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Bob McDonald wants seven billion customers.
As the leader of the multibillion-dollar consumer products giant Procter & Gamble Co., McDonald has the world within his reach. And his goal is as immense and vast as P&G’s $82.56 billion global business: Convert every person on the planet into a customer, and get every one of the firm’s categories into every country.
His sights are set on the developing world, where razors and shampoo are not commodities but aspirational luxuries.
“There’s no question that 30 years from now, when people look back at this moment in time they are going to ask, ‘Did the [P&G] leadership team properly move the center of gravity of the company more toward Asia and Africa where the babies are being born, or in this country to the Hispanic population, or in the Middle East to the Islamic population?” said McDonald, P&G’s chairman, president and chief executive officer, during an exclusive interview.
He also wants current customers to spend more.
“The average American spends roughly $100 on P&G products every year [across 35 product categories in the U.S.]. In China — where we are the number-one consumer goods company and do $5 billion in sales, over half of which is beauty — the average Chinese consumer spends less than $3 a year on P&G products across 15 categories. You can see the tremendous opportunity,” he said. McDonald ultimately sees Chinese customers spending much more per head on P&G products.
When it comes to beauty, the company said the average U.S. household spends $270 a year on female beauty products in general across all distribution channels, with $66 of that total dedicated to P&G beauty products, and $290 on beauty and grooming for women’s and men’s products combined, with $81 spent on P&G items.
McDonald, who like most P&G executives deftly rattles off P&G-centric figures and statistics, said the firm’s growth hinges on selling more of its 38 product categories in more parts of the world. The Cincinnati-based company currently sells an average of 19 product categories in 180 countries where it does business. “By the end of 2015, we want to have 25 categories on average. Many of those are beauty categories,” he said.
The company already is in hot pursuit of this strategy. In fiscal 2011, P&G expanded Olay to 16 countries, including Brazil and South Korea. “If you look at the previous five years, we wouldn’t have done five countries,” he said.
The big global milestones for 2011 include Pantene becoming a $1 billion brand in Asia alone, and P&G becoming the number-one hair company in Japan.
For P&G — a company known for peeking into consumers’ medicine cabinets — selling to more people means building relationships. “We came up with our purpose-inspired growth strategy, where we want to touch and improve the lives of more consumers in more parts of the world more completely,” said McDonald.
In fact, the phrase “touch and improve lives” is seamlessly — and often — interwoven into McDonald’s language, and is one of the most heavily used phrases in the company’s vernacular by many of its top guns. It also translates into a quantitative goal: Reach a total of five billion consumers by 2015 — and then go to reach the world’s seven billion inhabitants.
When McDonald took the helm from his predecessor, A.G. Lafley, in 2009, P&G counted 3.8 billion people as customers. Today, 4.4 billion consumers buy P&G products, ranging from diapers to high-end skin care.
Much of P&G’s growth plan focuses on growing brands vertically into more price tiers, and horizontally into more category opportunities. As McDonald sees it, growing vertically — meaning one can buy Olay Complete moisturizer for $6 or Olay Pro-X firming cream for $45 — will grow share. Tackling adjacent categories, a given in beauty, is key to horizontal growth. P&G’s move in this direction includes Dolce & Gabbana’s reach into color cosmetics from fine fragrance (see related story on page 6), and Olay’s recent entry into acne and depilatories.
Gina Drosos, group president, Global Female Beauty, explained that P&G’s drive to enter new countries with new categories is a “very deliberate and strategic process.” P&G’s advantage, she said, is “we have more breadth across a woman’s regimen and we can serve more needs from head to toe. So we try to leverage that. Getting more categories into new markets.”
For all of P&G’s might and success in the beauty industry, a number of Wall Street analysts say they’re growing increasingly impatient as they wait for the consumer products giant to jump-start more aggressive growth in the category. For the three-month period ended June 30, the company’s most recently reported quarter, P&G’s organic sales in the beauty division gained 3 percent and grooming’s organic sales ticked up 1 percent. The two categories were outpaced by health care, which grew 7 percent; fabric and home care, up 4 percent, and baby and family care, up 10 percent. Snack and pet care declined 1 percent.
Further raising eyebrows was a string of management changes earlier this year, precipitated by a number of executives vacating key beauty and grooming posts. At least five beauty executives have left the company so far in 2011.
P&G has emerged from the changes with a leaner organizational structure, an outcome McDonald views as a positive one.
That said, the departure of Ed Shirley — who was vice chairman of Beauty & Grooming and seen as a rising star within the company as the chief architect of P&G’s “him” and “her” beauty strategy — rattled some industry observers, who suggested McDonald was under growing pressure to fix the beauty business.
As of July 1, Shirley’s role has been overseen by Dimitri Panayotopoulos, the former vice chairman of Global Household Care, who as part of the changes was named vice chairman, Global Business Units. “The leadership turn is nothing to sneeze at,” said Deutsche Bank analyst Bill Schmitz. “P&G has lots of opportunity and an amazing geographic footprint. But I’d love to see someone take accountability for the beauty business and stick his [or her] neck on the line.”
