What's going on?
Investors betting on consumer goods giant Procter & Gamble hit the jackpot on Wednesday, while those backing rival Kimberly-Clark were left reaching for the company’s Kleenex.
What does this mean?
P&G comfortably sailed past profit expectations for last quarter, reporting “organic” revenue growth of 4% for the second time in a row (i.e. removing the effects of currency fluctuations and buying and selling parts of the business). Crucially, P&G said 1% of that was down to it increasing the prices of things like Pampers diapers. And with the likes of Crest toothpaste soon to follow, P&G raised its organic growth expectations for the next two quarters.
On the other hand, arch-nemesis K-C (about 40% of whose sales directly compete with P&G products, according to FactSet) lacked the Sunshine Band. Despite beating revenue estimates for last quarter, its profit came up short. And although it too plans to raise prices in the coming months, K-C’s profit prediction for 2019 was also lower than investors expected. That’s not the way they like it…
Why should I care?
The bigger picture: Too much is not enough.
The ongoing challenge for consumer staples companies – which sell stuff people need, rather than want – is raising the prices of their goods. Retailers stocking them are keen to keep prices low, so as to not lose resentful customers to cheaper, own-brand competitors. But inflation means that, when it comes to profit, K-C and company face having to give it up to higher costs.
For markets: Mixed fortunes down the road.
P&G appears to have found the magic formula of raising prices while keeping customers happy – for now. Its improved outlook saw shares rise 4% on Wednesday. For K-C, however, a new plan to shake, shake, shake things up wasn’t enough to push the overall organic growth it predicts for 2019 above 2% – meaning customers will likely continue to switch to cheaper rival brands. Its stock fell 3%. Get down tonight!