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Bob McDonald Looks to the Future of P&G

The executive's 40-20-10 strategy is designed to focus on the company’s 40 largest businesses; top 20 innovations, and 10 most important developing markets.

An enormous, two-tier birthday cake made with Procter & Gamble Co. products and topped with a “175” candle sits in the lobby at the company’s headquarters in Cincinnati to celebrate its storied past. The company’s chairman, president and chief executive officer, Bob McDonald, a former Army captain, knows that tackling the present-day challenges is no piece of cake.

But he’s ready to light many more candles in the future.

“The fact that this great institution has been around for 175 years and now we’re in a position to be stewards [of this company] is a terribly humbling experience,” McDonald told WWD, noting that 4.6 billion people around the world use a P&G product. “This is a great moment to be chief executive,” he said. “We’ve got the right leaders in place now, and we’ve got the right strategies in the 40-20-10 plan to improve innovation and productivity.”

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The plan is designed to focus on P&G’s 40 largest businesses; top 20 innovations, and 10 most important developing markets. The company is throwing its weight behind fewer, bigger ideas. P&G aims to sharpen its focus on innovation and is engaged in 30 projects at various stages of development that have the potential to result in launches as impactful as Swiffer and Febreze, both of which have annual sales of roughly $1 billion. The company’s portfolio already includes 25 billion brands, which generate between $1 billion and $10 billion in annual sales.

 

At the same time — as previously reported­ — McDonald is working to wring out $10 billion in costs by 2016. In November, he said the company plans to reduce nonmanufacturing jobs by an additional 2 to 4 percent annually from fiscal 2014 to fiscal 2016. The cuts come on top of P&G’s previously stated goal of trimming its workforce by 5,700 jobs during fiscal 2013.

P&G’s renewed focus on innovation and cost-cutting comes after a chorus of criticisms from Wall Street analysts that the consumer products giant was losing ground to its rivals across a number of key categories, including beauty.

The beauty segment’s net sales declined 7 percent in the first quarter ended Sept. 30. Beauty’s organic sales dipped 2 percent, while organic sales of the company’s remaining four business units grew in the range of 2 or 3 percent.

P&G’s overall sales declined 4 percent to $20.74 billion in the quarter, from $21.53 billion, due in part to the negative impact of foreign currency exchange. Organic sales gained 2 percent. The company forecasted that it expects organic sales growth in the range of 2 to 4 percent for the fiscal year.

The company’s challenges have attracted the attention of activist investor William Ackman, who since June has amassed more than 34 million shares, giving him a 1.3 percent stake in P&G. Ackman and his hedge fund, Pershing Square Capital Management, are pressing for a change of leadership. But P&G’s board stated it continues to support McDonald, who joined the company in 1980 and assumed the ceo post in July 2009.

As for the impact the rabble-rousing has had, McDonald said, “We have a laserlike focus on our plan to improve innovation and productivity of the company, on creating a culture that has both and a proven business model. As a result people don’t get distracted by that and neither do I.”

Some Wall Street analysts have called for P&G to break up the company and sell off categories, such as its paper and batteries businesses. When asked about this scenario, McDonald said, “I once was talking about that with one of our largest investors. He is a very smart guy and he said to me, ‘You know what? All I need to do is walk into a Wal-Mart store and I know that’s the dumbest idea in the world.’ He’s one of our largest investors and I agree with him.”

P&G is banking on an onslaught of new products to bolster sales.

“We are in the early innings of our innovation program,” McDonald told analysts in October, adding that a number of products will be on store shelves by January, backed by increased marketing spending. In beauty, new products include the reformulated Olay Regenerist, a line tailored for young women called Olay Fresh Effects, Vidal Sassoon and in the salon channel, Illumina Color by Wella. Also on deck is the “superpremium” priced Pantene Expert Collection, which includes two antiaging hair-care ranges, AgeDefy and Advanced+ Keratin Repair.

“In the U.S., Pantene’s share has begun to stabilize, and our most recent launches are performing well,” said McDonald. “We are investing behind our core brands, and we have a full portfolio of innovation this fiscal year that will strengthen throughout the year.”

