Procter & Gamble Crushed by China, Not Inflation
Consumer packaged goods firm signals potential trouble in China.
October 19, 2021
Increased commodity costs slashed 350 bps from Procter & Gamble’s (PG) gross margin in the latest quarter. The headlines were dominated by inflationary pressures that resulted in a 5% decline in operating income despite sales rising 5%. In response, the company clawed back 50 bps in price and 30 bps in productivity.

Inflation undeniably negatively impacted Procter’s results. What’s not getting much attention though is the company’s performance in China. In its latest 10-Q, Procter disclosed sales to Greater China declined in the low single digits. In five of six business segments, Procter’s numbers are worse than the headline.

Procter’s categories provide a glimpse into the health of the Chinese consumer as well as the competitive landscape online:

Beauty
-Hair Care: (up mid-single digits overall) saw a mid-single digit decline in Greater China due to trade inventory reductions and to a lesser extent, a slowdown in e-commerce consumption
-Skin and Personal Care: (up mid-single digits overall) saw a double digit increase in Greater China due to new innovation, e-commerce growth and customer inventory build-up

Grooming
-Shave Care: (up high single digits overall) saw a mid-single digit decline in Greater China due to trade destocking in certain markets and lower consumer promotions

Health Care
-Oral Care: (up mid-single digits overall) saw a mid-teens decline in Greater China due to increased competitive activity

Baby, Feminine & Family Care
-Baby: (up high single digits overall) saw a double digit decline in Greater China due to increased competitive activity and trade inventory reductions
-Feminine Care: (up high single digits overall) saw a mid-single digit volume decrease in Greater China due to lower consumption

Increased competition, lower consumption, and slowing ecommerce activity in China are causes for concern should they persist. China accounts for 9% of Procter’s sales. If and when inflation moderates after difficult comps are lapped, investors should not be surprised by a Procter stumble in China as home prices crash and soaring energy prices result in factory closures.
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