance. Shortly after Mr. Peltz came on the scene, P&G began touting a new approach to bringing “irresistibly superior” products to market, in which new offerings must meet more-rigorous standards on everything from packaging to efficacy.
The pay changes are the most visible sign thus far of the impact of Mr. Peltz, who criticized P&G’s compensation metrics last year. Mr. Taylor, CEO since November 2015, took a 4% pay cut in the latest fiscal year, earning $17.4 million including his annual salary, bonus and stock awards. P&G’s board made additional changes to the company’s bonus program in June, which will be in effect this fiscal year, according to a regulatory filing.
After long eschewing acquisitions of outside brands, P&G in the past year acquired a trio of startups — Native natural deodorant and two skin-care companies, Snowberry and FAB — with plans to expand direct-to-consumer offerings and smaller brands. With Native, which offers $12 deodorant in scents such as pumpkin spice latte and lemon zest and pomegranate, P&G employed a tactic to which it once fell victim. P&G used its retail clout to get Native on shelves in Target Corp.’s 1,800 stores. Two years earlier, online razor startup Harry’s moved into Target and won share from P&G’s Gillette brand.
P&G, one of the world’s biggest advertisers, has gone on a crusade to clean up the online ad market and force major technology platforms to provide more information about the effectiveness of digital ads. P&G said big players including Alphabet Inc.’s YouTube and Facebook Inc. have made significant changes since the company last year slashed digital ad spending by more than $200 million and issued an ultimatum for tech companies to become more transparent.
The company has also made progress in streamlining its bureacracy, which P&G executives called “the thicket” for its difficult-to-navigate structure.
The company also cut 3,000 jobs globally in the recently ended fiscal year. P&G has reduced its workforce by 25% in the past five years, leaving 92,000 employees world-wide. The company shrunk significantly in 2016 when Mr. Taylor completed the sale of Clairol, CoverGirl and most of its beauty brands to Coty Inc. for $12 billion.
And in a move that will be most acutely felt by American shoppers, P&G recently said it would raise prices on some of its biggest brands, including Pampers diapers, Bounty paper towels, Charmin toilet paper and Puffs tissues. P&G, as the industry’s biggest player, tends to drive industry pricing moves and several rivals, including Kleenex maker Kimberly-Clark, have followed suit.
Many analysts say the 181-year-old company — given industry challenges and the fact that Mr. Peltz has been on the board only seven months — should be allowed more time to show progress.
“There are a lot of investments being made to make the culture more agile, but is that going to translate to improved sales growth?” asked Edward Jones analyst Brittany Weissman. Adding Mr. Peltz to the board, “is going to give them some flexibility to execute on their plan. If that doesn’t work, you are going to see him become more aggressive.”
