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Procter & Gamble Co. Sets Its Strategy

The consumer products giant is in the midst of a colossal balancing act that requires it to cut costs while focusing on innovation.

The Procter & Gamble Co. is in the midst of a colossal balancing act that requires the $84 billion consumer products giant to cut costs while sharpening its focus on innovation.

“Balance is what leadership is all about,” Bob McDonald, P&G’s chairman, president and chief executive officer, told Wall Street analysts at the company’s investor meeting, held in Cincinnati last week. “The greatest leaders are those who can balance what appear to be dilemmas to other people.”

McDonald’s leadership acumen is being put to the test as the company works to accelerate growth and reverse market share losses across a number of categories.

In McDonald’s view, the firm’s 40-20-10 plan hits hard on both fronts with a focus on productivity and innovation. The plan is designed to focus on P&G’s 40 largest businesses; top 20 innovations, and 10 most important developing markets.

In other words, the company is throwing its weight behind fewer, bigger ideas, a strategy also employed by the Estée Lauder Cos. Inc., which in recent years has reaped the rewards from a more selective product focus.

McDonald acknowledged that P&G’s emphasis on cutting costs requires a cultural shift at the 175-year-old firm.

“It’s not just about the head-count reduction. It’s about changing the work process,” said McDonald.

In February, P&G said it planned to wring out $10 billion in costs by 2016, which includes $6 billion from costs of goods sold, $3 billion from selling, general and administrative expenses and $1 billion from marketing efficiencies.

At the investors’ meeting last Thursday, the company said more cost-cutting measures were in store. It now 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.

Jon Moeller, the company’s chief financial officer, said P&G, which is in its second quarter, had already eliminated about 4,700 roles by the end of October.

P&G, however, has accelerated its marketing spending over the last several years and, with a teeming product pipeline slated for 2013, that trend will continue.

Marc Pritchard, global marketing and brand building officer, said, “We are not looking to make cuts in marketing support behind our brands. In fact we will increase reach, frequency and effectiveness of our advertising messages with consumers while still making significant efficiency improvements in our advertising spending.”

He said, “We are increasingly developing fewer big ideas that can travel around the world.” The company found that too many marketing messages across one brand diluted the impact. As a result, P&G has begun to pare down its campaigns. For instance, Pampers — P&G’s largest brand with sales of more than $10 billion — is moving to two global brand messages from eight.

“We’re already achieving efficiencies in marketing spending,” said Pritchard, noting the savings have been reinvested in this year’s marketing plans

He added, “Going forward, we expect the portion of these efficiencies to come to the bottom line.”

P&G acknowledged that the pace of disruptive innovation — or products designed to create new categories of growth — has slowed over the past decade. The company said it is currently engaged in 30 projects at various stages of development that have the potential to result in innovations as impactful as Swiffer and Febreze, both of which have annual sales of roughly $1 billion.

The company has assembled a Transformative Platform Technologies team, which is charged with developing technologies that can be applied across multiple categories, such as the delivery of certain ingredients or bleach technology. The company’s chief technology officer, Bruce Brown, said a number of recent innovations born out of this two-year-old initiative have the potential to drive $1 billion in sales.

“[It] allows us to spend more on a big opportunities than any one of our categories could do by themselves. It’s really about doing more with less,” said Moeller.

A portion of these new products is slated to drive growth across P&G’s existing brands, earning them the name “change innovation,” according to P&G. For instance, this January the company will relaunch Olay Regenerist — the largest Olay franchise — with new technology. The Olay brand also is looking to grow sales by courting younger consumers with the introduction of a new franchise called Olay Fresh Effects.

“Over the next five years, we will launch three times as many change innovations as we did in the previous five,” said Brown.

Many of the upcoming launches carry bold product benefit promises, or “power claims,” in P&G speak. For instance, the upcoming Pantene Expert AgeDefy collection promises “hair that acts 10 times younger.” The benefits come at a premium. Products in the Pantene Expert range are priced 200 to 250 percent above the brand’s base-line price.

P&G has a number of hair-care launches due to hit stores in January including the Pantene Expert collections and a reintroduction of Vidal Sassoon. On the professional side, this quarter P&G will introduce Illumina Color by Wella, a new hair colorant that promises to deliver 70 percent more light reflection. The company said Illumina, which eliminates the need for colorists to use foils during the application, is off to a strong start in Europe.

As P&G’s product portfolio broadens, so does its reach in developing markets, which currently account for $32 billion of the company’s sales. That figure is up from $8 billion in 2000. The company has its eyes trained on geographies with a rising middle class, such as India, where P&G currently has 700 million customers, and sub-Saharan Africa, which Moeller referred to as “one of the last true consumer white spaces.”

He added that the advent of a new “consuming class” in developing markets will likely far surpass the impact of the Industrial Revolution. He noted that almost 1.5 billion consumers are expected to join the ranks of the middle class by 2020, nearly all of which will be from developing markets.

“We’re on the threshold of one of the biggest trade in, trade up cycles in history,” said Moeller. “We need to position ourselves to exploit this.…We’ll achieve this by focusing on growing the markets we compete in, increasing market share, improving mix, localizing production and leveraging our scale.”