He suggested should the company decide to appoint Drosos as the head of beauty, it would signal that “P&G is serious about beauty.”
RBC Capital analyst Jason Gere approved of P&G’s move to flatten the organization with one exception. “For beauty, you need the right reinforcement. You have to have a seasoned and focused executive there,” he said. “There’s been a lot of change over at P&G. It feels like this is one business where P&G hasn’t figured out the right recipe for success.”
McDonald sees the changes as part of the normal ebb and flow of a large corporation.
Referring to Shirley’s departure, he said, “Ed wanted to retire and we supported that. He contributed greatly to this company. He is a good friend. And we felt like this was an opportunity once Ed made that decision to flatten the organization.…It used to be beauty was a division of P&G.” He notes that if you include segments such as oral care and feminine care within beauty and grooming, the business accounts for nearly 50 percent of P&G’s sales, saying, “So why wouldn’t I want to be more engaged in 50 percent of the company?”
He added, “Since I became ceo, what I have been trying to do is flatten the organization and simplify the way we work. We have gone from seven layers to five. We now have 50 percent fewer vice chairs and vice presidents and 15 percent fewer directors.”
McDonald emphasized the current structure, namely the “him” and “her” beauty set up, as appropriate for the moment. “I can’t predict what P&G’s structure will look like in the future, but I can predict it will change,” he said. “I tell young people in the organization about the importance of having a purpose in life and not to make it as narrow as being in a [certain] position at P&G because by the time you’re ready for it, we will have reorganized and the position won’t exist anymore.”
When asked if P&G plans to name a new head of beauty, McDonald chuckled, “Who is the leader of the beauty business? Well, the ceo of the company is the leader of the beauty business. You can’t delegate that big a piece of the business.”
Stifel Nicolaus analyst Mark Astrachan said, “The whole leadership team is talking about how wellness and beauty is a priority,” adding it’s a message that helps to assuage investor concerns. “This is a category you should keep your focus on.”
In fact, analysts have said P&G often refers to beauty as “the path of least resistance for growth.”
For McDonald, a graduate of the U.S. Military Academy at West Point and a former U.S. army captain, years of globe-trotting have informed his international world view, particularly about beauty. The ceo, who was born in Gary, Ind., left his small-town roots behind during his time in the military, which took him to Belgium, France and Panama. He left the army in 1980, taking a job with P&G. The company’s growing interests overseas led him to take posts in Canada, the Philippines, Japan and Belgium. McDonald, who speaks four languages — English, Japanese, French and a bit of Filipino (or Tagalog) — says his two adult children, Jennifer and Robert, didn’t attend school in the U.S. until college.
He is teeming with anecdotes from his years spent abroad and, despite the demands of the corner office, is an avid student of history. In fact, he said he was about 300 pages into Ron Chernow’s biography on George Washington, called “Washington: A Life.”
“I didn’t want to read it,” he admitted. “I felt like I knew everything there was to know about George Washington. Boy, was that a mistake. It’s a great book.”
Asked about his take on Washington’s military success, which some have questioned, McDonald said, “He lost a large number of battles. He ended up winning the war, so it’s hard to discredit him. But the thing that impressed me the most about him is the way he learned. He never made the same mistake twice. One of the things I teach employees and the groups I teach to is the single biggest thing that differentiates those who succeed are those who are continually learning.”
During the decade he spent in Asia, McDonald developed a fondness for the beauty category. “I spent nearly five years of my life running the hair care business, from 1991 to 1995, at a time when we created Vidal Sassoon in the red bottle,” he said.
It may be fortuitous that hair care is P&G’s largest beauty category (while the industry’s is skin care), since McDonald was on the team in Asia that helped launch Pantene in the Nineties.
“I remember Pantene when it was a $50 million brand with a gold cap and a group of people I worked with in Taiwan and Japan came together and created something unique. What we figured out is that every woman in the world thought her hair was damaged — that wasn’t new news really — and we figured out a formula that made the hair healthy, but the key was to be able to show the difference in shine,” he said.
Hair, one the most marketing sensitive categories, McDonald said, is of course driven by technology, but new ideas are what can change the course of a hair brand.
“Technology is important and insight is important, but I love that any one of us can come up with an idea on any given day that could result in a $50 million brand becoming a multibillion-dollar brand and a leader in the category,” he said.
As a P&G veteran, McDonald is trained to keep his eye on the customer and he intends to win wherever people shop. If people are shopping online, they want to be there. If people are shopping in department stores, P&G wants to be there.
“Winning wherever people shop is a manifestation of our scale,” said McDonald.
P&G’s acquisitions — from Clairol to Gillette Co. — have helped it gain ground in certain distribution channels, for sure.
