P&G’s E-Commerce Play Should Help Operating Margins

Procter & Gamble (NYSE:PG) is the world’s largest manufacturer of personal and home care products. In May P&G entered the e-commerce market by launching its eStore in the U.S. The eStore will exclusively sell  P&G products such as Tide detergent, Olay skin cream, Pampers diapers, Pantene hair care products and Always feminine items.

Until now, P&G products have only been available online via retail partner sites such as Amazon.com (NASDAQ:AMZN), Walmart.com (NYSE:WMT),  and Target.com (NYSE:TGT). Although P&G has been actively involved in digital marketing since the late 1990s, selling products on its own site is a new step for this venerable company.

We think the eStore could help P&G’s operating margins, creating a small potential upside to the $83.81 Trefis estimate for the company’s share value. Our analysis follows below.

Management predicts that e-commerce will eventually contribute close to 10% of P&G’s total revenues, up from 1% in 2009. The bulk of this revenue will come from partner sites that sell a broad range of items in addition to P&G products. Given the breadth of P&G’s portfolio, however, we expect the eStore to eventually generate about 30% of P&G’s revenues from online sales.

We believe that the eStore venture could yield a 3.06% upside to our  $83.81 estimate for P&G’s stock price. We don’t expect the eStore to boost P&G’s total sales volume, as online sales will mainly cannibalize P&G’s brick-and-mortar retail channel. And P&G is unlikely to engage in online price competition with its retail partners, given the company’s long history of building mutually profitable sales relationships.

But we do expect higher EBITDA margins on the portion of P&G’s online revenue that comes from the eStore. This is because retailers such as Walmart, Carrefour and Target extract a margin of about 25% from P&G and other manufacturers of personal and home care products.