Some analysts have suggested that marquee brands such as Pantene, which is estimated to be north of $3 billion in size, and Olay, which is estimated to be roughly a $4 billion brand, are too big to meaningfully grow. McDonald takes a different view.

“We don’t really believe in the life cycle of brands, nor do we believe that any given brand may be too big to grow,” he said. “We believe more in letting the consumer help us make decisions based on the insights we gain. So far from what we have seen, we think that the new Olay Fresh Effects will be a big winner.”

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There’s a lot riding on the launches. Wall Street analysts have long had P&G’s beauty business under a microscope and they are anxious to see an improvement.

 

“P&G has underperformed in beauty in recent years as sales and profit lagged competitors L’Oréal and Unilever since 2010,” wrote Stifel Nicolaus analyst Mark Astrachan in a research note earlier this year. “Beauty should be a focus category for P&G.…Given its size and scale, we believe P&G should be able to take meaningful share of the beauty category, particularly given global market share is highly fragmented with the global leader L’Oréal at an approximate 15 percent share.”

McDonald said winning in beauty is a key priority, as evidenced by P&G’s 40-20-10 plan.

“Of the top 40 category and country combinations, 20 of those are beauty and grooming. Many of them are in the U.S., many of them are in China, which is our second-largest market, and many of them are in Japan, which is one of the largest markets. So certainly that top 40 is a focus on developed markets and on beauty and grooming. It’s focused on winning where it matters most: our biggest markets and our biggest categories.”

Together, beauty and grooming account for 34 percent of the $84 billion company, or $28.66 billion. P&G’s pure beauty business — which does not include items such as bar soap, toothpaste and razors — totaled an estimated $20.7 billion in 2011, according to Beauty Inc’s annual ranking of the top 100 beauty firms. It is second only to L’Oréal, which had beauty sales of $28.33 billion.

“The beauty and grooming business is absolutely critical to winning with consumers and building shareholder value. The beauty and grooming business for us is a core growth engine, particularly as we build our business in developed markets,” said McDonald. “We have built the largest and most profitable beauty and grooming business in the world, with more billion-dollar brands than L’Oréal and Unilever combined.”

But McDonald sees room to grow, citing P&G’s beauty and grooming market share of 14 percent. “We’ve got a lot of runway in a highly fragmented market that we can build off of. My vision is to be the undisputed leader in the industry.” McDonald said beauty consumers are constantly trying new products and brands in their quest for the Fountain of Youth. “That works to our advantage because we are an insight-driven, technology-driven company that can use consumer insight to bring new technology to bear.”

P&G’s scale also helps. The company spends more than $2 billion on research and development and more than $350 million on consumer research.

P&G has a long history of developing certain technologies across different product categories.

“It’s a P&G advantage to take things from one place and put them in another,” said Marc Pritchard, global marketing and brand-building officer.

“Both with the brands that we’ve built organically and that we’ve acquired, we’ve applied the model of deep consumer insights in terms of what they really need and want and then applying noticeably superior product. Throughout the years, we’ve brought the 2-in-1 technology to Pert Plus and then to Pantene; when we brought the longwear lip color to Lipfinity and then to Outlast, and when we brought first the SPF 15 [formula] and then on top of that amino peptides and niacinamide to Olay.…We’re taking these iconic brands and making them huge number-one winners by applying the P&G way to the beauty business.”

Under McDonald, the beauty business has undergone sweeping changes. Over the next two years, the company plans to relocate certain beauty-care categories  from the company’s Cincinnati headquarters to Singapore. The move, which will affect 30 to 40 people, is designed to keep P&G’s eyes trained on a region that’s quickly emerging as a groundswell of innovation for beauty and grooming.

“That’s where the competition is toughest, and that’s where many of the trends are being set,” McDonald told analysts in October.

“Beauty is our largest business in China. In fact, the whole Chinese business was build on beauty. It was built on the basis of the hair-care business and then skin care,” he said, naming brands such as Rejoice and Pantene in particular. “The business in China has changed dramatically.…Today there are more millionaires in China than there are in the U.S. They can pamper themselves with beauty and grooming products. The Chinese consumer has become very sophisticated, even trendsetting.”

P&G keeps its eyes trained on following consumer habits in China and each market where it does business. That strategy, in McDonald’s view, will successfully carry the company for at least another 175 years.