Company Overview
The Procter & Gamble (P&G) is company based in the U.S. that mainly focuses on manufacturing, marketing and distribution of consumer products all over the world. The company mainly focuses on food and beverage, health care, beauty care, laundry and cleaning and paper products. Each of these business segments are highly competitive and the products are available in over 180 countries primarily through grocery stores, drug stores, membership club stores, baby stores, e-commerce, specialty beauty stores, neighborhood stores and mass merchandisers. Procter & Gamble takes advantage of their superior online presence and marketing strategy to win millions of customers researching about a given product or brand. Working hand in hand with the customers, the company is able to improve the quality and presence of their products in the stores, winning the ‘first moment of truth’ as the customers shop at the stores. The company also strives to win the ‘second moment of truth’ after a customer has used their product and is evaluating how it met their expectations. Aiming at continued innovation for growth of the company, Procter & Gamble has put major emphasis on product development and research activities for a sustained growth in the coming years (Verschoor, 2014)
Accounting and Finance Environment
Procter & Gamble has five reportable segment registered under the U.S. GAAP as of June 30, 2016. These segments include: Health care, grooming, beauty, Baby, Feminine & Family care and Fabric and Home Care. It is easy to understand these businesses as they are all influenced by almost similar factors. There are various factors that lead to variances in the operating margins of each of these businesses: capital intensity of the segments, administrative and general expenses expressed as a percentage of the net sales, capital intensity of each business segment and the varying nature of processes and materials used in the manufacturing process. Each of these businesses is also expected to exhibit variances in the growth of net sales due to the different growth rates in the product and market categories in which each operate. None of the reportable segments at Procter & Gamble are seasonal. However, some segments exhibit seasonal components such as grooming.
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The cost of goods sold to Wal-Mart stores Inc. and its associates added up to about 15 percent of Procter & Gamble’s total revenue in 2014, 2015 and 2016. This is the only customer that represents over 10 percent of the company’s revenues. The company’s top ten customers make up for 35 percent of the total revenue achieved in 2014, 2015 and 2016. Due to the nature of business, there are no contracts with the government or material backlog order.
Nature of business
P&G mainly focuses on creating business operations and practices that are consistent and in line with the competing industrial segments. The company purchases almost all of the packaging and raw materials that it uses from other companies. Other raw materials, usually chemicals are produced by the company for use in the manufacturing process. The processes of manufacturing, transportation of manufacturing materials and finished products usually consume natural gas, fuel and other derivative products. The price of these products keep fluctuating from time to time and depending on the situation, the price change may or may not be passed on to the customers.
The licenses owned by P&G are under registered trademarks and patents, all which are used in line with the operation of all business segments. Some of these licenses or patents cover major parts of product formulation and manufacturing processes. The trademarks are key in the branding and marketing of the products. Each business has its trademark and all the major ones are registered. The existence of these patents, licenses and trademarks and their continued protection has been a major reason for the company’s success over the years.
Considering the nature of operations, P&G is faced by huge competition from other companies that produce similar goods. Some of these competitors are large companies; others are smaller while others are top global giants. P&G is well positioned in the markets and industry segments where they operate and the company enjoys a significant share in the market where it operates. The company markets its products through promotions, advertising and other avenues aimed at increasing awareness and purchase of the brand. This marketing strategy is backed up by having a highly trained and experienced workforce to ensure quality. This combination makes up for one of the most efficient marketing system ensuring performance, product quality, attractive packaging and value.
Company Expenditures
The company has greatly invested in research and development, which enables it to obtain patents for all business categories and also develop proper technologies so as to meet with the consumer needs and also improve their lives as much as possible. As per the reports on Net Earnings from operations, the company spent $1.9 billion on research and development in 2014, $2.0 billion in 2015 and $1.9 billion in 2016.
Other expenditures by the company come with environmental compliance. The company is expected to comply with the environmental rules and regulations by the state, local and federal governments. These expenditures have remained consistent over the years and are not material to the business. As such, there is no material change that is expected in the financial year 2017.
