Personal Care MarketWatch

COMPANY SPOTLIGHT: PROCTER & GAMBLE

Procter & Gamble Q2 net earnings down

US-based Procter & Gamble reported that net earnings were $4.66 billion, or $1.49 per diluted share, for the
second quarter ended December 31, 2009, a 7% decrease, compared to $5 billion, or $1.58 per diluted share, for
the second quarter ended December 31, 2008.

For Q2 2010, net sales were $21.03 million, a 6% increase on the same quarter of fiscal 2009, where sales reached $19.76
million.

For the first six months of fiscal 2010, net earnings were $7.97 billion, or $2.56 per diluted share, a 5% decrease, compared
to $8.35 billion, or $2.61 per diluted share, for the same period of fiscal 2009.

Net sales for the first six months of fiscal 2010 were $40.83 billion, compared to $40.75 billion for the first six months of
fiscal 2009.

Despite the fall, P&G remained upbeat. The company's CEO Bob McDonald commented in a statement: "Our investments
in innovation, portfolio expansion, marketing support and consumer value are working".

Business Background
Procter & Gamble (P&G) is a global manufacturer and marketer of consumer products. The company markets more than
300 brands in over 180 countries spanning the Americas, Europe, the Middle East and Africa (EMEA), and the Asian
region.

The company is organized into three Global Business Units (GBUs) and a Global Operations group. The three GBUs are
beauty, health and well-being, and household care. The Global Operations group consists of the Market Development
Organization (MDO) and Global Business Services (GBS).

The beauty GBU includes beauty and grooming businesses. The beauty businesses are comprised of cosmetics,
deodorants, prestige fragrances, hair care, personal cleansing and skin care. The grooming businesses include blades and
razors, electric hair removal devices, face and shave products and home appliances.

The health and well-being GBU includes health care and snacks, coffee and pet care businesses. The health care
businesses include feminine care, oral care, personal health care and pharmaceuticals. The snacks, coffee and pet care
business include coffee, pet food and snacks.

The household care GBU includes fabric and home care as well as baby care and family care businesses. The fabric care
and home care businesses include air care, batteries, dish care, fabric care and surface care. The baby care and family
care businesses include baby wipes, bath tissue, diapers, facial tissue and paper towels.

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The MDO segment is responsible for developing go-to-market plans at the local level. The MDO includes dedicated retail
customer, trade channel and country-specific teams. It is organized along seven geographic regions: North America,
Western Europe, Northeast Asia, Central & Eastern Europe/Middle East/Africa, Latin America, ASEAN/Australia/India and
Greater China.

The GBS segment provides technology, processes and standard data tools to enable the GBUs and the MDO to better
understand the business and better serve consumers and customers.

Table 2: Key Facts

Address: Beauty products include:

1 Procter & Gamble Plaza Cosmetics
Cincinnati Deodorants
Ohio 45202 Hair care
USA Personal cleansing
Telephone: 1 513 983 1100 Prestige fragrances
Fax: 1 513 983 9369 Skin care
Website: www.pg.com
Employees: 138,000 Grooming products include:
Turnover: $83,503m Blades and razors
Financial Year End: June Electric hair removal devices
Face and shave products

Source: Datamonitor DATAMONITOR

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SWOT Analysis

Table 3: SWOT Analysis

Strengths Opportunities

Strong focus on R&D Expansion in developing markets

Leading market position Future growth plans
Diversified product portfolio Growing Indian FMCG market
Strong brand portfolio

Weaknesses Threats

Increasing instances of product recalls Regulatory environment

Dependent on Wal-Mart Stores for majority of its revenue Global economic conditions
Counterfeit goods

Source: Datamonitor DATAMONITOR

Strengths

Strong focus on R&D

P&G has strong R&D capabilities. P&G's annual R&D budget is about $2 billion which supports 8,000 engineers and
scientists at 25 research centers in 12 countries. Additionally, P&G also involves external innovation partners to boost its
internal innovative capability, an approach it calls 'Connect and Develop.' In 2002, only 15% of its product initiatives
included innovation from outside P&G. Currently, more than half of all P&G innovation includes an external partner. In just
the past year, it has evaluated more than 5,000 innovation opportunities from small entrepreneurs, universities, research
institutes, and large companies.

