FMCG

by Greg Thain

  But there were some warning signs that there were troubled waters ahead. The timing of P&G’s year-end is 30th June, so 2008 sales did not really reflect much of the coming collapse in consumer spending provoked by the 2008 banking crisis. Most of P&G’s developed market growth in its 2008 report was pre-crash, and taking place in premium categories or behind premium innovations. More bad news was that two of its recent growth and profit goldmines, the pharmaceutical and OTC brands Actonel and Prilosec, both lost volume. Worse, it seemed that this might not be just a blip: Prilosec had lost its marketplace exclusivity as an OTC version of a by now off-patent Rx (prescription) drug. Elsewhere, P&G’s Folgers, Pringles and Iams brands were becalmed, with Folgers - a brand P&G had owned since the 1960s and one of the company’s vaunted roster of billion-dollar brands - hived off to the J. M. Smucker Company in June 2008.

  Other more insidious trends were also beginning to nibble away at the margins. Although the above-average growth in developing markets continued, driving the P&G share up three percentage points from 27% to 30% and in many respects good news, it wasn’t helping gross margins: a much greater proportion of sales in these markets was in lower-priced, lower-margin products. For example, it was not Fusion that lead the charge in those markets but PrestoBarba 3, a three-bladed disposable that was essentially a cheaper version of Sensor 3 superseded by Fusion in developed markets. A combination of the inexorable shift of business to developing markets plus increasing commodity and energy costs, pushed P&G’s gross margin downwards by almost a full percentage point to a lower level than 2006. To mitigate this shift, an aggressive approach was vital; isolating and exploiting cost synergies from the Gillette acquisition succeeded in knocking a full percentage point off SG&A costs while consumer marketing investment relative to sales was flat for the second year running.

  2009

  The economic crisis hit P&G hard. Reduced demand in many of its more premium categories was compounded by a $2 billion hit in increased energy and commodity costs, combined with a $4 billion hit on sales from foreign exchange as the dollar strengthened against most currencies. To mitigate these impacts, P&G pushed pricing ahead by around $4 billion, which helped protect gross margins and reduced advertising expenditure primarily in the fourth quarter, all of which looked suspiciously like an effort to make the numbers. To increase prices by 5 or 6% in the middle of consumer spending falls certainly looks questionable, especially as in the developing markets - up another full percentage point - P&G was increasingly competing against fast-moving, very low-cost local players with no real currency exchange problems to worry about. Clearly, the question was: could P&G afford to price-lead in these markets in difficult economic times?

  P&G was also hit by negative product mix changes, because its more expensive, more profitable brands were declining the fastest. There were disproportionate volume declines for Braun appliances, prestige fragrances, Wella, Duracell batteries and the pharmaceutical brands - consumers were cutting back or trading down on luxury purchases. Even Tide and Downy declined, while their cheaper fabric care brands grew. P&G’s acquisition strategy in the previous decade, going after higher-priced, higher-margin product categories, was fine when consumer markets were booming, but a P&G built upon the steady reliability of sales of bathroom tissue and diapers – baby care and family care were its only two categories to report growth – was not used to dealing with double-digit declines in what were now core categories. Overall, net sales declined by 3% to $79 billion.

  More worryingly, P&G was now starting to lose global share in key categories such as fabric care and OTC, where the Prilosec declines continued. Despite a 4% boost from price increase, P&G’s total Healthcare sales were down by 7%, a decline P%G aggravated by exiting its pharmaceuticals business altogether, dumping former star brand but now problematic Actonel on Warner Chilcott for $3.1 billion. Iams and Pringles had an even worse year, with net sales down by 3% despite a whopping 10% added on through price increases. Perhaps both brands were having their margins juiced for disposal. Overall, P&G lost share in categories covering two-thirds of its sales. But despite such tough marketplace conditions, there still seemed to be time for moving the deck chairs around in the GBUs. Female-grooming brands - Venus, for example - joined female beauty brands. Male brands such as Old Spice and Gillette pre- and post-shave products went the other way, splitting the Beauty/Grooming segment by sex rather than by product type.

  A far bigger change came from the fact that chairman Lafley, in preparation for his retirement, had been replaced as president and CEO by another P&G lifer, Bob McDonald. New man at the helm meant changes to the company strategy. Here is McDonald’s mission statement: ‘We will grow by touching and improving the lives of more consumers in more parts of the world… more completely’.Which being translated meant:

  · Increasing our presence in developing markets

  · Extending our distributions systems to reach more consumers through underserved retail channels

  Specifically:

  · Drugs, pharmacy and perfumery

  · High-frequency stores (neighbourhood stores in developing markets)

  · Export operations (to the approximately hundred countries that did not have a P&G operation on the ground)

  · E-commerce (the first time this had been mentioned as an explicit growth strategy)

  ‘We are expanding our brand and product portfolios,’ McDonald added.

