Proctor and Gamble 2006 Annual Report Download - page 6

The Procter &Gamble Company and Subsidiaries
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Consumers. The shift in power to consumers is accelerating.
We can see this most clearly in the explosion of consumer choice.
Consumers have more brands, products and services to choose
from in every industry in every market. As a result, consumers
expect more from the brands they buy and use every day. They
expect manufacturers and retailers to communicate with and to
listen to them more carefully, to learn from them, and to meet
their needs and wants.
Competitors. P&G competes against some of the best companies
in the world, companies with great brands and strong capabilities.
In addition, many retailers are creating retailer brands and product
lines that compete more directly with manufacturers’ brands.
We also compete with more local, low-cost manufacturers in
developing countries.
Commodity and Energy Costs. Rising commodity and energy
costs will continue to be a challenge. In fiscal 2005, we had to
absorb about $750 million in increased costs for energy and raw
materials and we’ve had to cover about the same amount this
year. We expect raw material and energy costs to be up in fiscal
2007 versus the prior year, though current estimates indicate the
increase should be smaller than in the past two years.
To respond to these and other challenges, we must continue to
lead innovation, reduce costs, and improve overall productivity.
I’m confident we can do it. We have the strategies, strengths and
structure that create the capability and the opportunity to grow.
CLEAR STRATEGIES
P&G’s growth strategies are clear and robust.
• Continue to grow P&G’s core businesses: Leading brands, big
growing markets, and winning retail customers, leveraging
P&G’s core strengths and core technologies.
• Develop faster-growing, higher-margin, more structurally
attractive businesses in which P&G has significant potential to
achieve global leadership.
• Grow disproportionately in developing markets to serve more
low-income consumers.
We have grown substantially in all three strategic focus areas over the
past five years, and we have further room to grow.
P&G’s strategies focus the Company on growth opportunities
that play to P&G’s strengths. These strategies have enabled us
to create a diversified and balanced portfolio of businesses,
geographic markets, and retail customers, which increases the
Company’s flexibility to deliver consistent sustainable growth.
To deliver a strong second half of the decade, we will continue
to execute P&G’s strategies with excellence.
integrated P&G and Gillette distributors, we will provide expanded
distribution for Gillette products
— and in some cases, for P&G
products, as well. We are also lowering the distribution costs per
case for both Gillette and P&G brands. During these integrations
we are experiencing some short-term inventory reductions which,
along with a number of retailer inventory-reduction programs,
have had a short-term negative impact on Gillette sales growth.
These inventory reductions were largely expected. Most important
is that consumer demand for Gillette brands remains very strong.
Consumption on Gillette’s major brands continues to grow,
which provides assurance the Gillette businesses remain healthy.
Gillette is a catalyst that is making P&G a better brand-builder and
a stronger innovation leader. As a result, we’ve approached the
Gillette integration differently than past acquisitions. We have
benchmarked best practices from both companies in every critical
part of the business. Where P&G is strongest, we’re bringing P&G
approaches to Gillette. Where Gillette is strongest, we’re bringing
those capabilities to P&G. And where there are opportunities to
combine the best of both companies, we are creating even better
and stronger capability than either company could ever have built
on its own.
I want to express my deep appreciation to the men and women
from Gillette and P&G who have delivered the progress I’ve
noted here. They have worked tirelessly and with extraordinary
professionalism over the past several months to serve consumers,
to integrate systems and external partners, to meet the needs
of retail customers, and to manage the transition of nearly
30,000 Gillette employees.
I have no doubt that P&G and Gillette are stronger together than
alone, and that our combined company can deliver our accelerated
growth targets over the balance of the decade.
Sustaining Growth
P&G’s performance in fiscal 2006 continues the consistent growth
we have delivered in the first half of the decade. Since 2001:
• Net sales have increased 12% per year. Organic sales
have increased 6% per year. Total sales have grown from
$39 billion to $68 billion.
• Earnings per share have grown an average of 12% per year.
• Free cash flow has grown to nearly $9 billion per year,
totaling more than $35 billion over the past five years.
This is industry-leading performance, but we recognize that
sustaining growth in the second half of the decade could be
more difficult than in the first half because the external
environment is becoming more challenging in three areas:
consumers, competitors, and commodity and energy costs.