P&G is ranked as one of the top-20 largest R&D investors among US-based companies, which include Pfizer, General
Electric, Sony, Merck, 3M, DuPont and Hewlett-Packard. The best proof of its innovation capability is the number of top-
selling new products that come from P&G. The IRI Pacesetters study tracks and ranks the most successful new consumer
products introduced in the US for the past 13 years. One-third of the most successful Pacesetter products, on average,
have come from P&G and Gillette. Moreover, in 2008, five of the ten best-selling new products came from P&G, including
Tide Simple Pleasures detergent, Febreze Noticeables air freshener, the new Herbal Essences line of products, Crest Pro-
Health toothpaste, and Olay Definity skin care products. P&G's research and development capabilities have enabled it to
secure about 27,000 patents globally and allows it to renew its product line at regular intervals, which boosts customer
loyalty and revenue growth.

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Leading market position

P&G has leading market positions across most of its businesses. It competes primarily in 22 global product categories and
is a market leader in over two-thirds of these categories. P&G is the global market leader in the beauty segment with
leading market shares of over 20% and 33% in the hair care and feminine care categories respectively, owing to its brands
Always, Head & Shoulders, Olay, Pantene and Wella. The company also holds a leading position in oral care. In
pharmaceuticals and personal health, P&G has approximately 33% of the global bisphosphonates market for the treatment
of osteoporosis under the Actonel brand. The company is also a global leader in nonprescription heartburn medications and
respiratory treatments. Actonel, Crest, and Oral-B are well known brands in the company's health care segment. The
company is also the market leader in fabric care with global market share of approximately 33%, through key brands such
as Ariel and Tide. In baby care, the company has a global market share of over 32%, competing through the strong
Pampers brand. The acquisition of Gillette has enabled P&G to hold leading market share in the manual blades and razors
segment with a global market share of approximately 70%. The leading market position provides it with significant
competitive advantage, as well as stabilizing the company's financial growth.

Diversified product portfolio

P&G maintains diversified product portfolios. The company participates in more than 22 global product categories with 300
brands in over 180 markets. The company markets a range of products across six segments: beauty; grooming; health
care; snacks, coffee, and pet care; fabric care and home care; and baby care, and family care.

In the beauty segment, the company's products include cosmetics, deodorants, feminine care products, hair care, personal
cleansing and skin care products. The grooming category sells products like blades and razors, electric hair removal
devices, face and shave products, and home appliances.

Feminine care, Oral care, pharmaceuticals and personal health care products are marketed under the health care segment.
The snack, coffee, and pet care category deals in coffee, pet food, and snack products.

The fabric care and home care category comprises air care, dish care, fabric care, and surface care products. In addition,
under the baby care family care category, P&G offers diapers, baby wipes and bath tissue. The diverse product portfolio
enables the company to protect itself against demand fluctuations for certain products.

Strong brand portfolio

P&G has a strong portfolio of brands. P&G's portfolio includes 24 brands that generate over $1 billion in annual sales and
20 brands that generate between $500 million and $1 billion in annual sales. Combined, these 44 brands account for 85%
or more of its sales and profits. This strong portfolio of brands enables the company to deliver consistent, reliable top- and
bottom-line growth.

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Weaknesses

Increasing instances of product recalls

In the past few years, P&G has registered an increasing number of product recalls. For instance, in March 2007, P&G Pet
Care in the US and Canada voluntarily recalled canned and foil pouch wet cat and dog food products manufactured by
Menu Foods Inc. This recall was part of a larger product recall by Menu Foods Inc., a contract manufacturer that makes a
small portion of canned and foil pouch wet cat foods for P&G's Iams and Eukanuba brands. Moreover, in September 2006,
P&G suspended sales of cosmetics in China after they were found by authorities to contain the banned substances,
chromium and neodymium. Also, the company recalled supplies of Sweep+Vac by Swiffer Vacuum Cleaner in 2005, after it
received several complaints of overheating, including one report of a fire resulting in minor property damage. Recurrent
product recalls could affect the brand image of the company, which would lead to low customer loyalty and brand equity.

Dependent on Wal-Mart Stores for majority of its revenue

P&G is heavily dependent on Wal-Mart Stores, Inc. (Wal-Mart) and its affiliates for generating a major part of its revenues.
Sales to Wal-Mart and its affiliates have represented approximately 15% of its total revenue since 2006. High dependence
upon Wal-Mart reduces the bargaining power of the company. Also, Wal-Mart could use its bargaining power to impose
unfavorable terms on the company. Any decrease in revenues secured from Wal-Mart could have a negative impact on the
company's business. Hence, the loss of this customer would lead to a sharp decline in P&G's revenues and also a loss of
its market share.