  This was the most far-reaching change as it entailed P&G expanding its portfolio in every possible direction: upmarket into premium, downmarket into economy and horizontally into adjacent categories. The danger with a strategy like this is it sounds suspiciously like, ‘We will sell more stuff to more people in more places more often’, which could easily lead to anything that might accomplish even one of these goals being judged a good idea by default. Unilever had achieved good results by making swingeing cuts to its own range of brands.

  2010

  P&G returned to growth, although a more than 3% increase in net sales would have been considered a failure in the earlier part of the decade. The year was notable for a certain amount of backtracking on the previous year’s decisions: some of the aggressive price increases, particularly in developed markets, were rolled back and advertising were expenditures increased to try to address the market share losses. The increased advertising was affordable: gross margins jumped a whopping 250 basis points in the year from 50 to 52.5% of sales, driven by a downturn in commodity and energy costs, whose increases the previous year had prompted the aggressive price increases. However, pricing benefit was retained: prices went up in many developing market sectors to cover further adverse currency impacts. The increases seemed to have no effect on consumer interest, however. Developing market growth continued unabated and now made up to 34% of sales. The company now claimed 4.2 billion customers, an increase of 200 million in the year.

  It is interesting how this return to growth was achieved. The growth in developing markets could by now be taken as a given, the margin challenges it posed mitigated by price increases that seemed to have been successfully pushed through. But in the developed markets, the acquisition boom of the late 1990s and early 2000s – P%G had averaged one increasingly massive acquisition every two years - had ground to a halt. Gillette had been the last biggie and that was five years ago. The purchase of Ambi Pur from Sara Lee in July 2010 for $470 million was 100 times smaller than the Gillette acquisition. Much of the growth this year came from a ramped-up range of innovations, although the fact that most appeared in the fourth quarter again suggested that perhaps the timing included an element of making the year-end numbers. However, Fusion ProGlide, with a larger-than-ever range of pre- and post-shave accessories, represented a significant step forward, as did Pampers with DryMax, claimed to be the biggest innovation for the brand in 25 years. Crest toothpaste added 3D White. All three products seemed very promising.

  Interestingly, only a year after the ‘Sell more of everything to everyone e
verywhere’ strategy was announced, there was a new focus: simplification of what had become a staggeringly complex business. The company used over 16,000 product formulations and over 4,000 different colours in its packaging and although this was not particularly unusual - virtually all companies would reduce the complexity in manufacturing and procurement if they could – it was perhaps another sign that P&G was becoming more internally focused.

  2011

  The 2010 fourth quarter innovation did the trick. Slight though they were, the improvements were visible. Organic sales rose by 4%, although organic volume increased faster at more than 5%, indicating a residual underlying mix problem: it was doing better in its lower-priced, usually lower-margin products. Gillette Guard, for example, was a cheap, disposable razor system designed for the half a billion Indian men who still shaved with double-edged razors an affordable but improved shave. At 15 rupees a unit with refills for 5 rupees (1 rupee per shave), the product, launched in October 2010, was the biggest-selling razor in India just three months later. Fusion margins at one rupee a shave were much tougher to achieve.

  With P&G’s developing markets businesses surging ahead - P&G Brazil, for example, had grown seven-fold over the previous decade - the pressure was on to return the developed markets to significant growth. Acquisitions were no longer providing the easy options, and innovations, while strong, were not in the Ivory, Tide, or Pampers league of long-term blockbusters. And non-innovated brands in developed markets not also had to grow, so it was very encouraging when P&G showed a formerly very well-hidden skill in creative and engaging advertising, and used it to accelerate brands. The company brought home a record-breaking 32 Lion awards from the Cannes Lions International Festival of Creativity, an event it historically had paid little heed to. The best example of its newfound creative skills, in both advertising and social media, was the Smell like a man, Man campaign for Old Spice, which increased sales for Old Spice Body Wash (the first focus of the campaign) by 40%. Not bad for a seemingly moribund brand that had just turned up in the same bag as the Shulton purchase.

  But P&G would need many more such successes. It needed to stem the margin drift inherent in the cheap and cheerful developing markets. For example, as its $20 billion beauty category declined in developed markets - particularly in core North America - it grew in high single digits in developing markets, thus skewing the average. But the year had its successes, principally in fabric care, home care, baby care and family care, where most of the previous year’s innovations had been launched. Grooming performed adequately, growing net sales by 5%, although, as with beauty products, volume was down in developed markets, generating an overall global share loss of around half a percentage point. At the tail end of the portfolio, Braun also showed a global share loss and the snack and pet care sector had an awful year with a 5% organic sales decline, due partly by a product recall on Iams. Nor did the acquisition of the Natura pet business help much: it contributed a net sector growth of just 1%. The company also divested itself of the annual Prilosec volume losses by merging its OTC business with Teva Pharmaceutical Industries.

