FMCG

by Greg Thain

  In 1982, P&G, already dabbling in the OTC drugs market, paid a massive $371 million for Norwich Eaton Pharmaceuticals, primarily for its Pepto-Bismol and Chloraseptic brands. This move was followed up by a blockbuster deal: the purchase in 1985 of Richardson-Vicks Inc. for $1.2 billion, by far the biggest acquisition ever made by P&G. While it had purchased the company primarily for OTC brands like Vicks VapoRub, Sinex and DayQuil, Richardson-Vicks also brought into P&G an interesting range of personal care brands -Oil of Olay, Pantene shampoo and the Vidal Sassoon range. These personal care brands would eventually be the main benefit flowing from the acquisition.

  On the home front, however, life had become tougher. While the 1983 launch of Always, based on Pampers’ stay-dry lining and absorbency technologies, had provided the company’s next blockbuster, P&G had been losing its commanding lead in its core categories of laundry and paper products. While efforts were made to shore up these areas, P&G invested further in building scale and expertise in personal care by acquiring brands such as Cover Girl, Clarion, Old Spice, Max Factor and Giorgio. P&G was now changing rapidly into a maker and seller of brands rather than having any specific category focus. It was also, somewhat more painfully, becoming a global company.

  How Is It Structured?

  As P&G became ever larger and more complex, how it structured and managed itself became a major part of its strategy. To keep up with the goal of doubling the size of the business every ten years, larger and larger acquisitions needed to be made. As those acquisitions took the company into new and different categories, new skills had to be learned and new management structures adopted. The issue became not just achieving growth but also coping with growth.

  P&G had first structured itself into divisions as early as 1955 and it subsequently initiated occasional bouts of restructuring and downsizing as acquisitions created inefficiencies and overlaps. But as the scale of the acquisitions increased, so did the structural issues. The purchase of large, already complex companies such as Tambrands in 1997, Iams two years later, Clairol two years after that and Wella in 2003 meant that the company was in a state of constant realignment, a process not really eased by selling off some of its by now less attractive foodstuffs business. After the Wella purchase, P&G was employing nearly 100,000 people in over 80 countries. In addition to the problems of scale and scope, P&G was dealing with the added complexities of doing business with the emerging retail giants, having formed a joint customer team with Bentonville-based Walmart Personnel as early as 1998. This followed on from P&G’s streamlined of its supply chain in the mid-1990s and its subsequent move away from cash discounts offers to everyday-value pricing.

  The P&G/Wal-Mart initiative would become a benchmark for the rest of the packaged goods industry, with P&G employees from sales, finance, marketing, IT and logistics working as one team with their Wal-Mart counterparts. Integrating information systems to achieve joint, real-time information share was a huge challenge: the companies had different financial years and different measures of sales and profitability. But the initiative was a clear success and by 2004 P&G had teams embedded in over 50 retail customers.

  In 1998, P&G launched its most sweeping re-organisation ever: Organisation 2005, the aim to with cope with the twin challenges of a truly global company trading in multifarious many market conditions on the one hand, with operating across a large number of product segments on the other. The outcome was a three-pronged matrix. Along one axis were seven global business units (GBUs), each responsible for the strategy, development and brand management of individual product sectors: tissue and towel, food and beverage, fabric and home care, baby care, feminine protection, beauty, and health care along with a separate New Ventures Group. On the second axis were eight market development organisations (MDOs) – geographic regions – that were responsible for market/customer development and local marketing execution. The third axis was a global set of corporate functions.

  This change was to be an implementation nightmare. P&G was now more concerned with looking inwards than looking outwards, at a time much when competitors were out there fighting back and the company’s own new product initiatives were lying fallow. P&L accountabilities were unclear, which created morale issues in the MDOs. Information to support the new structures lagged far behind the organisational changes. And the new structures themselves seemed to be fundamentally flawed, with increased overhead costs as each GBU had been set up with its own full set of functions: R&D, IT, and HR in addition to more operationally-focused activities. To avoid the impression that P&G wasn’t taking the global nature of its business seriously, two of the GBUs had been headquartered outside the US, the Feminine Protection GBU drawing the Japanese short straw. Lastly, it seemed that every subsequent acquisition and disposal created fit and size issues within the GBUs. Either an acquisition didn’t really fit under any of the headings so was shoehorned into somewhere essentially inappropriate or a significant disposal took a chunk out of a GBU’s turnover without reducing its overheads. The outcome was an average growth of 6.7% in net sales in the eight years leading up to 1998 dropped to a miserly 2.6% for the next three years with net earnings declining each year. It was a slump that cost the CEO his job.

