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2 Reasons Procter & Gamble Crushed It This Quarter

It's not terribly surprising consumer staples giant Procter & Gamble (NYSE: PG) managed to grow last quarter despite coronavirus-crimped conditions. Consumer staples like diapers, razors, detergent, and toothpaste are, by definition, goods people have to have regardless of the environment.

What is surprising is how much better P&G did given how the current economic backdrop doesn't exactly heighten or even alter the degree of need for consumables. There are two key reasons the company was able to log 9% sales growth -- organic as well as reported -- during its first fiscal quarter ending in September. Both are still in place, too, setting the stage for more outsized performances in the foreseeable future.

Image source: Getty Images.

P&G is a serious e-commerce player

With its brands like Gillette, Crest, Cascade, Tide, Old Spice, and others being familiar fixtures on store shelves, it could be difficult to see Procter & Gamble as an e-commerce outfit. And to be fair, most of its business is still done through retail partners. Shelter-in-place mandates have proven to be a boon for the company's budding online business, however, with last quarter's online sales growing 50% year over year. Thanks to that growth, e-commerce accounts for between 11% and 12% of the company's revenue.

For perspective, a couple of years ago online sales only made up about 6% of P&G's top line.

It's not unreasonable to suspect some of these consumer staples purchases being made online will subside once the pandemic does. Much of it will remain intact in the post-COVID world, though, as the company has actually been preparing for this shift toward digital-centric marketing for some time anyway. CEO David Taylor began talking about "smart audiences" last year, in reference to the use of digital consumer data as a marketing tool. When consumers voluntarily go online to shop directly from a supplier, it not only demonstrates a company's online reach, but also establishes a relationship that creates even more valuable marketing data (like home addresses, shopping habits, etc.).

It matters simply because selling goods directly to consumers bypasses middleman retailers, which only pay wholesale prices for the products they sell. P&G is getting retail prices for goods sold online, widening overall margins.

Procter & Gamble didn't skimp on the right marketing

The knee-jerk response from many consumer-facing companies when COVID-19 hit the United States in March was to tighten their purse strings and cut back on marketing spending in particular. Not Procter & Gamble, though. P&G made a point of continuing to promote its brands in the middle of the coronavirus storm as a means of keeping and even adding market share for the post-coronavirus world.

The company didn't back off on that spending in the meantime, either. Advertising industry news site AdAge reports Procter increased its advertising spending by $100 million last quarter, using some of the savings it found when it opted to stop using as many agencies as it had in the past. Namely, it's culled media production and creative agencies and is doing more of this work for itself, leading to around $200 million in savings last quarter alone. It's all part of Taylor's 2018 plan to reduce overall marketing expenses by $2 billion even as P&G shifts toward a marketing effort that's highly data-driven and ultimately more effective.

These changes haven't necessarily been easy. For instance, about one-third of its $7 billion worth of annual media spending is now planned in-house, according to advertising news venue TheDrum, which is a huge undertaking.

The takeaway

For investors, the big takeaway isn't so much that Procter & Gamble has navigated coronavirus-related volatility with success, but that it was even able to do so in the first place. This is a $350 billion behemoth with a lot of baggage. It's had to work very hard at shrugging off its old marketing paradigm and embrace what works in 2020 and beyond. The efforts appear to have paid off. Moreover, the recent digital success and effective marketing spending also bode well for the company even once the COVID-19 pandemic is in the rearview mirror.

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