We liquidated our position in Proctor and Gamble (PG) earlier this week.
While the position had generated positive total returns, dividend growth has stalled in recent years and the company is facing secular headwinds related to their core business.
Below we provide additional detail on our rationale for selling Proctor & Gamble.
Search Costs – “The Old Way”
If you’re like most people you want to get in and out of the grocery store as quickly as possible. Shopping is searching for a solution to a problem or a need you have, like laundry detergent for washing your clothes.
When shopping for laundry detergent you want a product that you can trust and is guaranteed to work. You don’t want to pay too much but you are willing to pay a slight premium for that trust.
There are a lot of laundry detergent brands. Before you buy you can compare each brand, their active ingredient(s), their claims of effectiveness, and price. But this would take a long time and you have 30 other items you need to shop for. You would be in the grocery store all day.
Your time is a precious resource and it is costly to spend all this time searching for one product.
Again, if you’re like most people you grab a brand of laundry detergent that you’re familiar with. You may even spend an extra $1-2 for a “name brand” because you know and trust this brand.
Consumer branded products like those that Proctor and Gamble sells have done well over the years because they lowered your search costs. It made your trip to the grocery store quicker. Your time and peace of mind are expensive so you are willing to pay a premium price for the name brand product.
Big name consumer brands were built on national print and TV advertising campaigns. They could afford it.
For years this was a virtuous circle. The more the brand spent on advertising the higher their sales. The higher their sales the more they could spend on advertising. Small brands couldn’t complete.
This is how brand building worked before the internet.
Search Costs & Brands Post Internet
Now when we want to know if a brand or item is trustworthy we turn to online reviews. Online reviews lower our search costs further while increasing our decision confidence.
Online reviews also save us more money. We buy cheaper unknown generic brands because online reviews provide the social proof we need.
The virtuous advertising cycle is over too.
Small brands don’t need to pay for a large national print and TV advertising campaign. They can build their band cheaply through digital marketing. La Croix seltzer water built its brand on Instagram.
Dollar Shave Club, a competitor to P&G’s Gillette shave brand and now a part of Unilever, made its name with viral videos.
Because of these shifts, Procter & Gamble has lost market share in key categories. Dollar Shave Club and Harry’s are both online razor subscription services. Both companies have taken market share away from Gillette.
Price increases were how P&G maintained sales growth.
Procter & Gamble cut prices across the majority of its brands because the market share loss has been too great.
Stalling organic growth has lead to stalled dividend growth.
We had hoped the activist investor Nelson Peltz would push the company into breaking itself up through spin-offs. But the recent proxy fight between the two sides makes us believe this won’t happen anytime soon.
We’re selling Procter & Gamble now because we found a company that will split itself up into three new companies. We’ll talk more about this company in an upcoming Dividend Letter.