'P&G's 1,000 PhDs not enough to crank up new blockbusters'

For much of its history, Procter & Gamble Co (PG) didn’t just roll out new products, it created new product categories, from the first mass-produced disposable diapers to Crest teeth-whitening kits. That’s one reason P&G has more than 1,000 PhD’s among the 8,000 employees at its 26 innovation facilities around the world.

“P&G is largely a branded science company,” said Larry Huston, former innovation officer at P&G who’s now managing director of 4inno, a consulting firm. Lately, though, there’s been a dearth of pioneering brands emerging from the world’s largest consumer-products company. Spending on research and development in fiscal 2012 ended June 30 was $2.03 billion, or 2.4 per cent of sales, the same as the prior year and down from 3 percent of sales in 2006.

 

“P&G is built on creating new categories, and innovation is in its DNA, but they need to rediscover it,” said Peter Golder, a professor at the Tuck School of Business at Dartmouth College.

P&G is trading at a 22 per cent discount to the 31-company Bloomberg Industries Global Household Products Index, near the five-year low of a 25 per cent discount reached in July.

Product Mojo
Regaining its new-product mojo is crucial because P&G’s business strategy has long been to charge premium prices for cutting-edge products. A 150-oz. container of liquid Tide detergent is $18 at Target Corp. (TGT), for instance, 20 percent more than the retailer’s house brand. As rising commodity prices have increased the cost of most basic household products, cash- strapped customers may still be willing to pay more for true innovations but not necessarily for the kind of product extensions and embellishments P&G has turned to.

That’s created a challenge for Chief Executive Officer Bob McDonald, who has lowered profit forecasts three times since Jan. 1. He’s trying to cut $10 billion in costs by 2016 and reverse market-share declines in such key categories as U.S. detergents. McDonald is under pressure from activist investor William Ackman, who in July took a $1.8 billion stake in P&G and may seek management changes.