P&G also spends quite a fortune on the employees’ both manufacturing and non-manufacturing ones. To reduce the spending, the company has been cutting off some of its employees. Below is an illustration of the company employees over the past fiscal years (excluding employees of joint ventures, co-ops and interns).
| Fiscal Year | Number of employees |
| 2016 | 105,000 |
| 2015 | 110,000 |
| 2014 | 118,000 |
| 2013 | 121,000 |
| 2012 | 126,000 |
| 2011 | 129,000 |
Financial Risk Factors that the Company Faces
Bearing in mind that P&G has major sales and operations internationally; the company is subject to significant risks including pricing controls, currency exchange, localized volatility and fluctuations in the foreign exchange. P&G operates in 70 countries and has its products distributed to over 180 countries. As such, the company holds assets, pays expenses, earns revenues and incurs liabilities in a variety of currencies other than the U.S. dollar. The exchange rates of these foreign currencies have been fluctuating, a good example being the recent volatility experienced in the Russian ruble. As such, this in return may lower the value of the cash flows, profits and revenues gained from markets that do not use the U.S. dollar and also increase the cost of production in these countries. As a result, the company is significantly affected, lowering its competitiveness in these markets. In addition to this, some of these countries could be having financial policies that are discriminative in nature and this in turn will negatively affect the performance of the company. The company also maintains their cash balances in the local currency in various countries with import authorization, pricing, exchange and other controls. Failure to properly manage these controls could significantly affect the operations of the company and its financial positioning. Besides these, the employee and business services also stand to be affected by disruptions in the labor market, political volatility and other issues that could arise in these foreign markets.
There is a major uncertainty in the economic conditions in the international markets. For instance, there could be a general economic slowdown, which could result in financial hardships and consequently a reduced demand for the company’s products. Other factors that could result in this decrease in product demand include reduced growth in the market, the credit market becoming increasingly tighter among others. These financial hardships could not only affect the consumers but could also weigh down distributors, contractors, suppliers and vendors, making it difficult for them to supply the needed goods and services.
Any credit market disruptions or reduction of the company’s credit rating could result in an increase in the borrowing costs in future and also make it harder for the enterprise to access sufficient credit markets and capital on commercially friendly and acceptable terms. In turn, this would significantly affect the company’s capital resources and liquidity or increase the capital costs for the company.
P&G greatly relies on a strong and reliable global supply chain to achieve the cost targets and also meet the needs of the consumers promptly. Any disruptions or loss of these supply and manufacturing arrangements could greatly affect the supply of products, and proper management and remedies are needed otherwise substantially affect the company’s operations and financial placement. Some of the factors that could disrupt the supply chain include natural disasters, labor disputes, terrorism, top manufacturing sites being impaired or closed down or other uncontrollable factors.
Being an international company, P&G greatly relies on networks and services and information technology systems such as data hosting, processing tools and facilities and internet sites, physical security systems and top hardware, software and other technical platforms and applications for proper business management and operations. Some of these are hosted, provided, managed and used by a third party. These IT services, systems, and networks are very crucial to the performance of the company as they are used among other things. More so, they are used for ordering raw materials from the suppliers, availing finished goods to the consumers, completing the manufacturing process, sales and marketing of the products. Similarly, they may be used in following up the process of the business operations, hosting, processing and, where necessary, sharing proprietary and confidential business plans, financial and research information. With the rise in information security threats such as cyber security breaches, failure of the IT system(s) among others, the company is at a huge risk of the integrity, availability and confidentiality of the enterprise’s data and business operations ( Weissmueller, & Johnson, 2014) .
Procter & Gambler Organizational Structure
1. Global Business Units (GBUs)
The GBUs are organized into five reportable segments under the U.S. GAAP: grooming, beauty, fabric & home care, baby, feminine & family care and health care. The GBUs pose major responsibility for the development of the brand strategy, market plans, innovations and upgrade of new products. The company has undergone major changes in each of these segments over the years including discontinuation or consolidation of brands which were considered as being non-strategic (Kedia, Luo, & Rajgopal, 2016).
P&G is leading in the beauty category worldwide. The company offers a wide variety of goods in this category and is highly competitive in skin, hair and personal care. Olay brand is the leading product in skin care having and overall global market share of over 7 percent. When it comes to hair care, the company’s Pantene and head & shoulders brand takes up 20% market share globally. In the grooming category, P&G is highly competitive when it comes to shaving care and appliances and especially so in the Gillette franchise and Braun brand. The company is also quite competitive in the health care category in both personal health care and oral care. The fabric and home care category are comprised of products aimed and taking care of fabrics. These include laundry detergents, fabric enhancers, and other products for home care such as air fresheners, surface cleaners, and dishwashing liquids.