  P&G needed to find a way to get back to the basics: focusing on consumers and customers while making its highly complicated structure work. This was to be achieved by the incoming CEO, A. G. Lafley, who was continuing the decades-long tradition of company man P&G CEOs who had started off in brand management. Lafley’s first priority was to ensure every manager had a dose of hard reality: the company was losing share on key brands with key customers in key markets while delivering insufficient innovation and incurring costs that were excessive.

  Focus was the answer. By merging baby care, feminine care, and tissue and towel into one new baby care and family care unit, the number of GBUs was reduced by two. Overseas GBUs were repatriated back to Cincinnati, and the matrix structure was given an external focus with Lafley’s brilliantly simple Two Moments of Truth. The first moment of truth occurred in the store when shoppers decided, or not, to buy a P&G product. This was the accountability of the MDOs: making the sale. The second moment of truth occurred whenever a consumer used a P&G product. This was strictly down to the GBUs: they had to deliver the promise. Lafley also demanded a laser focus on winning with top brands, top customers and in top markets. P&G could only win if it consistently made its big brands bigger.

  Lafley’s new approach also came just in time to also benefit from some new and more exciting innovation coming out of the pipeline. Swiffer, Febreze, Crest Whitestrips and the recently acquired Spinbrush were all classic P&G innovations that mirrored its historical strengths in either creating premium products in previously commodity-driven categories (Swiffer) or in bringing hitherto unaffordable luxuries into the mass market (tooth bleaching and powered toothbrushes). P&G was getting back to what it did better than anyone else. In 2003, P&G’s top-ten brands grew by an average of 8%, its top-ten customers by 13% and its top-ten markets by 11%. The machine was humming, or beginning to.

  What Has It Been Doing Recently?

  2004

  This was the year that Lafley’s strategies really kicked in. Net sales increased by 17% to break the $50 billion barrier, driven by 10% organic growth, with the balance due to a full year’s benefit from the previous year’s acquisitions, primarily Wella. Global market shares in P&G’s core categories all increased to historic highs: 36% in baby care, 35% in feminine care and 31% in fabric care. The company now had a historic high of sixteen brands with sales of over $1 billion, Pampers by far the largest at $5 billion. Crucially, market shares in the US and Europe had also improved significantly.

  In addition, P&G was benefiting from the upside of new product launches in its pharmaceuticals sector. Actonel, its osteoporosis brand, originally developed by leveraging its oral care calcium expertise, became the fastest-ever P&G brand to reach sales of $1 billion, whilst its Prilosec OTC brand achieved market le
adership in the heartburn treatment category in a staggering five days. Indeed, healthcare and beauty care were the darling categories for P&G, showing above-average growth of 18% and 40% respectively. These higher margins and below-average market shares thus left plenty of scope for further growth and rather overshadowed more sedate growth rates in P&G’s paper products and Fabric and Homecare sectors.

  The orphan of the organisation was snack and beverages, which by now had been reduced to two brands: Folgers coffee and Pringles. With only $3.5 billion in sales next to $17.1 billion in beauty care, for example, it made little sense to continue carrying a separate GBU overhead, which prompted another change to the GBU structure, the sort of change that would become an almost annual habit. Snacks and beverages GBU was folded into household care, while healthcare was merged with baby and family care, leaving beauty care as the third remaining GBU. With only three GBUs, the precise synergies between Folgers and Tide, Iams and Actonel, and Tampax and Hugo Boss was not easy to discern other than as simple overhead reduction. But this simply reflected the fact that, with such an aggressive acquisitions strategy, P&G’s brand portfolio was perpetually a work in progress.

