Fuelling P&G’s P&L
Elsevier Food International, Vol.8, No.3, September 2005Pascal Kuipers
“If you want to understand how a lion hunts, don’t go to the zoo. Go to the jungle.’ This one-liner of P&G’s chief executive Alan G. Lafley illustrates Procter & Gamble’s resoluteness to steer its business on true and reliable facts on consumer behaviour. With the consumer constantly changing, P&G has to show its adaptability to the utmost.
In 2000, when A.G. Lafley stepped up to the helm of P&G, the company was in a crisis. It missed its earnings targets and disgruntled investors massively turned their backs on P&G so the stock price plummeted.
Lafley reorganised P&G by divesting non-core activities and focusing the company on its five core categories, its core brands (each with sales exceeding the US$1bn level), its core countries (top ten countries that account for 80 per cent of sales and 95 per cent of profits), its core retail partners (leading, innovative, growing and expanding). “And we focus on core technologies, core capabilities and our core systems,” Lafley added in an interview published in Elsevier Food International’s September 2003 edition.
It is therefore fair to say that P&G refocused on its core … but still P&G’s main centre of attention has not yet been mentioned: the consumer. ‘The consumer is boss’ is a mantra that P&G’s managers in all layers of the organisation constantly recite. Putting the consumer to its core must lead to a nuclear fission that fuels P&G’s P&L (profit & loss), now and in the future.
The consumer as a shopper
A lot of refocusing, however, still needs to be done, as consumer behaviour is constantly changing while media audience research apparently does not take this into account. This was a complaint Bernhard Glock, P&G’s manager of Global Media and Communications, expressed in an interview last year in Research World magazine. “We want to put the consumer at the heart of everything and research must start with the consumer and look at where and when they are receptive across different channels,” Glock said. “The lack of consumer focus and the silo approach, which is based on measuring each media type separately, are the main weaknesses of today’s audience surveys.”
It is surely frustrating for a company used to fact-based marketing management, not being able to rely on good information. His words will surely not be wasted on representatives of the media and advertising agencies, as P&G is the world’s largest advertiser.
“Procter & Gamble has traditionally been focused on the consumer, who we can identify as someone who uses our products,” says Andrew Garden, general manager Customer Business Development for P&G in western Europe. “We want to understand how consumers shop in different formats. We therefore focus on the consumer as a shopper. This has clearly been emphasised by AG Lafley, who speaks of the two moments of truth. The first is in store, when the consumer buys the product and the second is at home when the consumer uses the product. We traditionally are good at the latter but now we also focus on the first moment of truth.”
According to Garden, there is no P&G strategy to ignore mass media and focus on the Internet or other new channels of information instead. “Our strategy is to be with the consumer,” he says. “With today’s media fragmentation, we need to explore and test new marketing approaches to connect with consumers where and when they are most relevant and receptive. We are thinking more upfront how we can provide consumers with information that is relevant to their lives. This means understanding how they are entertained, how they live their life and what we can do to connect with them.”
Tremor teens
Garden calls it ‘shopper marketing’ which entails close collaboration with retailers. “We are working with retail partners on category and store layout design and better, clearer education within the store. An example is Greece where we worked with retailer Veropoulos to communicate the benefits of our dishwashing liquid Fairy in store.”
For difficult to reach consumer groups such as young adults, P&G designed a tailored communications strategy. “A good example is our work on Always,” says Garden. “We have a School Programme where healthcare professionals go into schools to help girls understand more about the changes their bodies will be going through. We also support a website ‘Being Girl’ (www.beinggirl.com) that offers teenagers the opportunity to talk to each other and get their questions answered.”
Another example is Tremor, “a VIP community of teens” as it calls it on its website www.tremor.com. Powered by P&G, Tremor recruits teens to develop product ideas and marketing programmes that appeal to this difficult to reach group of consumers. Tremor was already launched in 2000 and currently over 250,000 teenagers from all over the US are members. Membership is free and the Tremor teens are given a say on new products and brands that are sent to them before they are really introduced. These teenage-connectors are asked to discuss these products with their friends and other Tremor teens via the website. This creates an effective word-of-mouth campaign. In addition, the members provide Tremor with feedback that P&G also shares with external clients interested in effectively reaching the teen consumer. Tremor, which is operational only in the US, is adding a new demographic to its marketing reach, Women with Kids aged 5-19. This demographic expansion is being tested and Tremor plans a national expansion in early 2006.
