International: P&G's New Austerity Plan: A Small-Scale Restructuring

BOCA RATON, Fla. (AdAge.com) -- Procter & Gamble Co. will eliminate 15% of its general-manager positions and an unspecified number of underperforming brands while keeping overall employment flat to negative, in a bid to accelerate productivity amid rising commodity costs and tougher competition.

Chairman-CEO A.G. Lafley laid out some details of what sounded very much like a standard-issue restructuring in a presentation to the Consumer Analyst Group of New York today, though both he and Chief Financial Officer Clayton Daley said the restructuring would fall well short of the bigger revamps rivals such as Unilever, Kimberly-Clark Corp. and Colgate-Palmolive Co. have undergone in recent years.

ZOG, NOG, HOG
Under the plan, most of P&G's brands will be limited to "zero overhead growth" (or ZOG), where employment won't rise regardless of sales growth. The highest-priority businesses, such as China, Central and Eastern Europe, along with beauty care, will be limited to "half overhead growth" (HOG), where overhead costs can rise no more than half as fast as sales. The lowest-priority businesses, including an unspecified number of brands P&G will look to divest, will aim for "negative overhead growth" (NOG), in which employment and other overhead costs decline as a share of sales.

The goal is to boost P&G's productivity growth, which already has averaged 6% annually under Mr. Lafley (well ahead of the rate for the U.S. economy), to 7% to 8%, while continuing to provide strong marketing support for the 41 brands that account for 80% of P&G's sales and 90% of its net earnings.

The new austerity doesn't mean P&G will stop hiring, but it does mean it will "create additional attrition" of more senior employees, as Mr. Daley put it. Exactly how P&G will get people to leave faster, however, isn't clear.

Accelerated attrition doesn't mean layoffs, Mr. Lafley said in an interview after the presentation. "The only time we'll announce a layoff is when we're shutting down a manufacturing site," Mr. Lafley said. "But most of our brands we're handling from attrition. We're handling it through growth [without commensurate hiring]. I don't rule anything out, because we need to do what's right for the shareholders. But [layoffs are] not the plan."

While P&G will continue to hire entry-level marketers into its associate brand manager ranks, it may hire fewer than before. "We're [already] not hiring as many [associate brand managers] as we used to," Mr. Lafley said, because the company's bigger brands are driving more of its sales. "And if we weed the brand portfolio," he said, that will result in fewer marketers who were formerly assigned to divested brands. He declined to say which brands are expected to be divested.

45 jobs globally
The move to eliminate 15% of general-manager positions should result in elimination of around 45 of 300 such positions globally, said people familiar with the company. P&G also will cut costs by using 40% to 50% fewer expatriate managers, reducing the considerable relocation and sometimes salary expense required to move managers outside their home countries.

P&G will also cut costs by eliminating duplication between its global business units, where most marketing executives now work, and its market development organizations, which handle sales, shopper marketing and media buying. For example, Mr. Lafley said some market research done on shoppers, which was duplicated in both units, has been consolidated within the global business units in North America.

"We feel we can eliminate 10% to 20% of initiative development [new product and marketing efforts] among the global and regional teams," Mr. Lafley said. One example is in point-of-sale marketing and store signage, once handled on a brand-by-brand basis, but now being consolidated into a single global organization, he said.

P&G executives didn't commit to spending any of the savings from overhead controls on marketing -- but they could provide room for the company to maintain spending while improving operating margins in the face of rising commodity costs.

Overall, Mr. Lafley said P&G is looking to apply the same analytics and spending discipline it applies to the $10 billion it spends annually on advertising and consumer promotion to the $10 billion it spends on trade promotion through retailers, most of which appears as a reduction of net sales on P&G's books.

Smaller in scope
The moves sound in many ways similar to the waves of global restructuring P&G rival Unilever has undergone the past three years, but Messrs. Lafley and Daley said it will be considerably smaller in scope. P&G plans to keep its annual restructuring costs, which include writedowns of divested facilities and separation costs for employees, to $300 million to $400 million -- about double the rate P&G has had in years past, but well below the multi-billion-dollar writeoffs it has had in prior decades and competitors have undergone more recently. "We've said many times that we're not eager to do major restructurings like some of our competitors," Mr. Lafley said.

But the upcoming split off of Folgers could provide some room for P&G to do restructuring next year above its $400 million limit. Mr. Daley noted that the transaction, in which P&G shareholders likely will be able to opt for shares of Folgers Coffee Co., will generate a one-time gain to be offset at least in part by a one-time charge for writedown of Folgers assets.

P&G's belt tightening is another testament to the legacy of former Gillette Co. Chairman-CEO Jim Kilts, who similarly deployed ZOG and NOG at Gillette prior to its acquisition by P&G in 2005, though HOG is a kinder, gentler P&G formulation. Just prior to P&G's presentation, former Gillette and current Avon Products Chief Financial Officer Charles Cramb outlined how ZOG and NOG had freed funds for a tripling of ad spending by that company in the past three years.

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