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By Erik Kobayashi-Solomon | 06-08-2010 01:00 PM

Beyond the Brands at P&G

Morningstar analyst Lauren DeSanto says the consumer products giant is well-prepared for a potentially tough European market.

Erik Kobayashi-Solomon: Hi, I'm Erik Kobayashi-Solomon, co-editor of Morningstar's OptionInvestor. Today it's my great pleasure to welcome Lauren DeSanto, who is a stock analyst covering consumer products companies for Morningstar. Thanks for coming.

Lauren DeSanto: Thanks for having me, Erik.

Kobayashi-Solomon: So, I just wrote a bullish article on a company that you cover, Procter & Gamble, P&G, and wanted to ask you a little bit about this firm. When I think about P&G, what I think of is just the marketing power. But you make a good point that it's also – their story is about economies of scale, also distribution scale. Can you just talk about how those things make a moat for P&G?

DeSanto: Sure. Well, I would say one leads to the other. So, while P&G has really been very focused on brands and consumer understanding, and that's really what they excel at. They are the best in the business at understanding consumers. They have then been able to build this portfolio of billion dollar brands and brands that achieve more than half a billion dollars in sales. As you get these brands, it gives you some leverage with retailers. So they're able to go to the retailers with a great portfolio of brands, and say, 'You know, if you want these on your shelves, here is the terms we like.' And they're able to negotiate.

Kobayashi-Solomon: So in other words, they can say, 'Look, we want to sell this kind of minor brand.'

DeSanto: Possibly, right.

Kobayashi-Solomon: 'If you want to sell our major brand, you're going to have to pick up this minor brand.' Is that part of it?

DeSanto: Exactly. That's part of it. Also they can say, 'We understand this category extremely well. We can segment it. We know the consumers that are in it. So you're going to want these different kinds of brands in here. Oh, we offer all those kinds.' So, they do segment categories very well.

Kobayashi-Solomon: So really providing retailers kind of a pull for the consumers to pull people into the stores.

DeSanto: Exactly, that's what strong brand equities essentially do. And so, as they – and it kind of creates a self-fulfilling cycle because as they get more sales for these brands, and learn more about the consumer from these brands, they're able to develop new products, expand overseas, expand their brands into new markets, where they again learn about consumers.

Kobayashi-Solomon: And I guess, they can also start pushing on suppliers a little bit as well, right?

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