  McDonald had now also assumed the role of chairman, and under the new management regime, P&G was changing fast, in some ways undoing many of the Organisation 2005 GBU changes. Seven were now down to two: grooming and beauty, and household care, each of which was a colossal global business in its own right. The original notion of having GBUs focus on specific segments was now long gone. Under McDonald, the focus was on integration which, he believed, would best leverage the one attribute on which P&G couldn’t be matched: scale. As McDonald said, ‘Integrating to operate more fully as a global company is the way we turn our size into scale and our scale into faster growth and cost advantage’.

  There was much logic to the approach. The key to maintaining success in developing markets was to roll out as many P&G product categories as fast as possible; this could be done far more effectively with cohesive multi-category strategies, not unlike those employed in the company’s initial rollout into Eastern Europe. Equally, there were previously untapped opportunities in multi-brand commercial activities such as the Olympic Games’ sponsorship and also in direct marketing activities, with initiatives such as P&G Brand Savers. There was also integration in the supply chain, as the company moved away from gigantic, regional, single-category factories to more localised, multi-category operations. McDonald’s simplification drive continued beyond formulations and colours to the product range itself, which now amounted to a startling 50,000 SKUs. The target was set to reduce this by 30% over three years, though how this would be squared with another of his goals, ‘more offerings to more consumers in more retail channels’ was not made clear.

  There was nothing in these strategies that had not been accomplished before, at some time in the past and in some part of the world. But on a company-wide basis it was a far cry from the initial driver of P&G’s success: internal competition generated by a segmented range of products guided by dedicated brand management.

  2012

  This was a year when the US economy returned to growth, as did many of the world’s developed markets. But P&G did not. While the reported plus 3% organic growth in the twelve months ending on 30th June seemed acceptable, if a little uninspiring, it masked a much more worrying position. When acquisitions and disposals were excluded, the figures were depressingly flat. The continuing shift of business towards developing markets, now up to 38% of total sales, had a 1% negative effect on sales’ value, which meant that the single driver of increased sales was a 4% average price increase. Even worse, the company was losing market share on almost every front: in beauty, dry shaving, fabric care, pet care, oral care and feminine care. Only in home care, hair care and wet shaving did it manage to hang on and only in two did it grow, batteries - where competitors declined even faster than P&G - and the ever-dependable baby care, thanks to Pampers. The only notable innovation was Tide Pods. Pringles, an iconic P&G innovation in its day but increasingly anachronistic given the company’s full tilt into beauty and shaving businesses, was sold to Kellog’s. No transformative acquisitions took place. And surely it cannot have been in the plan to lose share in both shaving and batteries only seven years after paying $57 billion for Gillette purchase? Where were all the growth synergies from the mega-deal?

  The response of management was to retrench, after yet another change to the GBU set-up. Once again, previous changes were undone, with the male/female split in beauty and grooming changed back into a product split. The proposed bigger solution to P&G’s woes was to focus on the core, focus on the short-term, radically cut costs and hope and pray that the innovation pipeline would recover its mojo. And the focus would be a quantifiable 40/20/10: focus on its largest 40 businesses that delivered 50% of sales and 70% of profits, being primarily in the US – where P&G had lost volume almost across the board after too many price increases and not enough innovation – and China.

  The second focus was on its top-twenty innovations which history had shown to usually turn out ten times bigger than other initiatives, although history had also shown that most of P&G’s most successful, disruptive innovations looked anything but big and successful in their first few years. Tide, Bounty, Pringles and many more had either languished unloved or been financially underwater for years before finally coming good. Given the year’s other changes, whether P&G 2012 would have the patience to indulge a rogue researcher, or a paper company that lost money for ten years, or a potato technology that took twenty years to become a billion-dollar brand, that was certainly open to question. Rather more prosaically, the company did commit to delivering by a $10 billion in cost savings by 2016 in cost of goods, marketing efficiencies and non-manufacturing overheads, while aligning management targets on short-term sales, profit growth and cash-flow. The last focus would be on the ten most important developing markets while the plan for innovation was plainly stated: ‘We need to get back to this level of (discontinuous) innovation in a meaningful way’.<
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  That is very true. P&G is now facing many of the issues that had confronted Lafley ten years ago:

  · Declining sales and share in developed markets

  · Prices too high

  · A patchy innovation record

  · Costs that needed a severe pruning

  The question is whether the company can solve these problems all over again.

  What Is Its DNA?

  As we have seen, P&G has been through many transformations: the products it markets, the countries it markets them in and how it interfaces with its retail customers to name but three. But although James A. Gamble and William Procter probably didn’t expect their company to be selling shaving aids, dog food and designer perfumes in every corner of the world, we believe they would probably still recognise some of the key ways in which P&G did, and continues to do, its business. Here is Current Chairman, President and CEO Robert A. McDonald’s description of the company as follows in the 2012 annual report:

  ‘Our long track record of success is based on a time-tested business model – we discover meaningful insights into what consumers need and want; we translate those insights into noticeably superior products focused on those needs; we communicate that superiority through advertising that includes compelling claims, performance demonstrations, and superior visual benefits; and we price our products at a point where consumers experience overall value’.