Growth and innovation
A.G. Lafley’s work of reorganising and refocusing P&G to find the path of sustainable growth got a new growth dimension in March 2003 and January 2005. In March 2003, P&G announced the acquisition of the German beauty care company Wella, for US$6.4 billion. In January 2005, P&G announced the largest acquisition in its history, as it clinched a deal worth US$57 billion acquiring Gillette.
P&G’s acquisition zeal was not, however, unanimously applauded as Lafley’s turnaround job since 2000. “Though P&G and Gillette products are popular, they grow as fast as the population and the economy,” commented David Pauly of Bloomberg in an article in Canada’s financial newspaper Financial Post. Referring to the personal benefits Gillette’s CEO David Kilts receives, he states that “[…] Gillette and P&G shareholders are left with hype. A.G. Lafley says the company needs to get bigger in order to deal on even terms with ever-larger customers, notably Wal-Mart. Wal-Mart last year accounted for 17 per cent of P&G’s sales. […] A beefed-up P&G may still have to do Wal-Mart’s bidding. The world’s biggest retailer can always threaten to replace P&G products with its own brands.”
“It is not about consolidation, it is about driving innovation and building brands that are loved by the consumer,” says Garden, who acknowledges that retailers increasingly pass on price pressure to suppliers. “There is absolutely more price pressure,” he says. “It’s far greater than in the past. I worked for over 20 years in Europe and I know that there is an extremely difficult business environment now. We can only respond by focusing on consumer value, while optimising our cost base.”
In the four years since 2000, P&G’s enterprise value soared by over US$70 billion. Ninety per cent of this increase was a result of P&G’s investments in growth, whereas the much-touted operational improvements accounted for less than ten per cent, stated Nathaniel J. Mass of N.J. Mass Associates in an article in the April 2005 edition of Harvard Business Review. Introducing a new strategic metric called the ‘Relative Value of Growth’ (RVG), Mass points out that growth often is far more valuable than managers think. “If P&G can apply its marketing skills to boost growth from Gillette’s operations by just a third of a percentage point – hardly an impossible task given the company’s success with its own operations – the deal will pay off for P&G’s shareholders,” Mass said. “And this does not take into account the margin benefits that P&G can easily squeeze out of the deal by eliminating redundancies across both companies after the deal’s completion. […] P&G’s continued investments in growth and innovation capacity, will be the real driver of value creation at the company,” Mass said.
“We at P&G have cosmetics brands that focus on women, whereas the Gillette brands mostly focus on men,” Garden broadly outlines the acquisition synergies. “The collection of 21 billion dollar brands the two companies share, are a testament to a passion for consumer-focused innovation. Gillette’s capabilities and competence in skin and oral care, women’s hair removal and men’s grooming will offer new opportunities for innovation that will result in exciting new products for consumers. Beyond the innovation benefits, there is the potential to sell Gillette products in new markets through P&G’s distribution network, particular in emerging markets.”
Insourcing
‘Connect + Develop’ is the name of P&G’s open innovation strategy, in which it opens up to all external sources of innovation. Currently some 35 per cent of innovation comes from outside the company. Garden denies that it is P&G’s target to obtain 50 per cent of new ideas from outside the company by 2010. “While we are looking to connect more externally, we do not have a set 50 per cent target or firm deadline of 2010,” he says. ”We are not outsourcing R&D, we are ‘out reaching’, looking externally to increase capabilities, opportunities and efficiencies. A.G. Lafley gave us the goal of sourcing more of our innovation from outside the company, because it doesn’t matter where good ideas come from. What matters is that P&G is able to successfully commercialise them to meet the needs of consumers and build shareholders value. Nabil Sakkab, our global leader for Fabric & Home Care, calls this ‘insourcing’. It’s a great line. Nabil says he employs around 7,000 scientists to innovate. Yet, there are around 1.5 million people outside the company with skills that can help. Our external innovation partners can come from anywhere: academia, government labs, small and large cap companies, entrepreneurs, venture capitalists… even competitors.”
The Swiffer Duster is an example of a product that has been sourced outside. It is licensed from Unicharm for sale outside Japan. “Instead of inventing something ourselves, we approached Unicharm,” says Garden. “We obtained the rights to market the product outside Japan and got it to market within 18 months.”
Another example is in cosmetics: Olay Regenerist. “P&G was at a conference where a small French company called Sederma presented a paper on novel skin care actives. We were able to license their technology for use in Olay Regenerist and we continue to do upstream work with them,” Garden comments.
According to Garden, despite its size “[…] P&G knows that it cannot be complacent. Change is an absolute, so we must always be ready for change and in fact be leading change.” That is why P&G’s managers will need to prefer the jungle over the zoo.
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