  2005

  The rate of sales increase softened slightly but was still impressive, increasing by 11% to $57 billion: after all, without a blockbuster acquisition on the Wella scale, slowing down was inevitable. True, the announcement of the forthcoming Gillette deal gave promise of better days to come. But organic growth also slackened off a couple of points with only Dawn, the single new brand, joining the elite list of 17 billion $ brands. (22 once Gillette had been acquired). By this point, fully half of P&G’s sales were coming from outside North America and the company now had four customers who sold more than $1 billion a year of P&G products. At the other end of the economic spectrum, P&G’s success in growing sales by 50% over the previous four years through High Frequency Stores (mostly neighbourhood independents) made that sector larger in sales for the company than Wal-Mart. Store like these accounted for 80% of sales in the developing markets.

  Within the GBUs, Tide Coldwater - developed to match the Japanese housewives’ washing method of choice - made its successful transition into the European and North American markets, where housewives took to it for its potential to save on energy bills. The company also launched Tide with a Touch of Downy, in the first of what would become an almost habitual strategy of combining the incidental benefits accrued from developments across its now vast 300-plus brand portfolio. Febreze also made its first move from the furnishing spray it had been into the larger air freshener market. The company also launched products aimed at lower-income consumers - Blendax tooth-paste in Russia, for example - but also introduced similar products into developed markets with Bounty Basic and Charmin Basic, a response both to a growing part market of lower-priced secondary brands and particularly to private labels.

  The company mission was also clarified: the creation of sustainable advantages in branding, innovation, go-to-market capability and scale. With seventeen billion-dollar brands, an R & D spend of $2 billion a year, number-one supplier ranking with US retailers and $57 billion in sales, P&G was well placed on all fronts. It is clear how well the Gillette acquisition fitted in; it was a prime example, as Wella had been, of the company shifting its focus to a faster-growing, higher-margin and more asset-efficient businesses. And although Steady-Eddy paper towels might pay the bills, P&G was determined to take its skills upmarket in relatively developed markets while simultaneously taking its products into lower-income sectors in developing markets.

  The Gillette deal was ratified by Gillette shareholders on 12th July 2005, costing P&G a whopping $57 billion and increasing the size of the company by 20%. As well as the Gillette brand with its 70% global market share, the deal also brought Duracell, Braun electric shavers and Oral-B toothbrushes into the fold. Short-term benefits took Gillette brands much deeper into China and P&G brands into sales channels where Gillette had been stronger - home improvement, for example - and also enabled around $1 billion in annual cost savings. Longer term, P&G, buoyed by its success in achieving dramatic growth for new brands like Pantene and Clairol, looked to broaden the Gillette franchise. As the annual report acknowledged, ‘We are confident the Gillette brand can stand for more than blades, razors and pre- and post-shave products in the minds of consumers’. The initial plan was to run the Gillette business as a fourth GBU, headed by the existing Gillette CEO.

  It was a blockbuster deal that made the rest of the packaged goods world - retailers and other manufacturers - sit up and take notice. P&G was driving a stake into new territory proclaiming a clear message: that acquisition capability would be a defining success factor for the future. Warren Buffet, a substantial stakeholder in both companies, unsurprisingly described it as ‘a dream deal’. Not entirely un-noticed by, nor insignificant to, P&G management was that the fact the deal had created the world’s biggest consumer goods company, leapfrogging Unilever: a pivotal year for P&G

  2006

  Unsurprisingly, the Gillette deal boosted reported net sales by 20% to $68 billion, with Gillette integration problems more than counterbalanced by the launch of Gillette Fusion, the year’s best-selling new product in the consumer products industry. Organic sales increasing by a still respectable 7%, mostly powered by Actonel and Prilosec, which both seemed unstoppable? The annual GBU restructure took place in April 2006 when the family health GBU was dissolved and the component parts split between the other groups, the I-ams pet business going into household and the rest into beauty, now renamed beauty and health.

