Procter & Gamble: Tumble cycle
By Jonathan Birchall in New York
Published: December 17 2009 19:31 | Last updated: December 17 2009 19:31
On a recent visit to Moscow, Bob McDonald took time out to drop in on a Russian housewife. The chief executive of Procter & Gamble wanted to check up on what she was buying amid a severe economic downturn and an annual inflation rate running at about 9 per cent.
“The lady’s reaction to the economic crisis in Russia was to buy large sizes of everything,” recalls Mr McDonald of his visit to the suburban apartment. The working mother with two children was already buying bumper packs of laundry detergent. But she wanted large-sized bottles of shampoo and Fairy dishwashing liquid too. “Her whole purchasing habit had changed.”
In an interview at P&G’s headquarters in Cincinnati, Ohio, Mr McDonald notes that the world’s largest consumer goods company had seen this kind of change before: in Turkey, for example, during the dramatic currency devaluation of 2001, when he was head of P&G’s global fabric care business. “During every recession we’ve seen a change of behaviour,” he says. “During our 172 years of operation, [for] more than a quarter of them we’ve operated in a recession. So we’ve been there before.”
Rise of private labels
An advertising campaign for Charmin, Procter & Gamble’s US toilet paper brand, invites consumers to “soften your bottom line”, saying it may cost more but lasts four times longer than “leading value brands”. This is part of P&G’s “performance-based value messaging”, targeting retailer private- label brands that have gained market share in the downturn. A survey by research firm Consumer Edge suggests 30 per cent of US households now use private-label toilet paper. Just over 53 per cent of households surveyed were “very satisfied” with it, indicating shoppers might stick with private labels after the recovery, the firm says, underlining the challenge to P&G.
Mr McDonald’s sang froid amid the worst consumer recession since the 1930s is in tune with the style of A.G. Lafley, his unflappable predecessor, as well as his own background in the US army’s officer corps before he joined P&G 29 years ago. Previously chief operating officer and right-hand man to Mr Lafley, Mr McDonald had long been seen as his likely successor. But the timing of his appointment in June took the industry and Wall Street by surprise.
“It was probably a year earlier than we were expecting,” says Bill Pecoriello, analyst at the Connecticut-based Consumer Edge Research. “But we were totally confident that it would be a smooth transition, despite the fact that it was happening in the middle of a global economic crisis.”
With more than 4bn customers, and just over 30 per cent of its $79bn (£49bn, €55bn) annual sales coming from developing markets, P&G is both a barometer of the health of global consumer demand and a standard-setter for consumer goods marketing.
Sales of its brands such as Pantene, Head and Shoulders and Wella account for one-fifth of all the hair products used around the world; more than 70 per cent of the world’s razors and blades are made by its Gillette brand. Over the past decade P&G has led the creation of new product categories with products such as Crest dental whitening strips and Swiffer cleaning mops, delivering new products at a rate that has outstripped Unilever and other global rivals.
Mr McDonald (pictured left) argues that his arrival in the top job represents “continuity with change”. But the switch in leadership has been accompanied by a shift in strategy that, if successful, could put P&G on the list of companies, such as Estée Lauder and Avon, for which this recession turned into an opportunity – they pushed through restructurings that otherwise would have been harder to achieve. “Maybe when we look back, we’ll see P&G as being one of those companies,” says Lauren Lieberman, an analyst at Barclays Capital.
News of the change came after a quarter in which P&G’s sales were hampered by the price rises it had instituted in 2008 to deal with inflation and the jump in commodity prices the world was experiencing at the time. Mr McDonald admits that when he took over, the company was running in “crisis mode”, trying to stabilise its business as a fall-off in global consumer demand followed Wall Street’s precipitate slide the previous September.
“In October through December, things fell apart and they fell apart relatively rapidly,” he says of the post-crash universe. “It was clear to us ... that we had to take dramatic steps quickly to restore the financial structure of our business.”
Last week it was announced that Mr Lafley, who stayed on as chairman after the handover, would next month relinquish that post too to Mr McDonald.
Ms Lieberman argues that the crisis exposed weaknesses and missteps by P&G, such as launching Tide Total Care, the most expensive version of its Tide detergent, in July 2008 rather than the “value tier” Tide Basic line it is now testing in the US. The company had “the wrong product portfolio for the [economic] environment”, skewed towards higher-end products and discretionary items such as Wella. Its global business was also strong in Russia and eastern Europe and comparatively weak both in south-east Asia, where consumers were less affected, and Latin America, where they were more accustomed to inflation-related price increases.
Initially, P&G’s response included price rises in its overseas markets to defend the profitability of its brands, combined with a review of its planned product introductions and a shift in its marketing. That move, still under way, is towards “value-based metrics” such as stressing that its Charmin toilet paper may cost more than an alternative but lasts four times longer.
But it was the price increases that had the most immediate effect on its business. In Russia, for instance, it raised prices four times in a row on products such as Ariel detergent and Head and Shoulders shampoo, as it tried to offset falls in the value of the rouble. The rises had been expected to hit sales. But by spring and early summer of this year, the company came to recognise that its had fallen by more than it had reckoned for – just as it began to discuss the transition in the top job.
In the US and western Europe, the main beneficiary of those losses were the “private label” goods produced for retailers. By the time of the succession, P&G had determined a short-term plan of action to reinvigorate sales by boosting spending on marketing to rebuild market share. It also cut prices on 10 per cent of its product lines, undoing many of the price rises it had instituted in Russia that its competitors had chosen not to follow.
