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Procter & Gamble Acquisitions - Don't Mind The Gap, Fill It


A recent SA piece described in too broad of terms that Procter & Gamble should consider acquiring promising brands.

While legitimate, a more precise strategy is needed to investigate buying brands that fill the company's current gaps rather than venture into new product divisions.

Procter & Gamble should consider focusing on established green brands, as this area has gained traction in all of its product lines, with very few organic initiatives in this area.

This past week, Shudeep Chandrasekhar wrote an interesting piece on Procter & Gamble's (NYSE:PG) need to acquire to grow its dividend... and really grow in general. While the acquisition of new brands is the opposite of the current strategy of PG shedding under-producing entities, shrinking to grow only works for so long and generally focuses more on cost-cutting, which can only expand profits for so long. It leads investors to wonder how organic growth can be achieved by selling off brands and simply becoming leaner. Without new products that provide more than enhanced gimmicks (i.e., a razor with 9 blades that swivel and plays your favorite wake up jam while you shave... please sense my sarcasm here), PG should probably begin considering some efficient additions to its core assets. So, while I won't argue Shudeep is wrong on this assertion, he gave much too broad a brush with the solution of:

It is a hand-wave solution, like "we will stop ISIS by putting more boots on the ground and using heavier weapons." While logical, there is no specific direction or note of what these promising brands might be. It also leaves open the door for PG to shop for products and brands similar to those it is disposing itself of, such as Duracell, or buying back into pet food - areas it should avoid, as its performance has demonstrated. PG needs a sounder goal and strategy for any acquisition, and it should coincide with economist and Nobel Prize winner George Stigler's theory of complements and substitutes.

Support the complements, fight the substitutes... and if you can't beat 'em, join 'em!

In Stigler's 1971 economic article titled The Theory of Economic Regulation, he notes that entities, i.e., corporations and labor unions, will work to maximize regulation that preserve market share and hinder competitors. Much of this regulation comes down to substitutes versus complements - they work to deter products and services that can substitute for their own, while enhancing the abilities of complementary products and groups.

For example, J.M. Smucker (NYSE:SJM) makes peanut butter and jelly. SJM will work to help the makers of bread/crackers, while trying to deter competitors that make almond butter and honey. In similar fashion, big beer makers will push for bills to limit the ability of a craft brewer to enter the market, thus preserving market share and limiting competitors. And if that does not work - as it often does not in the long term, with every small entity having a seat at the...