Opportunities

Expansion in developing markets

The consumer products business is driven significantly by three basic demographic factors: population growth, household
formation, and household income growth. These factors are now driving strong growth in many of the company's
developing markets, including China and Russia. The GDPs of these economies are expected to register a decent growth
rate in the future. In China and Russia, P&G is using its portfolio of leading brands to attract, build and expand a network of
distributors. Currently its distributor network in China reaches about 800 million people. In Russia, it now has access to
80% of the population. Therefore, with its expanding distribution network, P&G could harness opportunities in these two
countries to enhance its market share as well as stabilize its top line growth.

Future growth plans

P&G is pursuing a clearly drafted growth plan. As per its plans, the company has reorganized its Asian operations from one
headquarters into three. It is applying this model to other nations, as well. Further to this, it aims to streamline its worldwide
portfolio by as much as 25% through 2012.

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At the same time, it will be building production facilities in 18 developing countries over the next four years. Currently,
P&G's products are used by 3.5 billion people around the world. These growth plans will increase P&G's reach to an
additional 1 billion of the world's 6.5 billion consumers, by 2010. Thus, pursuing a clearly drafted growth plan is likely to
have a positive impact on the company's top line growth.

Growing Indian FMCG market

The Indian Fast Moving Consumer Goods (FMCG) industry is likely to witness strong growth in the future. It is poised to
achieve 16% growth in sales during 2008–09, compared to 14.5% in 2007–08, according to a survey by the Federation of
Indian Chambers of Commerce and Industry. The growth would be attributable to rising income and increasing demand.
The survey points out that consumer preference for FMCGs is shifting towards higher lifestyle categories like skin care,
shampoos, deodorants, anti-aging solutions, fairness products and men's products, in particular.

In India, P&G's distributor network covers 4.5 million stores, an increase of two million stores in just five years. Moreover, in
India, P&G is present in merely eight different categories, as opposed to 21 categories in the US. This provides P&G with
an opportunity to enhance its market share, as well as to expand its presence in other categories.

Threats

Regulatory Environment

Several consumer protection groups are voicing concerns over the presence of harmful chemical ingredients in cosmetic
products. A recent study showed that about one-third of cosmetic products contain carcinogens. Due to increasing public
pressure, the US Food and Drug Administration (FDA) are expected to impose stringent quality norms on cosmetic
products. New regulations may delay launch of new products and result in higher product development expenditure. At the
EU level, the European Commission has published a draft regulation for the registration, evaluation and authorization of
chemicals (REACH), along with restrictions applicable to chemical substances, and has set up a European Chemicals
Agency. REACH focuses on the 30,000 chemical substances introduced into the market before 1981 and manufactured or
imported in quantities of more than one ton per year, on which hazard information has not been sufficiently well examined
by the current system. The regulations came into force in the fourth quarter of 2008, imposing new liabilities and increasing
operating expenses.

Global Economic Conditions

The global Gross Domestic Product (GDP) is expected to increase marginally by 0.9% in 2009, according to the World
Bank's report 'Global Economic Prospects 2009'. According to the report, the economic growth rate in developing countries
is expected to decline from 7.9% in 2007 to 4.5% in 2009, while the growth in developed countries in 2009 is likely to be
negative.

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The current economic climate is forcing shoppers to watch their expense and look for cheaper options of discounted brands
or own label merchandise. Even suppliers as powerful as P&G are under pressure from retailers like Wal-Mart, who are
cutting prices and introducing their own labels.

These retailers are promoting their own-labels for the purpose of sustaining their revenue growths and margins. The dent in
consumers' disposable income caused by the slowdown in the global economic situation is making it increasingly difficult
for branded product manufacturers like P&G to maintain their sales volume and revenue growth.

Counterfeit goods

The trade of counterfeit and pass-off products is negatively affecting the growth of FMCG companies like P&G. Pass-offs
are look-alike products that resemble the original products, mainly through misspelling of the trademark. For example,
Sunslik instead of Sunsilk, Clemic Plus or Climic Plus or Cosmic Plus instead of Clinic Plus, Collegiate for Colgate, and
Vips Rub or Vives Rub as a pass-off for Vicks Vaporub. Whereas counterfeits are the infringement of trademarks and
copyrights, duplicate/fake products are passed off as company products.

According to AC Nielsen, a global marketing research firm, 10–30% of cosmetics, toiletries and packaged food are
counterfeit. The top two brands within any category, be it cosmetics, detergents, or soaps, are effected the most by
counterfeiting and pass-offs. Besides revenue losses, counterfeits and pass-offs also affect the company's brand as they
are unsafe. Moreover, counterfeiting could hit customer confidence as the fake product does not give the desired results
promised by the brand.

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