The baby care segment mainly focuses on baby wipes, pants, and diapers (primarily pampers). For feminine care, the company has amassed over 25% of the market share globally mainly due to Always. The company also competes strongly in the family care category with the Charmin toilet paper and the bounty paper towel brands.
2. Selling and Marketing Operations (SMOs)
It is the responsibility of the SMOs to develop and execute go-to-market plans, and they include country-specific teams, trade channel, and retail customer. The SMOs at P&G have been under six regions which include Europe, Latin America, North America, Great China, India and Asia Pacific. The developed markets for the company include Japan, North America, and Western Europe. The rest are developing markets (Verschoor, 2014) .
3. Global Business Services (GBS)
The GBS provides standard data tools, processes and technology that give the SMOs and the GBUs the standard data tools, technology, and processes to give a clearer understanding of the business and also make it possible to serve the customers better. The GBS aims at providing world class products and solutions at the lowest cost possible and with the minimum possible capital investment.
4. Corporate Functions (CF)
The CF is responsible for providing portfolio analysis and company-level strategy, treasury, corporate accounting external relations, tax, human resources, governance and other functional support in a centralized manner (Sinnett, 2012).
2016 Financial Reports Summary
The net sales at P&G decreased by 8% to $65.5 billion due to the impact of negative foreign exchange. Organic sales rose by 1% because the decline in original volume partially offset the increased pricing. Unit volume also decreased by 3% on overall in all the operating business segments. In the financial year of 2016, net earnings from the company’s operations rose by 21% to $1.7 billion. However, this was because of the after-tax charge in the previous year amounting to $2.1 billion due to the deconsolidation of the Venezuelan subsidiaries, which improved the gross margin. The net earnings from the continuing business operations were negatively affected by about 11% due to the impacts of foreign exchange.
Introduction and rise of the batteries business in the financial year 2016 coupled with the greater impairment charges on the firm in the previous years helped increase the net earnings realized from the discontinued business operations by $1.7 billion. On overall, the net earnings at Procter and Gamble in the fiscal year 2016 amounted to $10.5 billion, which was a 49% increase (3.5 billion) compared to the previous year (Kedia, Luo, & Rajgopal, 2016). All the same, this is attributed to the increase in the earnings realized from the discontinued and continuing operations as previously mentioned. The cash flow realized from the operating activities amounted to $15.4 billion while the diluted net earnings for one share rose by 51% to $3.69.
Business Outlook and Uncertainties
Currently, the macroeconomic factors are quite dynamic, and there are chances of market contraction due to increased political instability, economic slowdown, and reduced GDP. These uncertainties could greatly lower the company’s earnings and reduce sales (Verschoor, 2014) . Changes in productivity efforts and commodity prices could also result in fluctuations in costs. Other factors that stand to affect the business operations in the future include changing government policies and fluctuations in foreign exchange rates.
Summary
Comparing the latest financial performance of P&G with that in the prior years, the company has done quite well, benefiting from higher pricing, reduced manufacturing costs and reduced cost of commodities. However, unfavorable geographic positioning has resulted in an increase in the income tax rates. However, the company has been making efforts to offset this. One step taken includes the deconsolidation of the Venezuelan subsidiaries. Thanks to the cash flow, realized from the business operations, P&G is well equipped to support short-term liquidity. All the foreign subsidiaries are subject to the income taxation system of the U.S. the company is faced with the challenge of accessing foreign capital from its subsidiaries. However, the company is well-positioned to fund all discretionary items such as share repurchases and acquisitions.
References
Kedia, S., Luo, S., & Rajgopal, S. (2016). Culture of Weak Compliance and Financial Reporting Risk. Unpublished Manuscript (January 2016) .
Sinnett, W. M. (2012). SEC Reporting and the Impact of XBRL: 2011 Survey. Morristown, NJ: Financial Executives Research Foundation .
Verschoor, C. C. (2014). Penalties for fraud are insufficient to deter wrongdoing: the SEC charged two former executives of Diamond Foods, Inc., with the falsification of quarterly and annual results for fiscal years 2010 and 2011. Their punishment was a slap on the wrist compared to what they should have received. Strategic Finance , 19 (3), 15-18.
Weissmueller, R. J., & Johnson, G. G. (2014). Impact of using XBRL in 10K and 10Q filings with the SEC: evidence of increased timeliness in reporting. International Journal of Business Research and Information Technology , 1 (1), 45-59.