Patrice Louvet, president of the company’s global male grooming business unit, said the Gillette deal taught P&G to dive deeper into mass retail expertise, particularly with a dual presence in stores, and to create a new space known as the “guy aisle.”
“We have historically been focusing on the shelf, but with Gillette and Duracell, focus on checkout is a critical area for male grooming and we’re starting to leverage that across our portfolio,” said Louvet. “If you think about guys shopping, they buy in a female space. We are creating a male-focused environment — ‘the guy aisle’ — which is reorganizing these products that are relevant to our mind-set.…You will see it in some stores in the U.S., at Wal-Mart for example, but probably the best example is H-E-B [grocery chain] and Target.”
The aisle, said Louvet, “has everything you can think of” including deodorant, skin care, fragrance and even male magazines. It first made its debut in 2009, but the concept has expanded over the past 18 months around the world, such as in India, where a month ago Louvet saw it in a local chain.
Joe Magnacca, president of Daily Living Products and Solutions of Walgreen Co. and president of Duane Reade, said P&G’s approach to its male grooming business has influenced the two drugstores’ planograms. Duane Reade, for instance, is planning to expand on the “men’s zone” section at its new store, located at 40 Wall Street in Manhattan, with a more dramatic merchandising effort. Magnacca recently met with P&G’s Panayotopoulos, who now oversees beauty. “I feel extremely confident with his leadership and focus on beauty, particularly with his European background,” said Magnacca.
Louvet forecasted that the next decade may finally be the one where male grooming sees its long anticipated boom. The growth rate in male products is twice that of the women’s category, he said, noting The Art of Shaving is the fastest-growing brand in the men’s portfolio. A combination of same-store growth, increasing awareness, making more products available in existing stores and opening more stores in the U.S. is driving that growth. When P&G first acquired the high-end men’s brand, The Art of Shaving had 31 stores, but plans are to end the year with 50, mostly in big cities and in malls in key locations, such as Chicago, Dallas, Los Angeles and Minneapolis.
Being that much of the division’s investment is being put behind The Art of Shaving, P&G has consequently decided to discontinue distribution of Zirh, the men’s skin care brand it purchased in mid-2009 for an estimated $40 million. The decision was made “after a thorough review [of] the future potential of Zirh relative to other investment opportunities,” the company said.
There also has been a lot of discussion around Pantene. Depending on the week, Pantene claims an 11 to 15 percent dollar market share of the U.S. hair care market, whereas in many markets around the world, the brand claims a 20 percent share. Globally, it is upward of a $3 billion brand. And while it recently became a $1 billion brand in Japan, growing it domestically has been difficult.
Earlier this year, during an earnings call with analysts, McDonald called Pantene’s U.S. business “the hole in the bottom of the bucket.” The April 2010 relaunch of the Pantene brand — the second in four years — failed to gain traction with shoppers. As a result, this year Pantene began to introduce items consumers said they missed, including two-in-one shampoo-and-conditioners and larger-size items — all backed by a new marketing campaign.
Enter Walter Geiger, P&G’s newly named vice president of North America, hair care and color. Geiger comes to the U.S. with more than 10 years of hair care experience, most notably in Asia and most recently in Singapore.
One month into the position, Geiger said the most important goal is to grow market share. To get there he wants to sell more treatments and styling aids, and grow into more premium and specialized offerings. The plan to grow conditioner and treatment sales isn’t new for P&G and even harkens back to 2001, when the U.S. hair business was led by Ravi Chartuvedi. As for salon-inspired brands, Geiger assessed sales of the high-end brand Fekkai at drug stores as good, but there is room to grow. “We can be much bigger. And in midtier, the whole affordability theme, that I want to work on.”
He also wants to tap into the Hispanic and ethnic consumer. “In Asia, everyone has long dark hair. In Europe, it’s thin brunette or blonde [hair]. Here, everyone is diverse,” he said.
Geiger said he remembers the launch of Pantene in Japan and how the model of bringing a two-in-one technology (healthy hair and shine) was a new end-benefit message.
“That still sticks in my mind,” he said. “And there is still an opportunity to go back to that in the U.S. on TV.”
Currently, P&G is honing in on its “zero breakage” end-benefit message in TV and print ads featuring Eva Mendes.
How long it will take Geiger to recharge hair care and hair color is unknown. And while analysts often point to Pantene’s sheer mass as one of its biggest hurdles, McDonald sees Pantene’s size as an advantage.
“We at P&G don’t buy that there are mature categories and mature brands,” McDonald said. “Look at what we’ve done with Olay and Old Spice. People thought those brands were dead.”
In McDonald’s view, “The ideal for me is a one-on-one relationship with every customer in the world.…Eventually someone is going to get there. Digital technology permits that.” He added, “We have to have each of our brands have that kind of relationship with the customer. We want to understand the insights and then develop big ideas into ways people can participate and turn their participation into movements.”