  The Gillette GBU at 9% of company net sales - oral care and personal care components had already been hived off into the other GBUs - was clearly now on borrowed time as a stand-alone GBU. Sales of Gillette, Braun and Duracell had crept up by 1% in the year, increases from Fusion offset by customers taking the chance to reduce inventory as distribution shifted over to the P&G system. Overall, it was a satisfactory outcome, given the scale and complexity of an extensive integration process completed in 26 countries during the year.

  It was also a year in which a change to P&G’s historical approach to innovation reached a significant milestone. As with Ivory, Crisco and Tide, the company had not been shy in leveraging ideas from outside the business, although in the post-war period it had become more focused on generating new products from within the company - successfully it must be said. The mantra Connect and Develop had underpinned a particular strength: leveraging its own areas of technical expertise had led to Pampers, Actonel and Always. In 2006, around 35% of the company’s new products included features or technologies sourced from outside the company, whose explicit goal was to raise such sourcing to 50%. Given that P&G possessed, amongst packaged goods companies, undeniably the best scientific capability in the post-war period, this switch to an external focus would need to be carefully managed. It needed to exploit, not compromise, the company’s scientific lead.

  2007

  This was the third year in a row that the rate of increase in organic sales had slowed, this time down to 5%, while acquisitions helped prop up the top-line increase to more than 12%. Tide Simple Pleasures, Febreze Noticeables and Crest Pro-Health were the main innovations and compensated for the complete absence of growth from the company’s food brands, both human and canine. The acquisition of Dolce & Gabbana to bolster the company’s vibrant prestige fragrances business further highlighted how much the company was changing: exactly what were the commonalities between high-end fashion brands and Pringles? The good news was that sales of blades and razors increased by a very healthy 8%, though whether this was due to synergies from the acquisition or fortunate timing - Fusion had just come on stream - remained to be seen. Margins also increased for the fourth year in a row to exceed 20% for the first time, reflecting of an acquisition policy whose job was to achieve exactly that result.

  The Herculean integration of Gillette was declared complete just in time for the next round of GBU musical cha
irs. Gillette and Braun were moved into the Beauty GBU and reunited with their branded shave prep products, feminine care products making way by being shifted into the newly named health and well-being GBU, while Duracell went into household care.

  With Gillette now integrated, Lafley defined the next big goal - looming for some time -as ‘How do we keep a business the size of P&G growing?’ A good question. The company now had 23 billion-dollar brands, which were almost all leaders in their categories, twelve billion-dollar countries and seven billion-dollar customers. And while much emphasis was placed on the vast resources ploughed into innovation – 8,500 scientists beavering away with seven years and a billion dollars’ worth of consumer data - the answer was not clear.

  2008

  It seemed the answer to Lafley’s question would be innovation. After all, P&G was the industry’s largest innovator, churning out more new products across more categories and brands than any other, and spending more on R&D – $2 billion a year – than anyone else: double that of Unilever and more than Avon, Clorox, Colgate, Energizer, Henkel, Kimberley-Clark, L’Oréal and Reckitt Benckiser put together. But then the absolute growth that P&G had to generate each year – target 6% of sales – was by now a mind-boggling $5 billion on sales of $83 billion. So the drive towards open innovation was continuing and, having reviewed and evaluated over 5,000 external innovation opportunities, the 50% target for new products with an external component was met.

  On the other hand, organic growth had slowed again, down to 4% with a bigger increase in net sales coming from the foreign currency lottery. Within the GBUs, the largest organic growth came from household care, specifically within the US-centric category of family care where Charmin Ultra-strong, Bounty Basic and Bounty Extra Soft all enjoyed strong growth. Pampers, aided by the Pampers Baby Stages of Development, exceeded sales of $8 billion for the first time. Within fabric and home care, detergents had a good year helped by the rollout of new liquid detergent compaction technology across several brands. In beauty, Olay Regenerist was leading the way, aided by double-digit growth in the company’s premium fragrances, as Dolce & Gabbana was fully absorbed. In grooming, the continued Fusion rollout increased brand sales by 40%, making it P&G’s 24th billion-dollar brand.