To allow it to invest more in marketing and brand building, the company also dropped its 2010 diluted earnings per share growth below the long-term double-digit target that had been a shibboleth of the Lafley era, as it shifted spending into the drive to win back market share. Having initially predicted that it would see an “inflexion point” for a return to top-line sales growth in the current three months, the company returned to growth by the end of its July-September quarter.
Mr McDonald maintains that the group is now placed to deliver profitable growth over the coming five years. “In those five years, we’re going from reaching 4bn consumers using our products to 5bn consumers. And we’re going to go from the average consumer in the world spending $12 a year on P&G products to $14 a year. And we have all the building blocks that lead to those results,” he says.
Ms Lieberman argues that the leadership transition also marks an evolution in P&G’s strategy, albeit one that was evolving even before the recession hit. After improving margins by creating innovation that customers will pay more for, Mr McDonald is focusing on building global scale through unit sales. “P&G was getting an existing Tide consumer to trade up to another version of Tide, rather than getting someone who is not a Tide consumer to buy one of the products. There’s not enough growth in that strategy.” Changing that, she argues, “is what Bob is all about”.
The new strategy includes a direct assault, both through marketing and new “value tier products”, on the private labels that have gained market share during the recession. “We don’t think there is any reason any consumer should have to use a private label. We should be able to innovate at multiple price points to delight all consumers,” says Mr McDonald.
In the US, P&G had already launched “basic” lower-cost versions of its Charmin toilet paper and Bounty paper towels before the recession hit. But this year it not only started testing “basic” Tide in the southern US but, in Europe, introduced the lower-cost Simply Dry version of its Pampers nappies. It is continuing the expansion of its Naturella female pad brand originally developed for low-income women in Mexico: after its recent expansion into Saudi Arabia and Khazakstan, a launch in China may follow.
In 2009, only about half of its product categories offered “value tier” versions in its top 17 country markets. The proportion is expected to increase to about 75 per cent by P&G’s 2011 fiscal year. “There is renewed commitment that this is very strategic, and we need to get it done more quickly than ever before,” says Mr McDonald.
To support what it calls “white space” expansion into new categories and markets, the company is in the midst of its largest ever increase in international manufacturing capacity, with almost 20 plants being built outside the US. That includes facilities in India, where consumers currently spend less than an annual $1 a head on P&G products, and China, where the amount is only $3 – compared with $20 in Mexico.
Mr Pecoriello at Consumer Edge argues that P&G is “still playing catch-up” against competitors in developing markets. “They have the opportunity to expand. But the reality is they are very competitive markets and there are entrenched local and multinational competitors, such as Unilever, L’Oréal and Colgate. It’s going to take investment, but it is absolutely the right strategy, because that’s where the growth is.”
Last week, P&G announced the $470m acquisition of Ambi Pur air fresheners and other household products from Sara Lee, one of its US rivals. The move gives it access to Ambi Pur’s markets and distribution network in Asia and Europe where P&G’s Febreze brand is not sold.
As the world edges out of recession, Mr McDonald says he is not among those who believe that basic consumer behaviour will have been permanently affected or demand reduced by the experience. “Is there going to be a new ‘reset’? I don’t know. I don’t think it’s going to be to the extent that people think it is. The US may reset to a somewhat less credit-driven level, but that has arguably a relatively minor impact in the world.
“We’ve been to the movie before,” he says. “We see behaviour change during the recession, we see [demand] come back with resilience at the end of the recession.”
How bonds beyond borders reveal the culture of the fabric conditioner
Bob McDonald argues that Procter & Gamble needs to look for new consumers not only in the developing world, but also in the company’s existing markets in developed economies.
The 56-year-old head of P&G says senior executives recently “committed to redouble efforts to serve Hispanics and African-American minority consumers” in the US. Although minority communities account for a little more than one-third of the population today, “some time between 2035 and 2045 the minority will become the majority in the US, and looking at the US as a homogenous country is a big mistake.
“Country boundaries are irrelevant,” he says, citing the influence on his thinking of Samuel Huntington’s 1996 book, The Clash of Civilizations and the Remaking of World Order, published when he was working for P&G in east Asia. Huntington’s stress on ethnic and cultural bonds over national identity “resonated” with his own experiences while selling haircare, fabric and beauty products. As a brand manager for laundry products in Canada from 1989 to 1991, he had observed that French-Canadians loved lavender-scented fabric conditioner, while the English parts of the country “hated” it. Then he found a similar love of lavender in parts of Europe and Latin America and the Philippines. “You start wondering why these cultures develop certain needs and similarities,” he says.
In east Asia in the 1990s, he saw cultural similarities between the transnational ethnic Chinese community in countries such as Indonesia, the Philippines, Malaysia and Singapore. “Why can’t we market our products to these civilizations? Well, now, with global retailers and with digital technology, we can do that.”
He plans a new commitment to the internet and e-commerce, with the company seeking to expand the small percentage of goods it sells online. “We’ve got to learn about that shopping experience the way we understand the shopping experience in bricks-and-mortar stores.”
Part of his challenge now is to persuade P&G’s country-focused managers to join him in his belief that borders are irrelevant. That would mean “the integration of approach from northern Mexico to the southern US” in America, for example. “You’ve got people going across the border and they need to understand that the brand that they know and love is available on both sides.”
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