By and  on June 15, 2007

When it comes to building a multibillion dollar beauty and personal care company, Procter & Gamble’s Susan Arnold makes it all sound so easy.

Just delight the consumer with game-changing innovation (two favorite and oft-repeated maxims in the P&G lexicon) and voilà—$20+ billion in annual sales.

If only.

Arnold, one of the main architects of P&G’s beauty strategy over the past 20 years, knows it’s not that simple.

Sure, she’s stayed laser-focused on the consumer and the products she offers them. But it’s by shattering a century of tradition in the beauty industry and creating an entirely new business model that has enabled Arnold to help transform the Cincinnati-based behemoth from a fusty consumer packaged goods giant into one of the world’s biggest (she would say the biggest) beauty companies. In so doing, Arnold has changed beauty from a trickle-down business, where innovation is launched in the upper reaches of the prestige market before making its way into the mass market, into a trading-up scenario where the newest, most technologically advanced launches are introduced directly into the mass market, bypassing the luxury sector altogether.

The continuing success of Arnold’s strategy has raised the stakes both for the beauty industry and for Arnold herself. Thanks to her game-changing plan, she’s positioned herself as a potential candidate for one of the plummiest jobs in corporate America—chief executive officer of Procter & Gamble. Recent speculation has current ceo A.G. Lafley, who’s been in the top spot since 2002 and is 60 years old, retiring in the next two to five years.

The buzz around Arnold, 53, intensified in May, when she was given the newly-created title of president, overseeing all of P&G’s business units —Beauty Care, Global Health & Well Being and Household Care—with combined sales of an estimated $75 billion.

Previously, in the phased-out role of vice chairman, she had oversight of solely Beauty and Health, which accounted for over 50 percent, or about $40 billion, of P&G’s turnover in 2006. Of that, beauty accounted for about $21.1 billion, Gillette $6.4 billion and health care about $7.8 billion, according to P&G’s 2006 annual report, which included nontraditional categories such as feminine care, personal cleansing and salon furniture in its beauty figures. Not including those categories, P&G’s traditional beauty sales were estimated to be about $18 billion for the fiscal 2005-2006 year. For fiscal 2006-2007, an estimated $23 billion is considered Beauty revenue by P&G, including the aforementioned categories but not Gillette.

During her tenure, Arnold has overseen the integration and explosion of some of the company’s key acquisitions, including Richardson-Vicks, Clairol, Wella and, most recently, Gillette.

On the just-published Fortune 500 List, P&G is ranked number 25, making Arnold one of the most powerful businesswomen in America today.

Insiders and Wall Street analysts consider Robert McDonald, who served as vice chairman of global operations until May when he was named chief operating officer, her primary competition for the upcoming ceo spot.

Although Arnold is quick to swat away speculation about her future, she’s the first to admit beauty’s importance to P&G’s overall corporate health. “Beauty has been and is expected to be an engine for disproportionate growth in the company,” says the executive, in her customary rat-a-tat-tat matter-of-fact style. “Beauty and health were about 30 percent of the company’s sales and now we’re over 50 [counting Gillette]. We call this our decade of beauty,” she continues. “And what I mean by that is we have been building and continue to build and look to build. Our goal is to build a long-term foundation for long-term leadership and growth in this business.”

The first critical element to that growth is a diversified portfolio of global brands that encompasses both fast-growing and solid-growth businesses. Currently, P&G has six personal care brands that do over $1 billion in sales—Olay, Pantene, Head & Shoulders, Wella, Mach 3 and Gillette—and seven brands in what Arnold calls the “on-deck circle,” those between $500 million and $1 billion in sales. They are Hugo Boss, SK-II , Cover Girl, Herbal Essences, Rejoice—a value-priced shampoo sold in China—Fusion, a men’s shaving system from Gillette, and Venus, a women’s version.

“A diversified portfolio gives us advantages in terms of who we work with and look at and talk to, with a broad range of consumers,” Arnold says. “It also gives us balance in terms of stability and growth.

“Our strategy is working,” she declares. “We’ve provided disproportionate growth over the last five years. We’ve grown at a compound annual growth rate of 17 percent a year; on an organic basis, 7 percent a year.”

Wall Street seems to agree. “Arnold has a brilliant track record,” says Justin Hott, managing director in equity research at Bear Stearns & Co. “She has taken P&G’s beauty brands to a level that the company has never seen before. The company gathers data and information first, and listens to hear what its customers and retailers want. It’s very disciplined on that front, which is why it has done so great in the mass market.”

William G. Schmitz, an analyst with Deutsche Bank North America, agrees—with one caveat. “Arnold has rethought the way people approach beauty by taking a metric-driven and analytical model to the business,” he says, adding that the result can sometimes zap brands of marketing sizzle. “P&G’s color business is marketed for profitability,” he says.

Still, there’s no denying that Arnold has been instrumental in turning P&G into a beauty leader by
parlaying underperforming brands acquired in the last 20 years into global retail powerhouses. Take Olay, for example, which Arnold estimates did about $200 million in sales when P&G acquired it as part of the Richardson-Vicks acquisition in 1985 and is now almost a $2 billion brand. “SK-II was about $50 million when we acquired it and is now over half a billion dollars. Boss [fragrances] was about $40 million and is now well over half a billion,” she says. “Or Pantene, one of my favorites, which also came in with Richardson-Vicks and was a very niche brand. It was somewhere around $20 million, $30 million, $40 million in the late Eighties and is now approaching $3 billion in annual sales.”

Though she clearly relishes ticking off the successful figures, it’s when discussing the explosive growth of Olay that Arnold becomes truly impassioned. “I’m old enough to remember Oil of Old Lady,” she says. “When we acquired it, it was a pink beauty fluid—there were about 20 different products at the time and all of them were derivatives of that. It was weak in stores, because over the years retailers had used it as a loss leader, so the pricing had spiraled down. The brand needed a fix,” she says bluntly.

Fix it she did, with a gutsy strategy that broke both mass market price barriers and Olay’s traditional product categories. Arnold and her team launched Olay Daily Facials Cleansing Cloths and the antiaging line Total Effects, two efforts Arnold describes as “game-changing innovation.” Coupled with revamped packaging, improved product textures and fragrances and a modernized marketing campaign, Arnold was emboldened to raise the brand’s price points, as well as prices for the entire mass market skin care category. Whereas the average cost of an antiaging moisturizer at the time was about $8, Total Effects went to market with a price tag of $18.

It was a risky move that paid off. Olay’s facial cleansing business has grown 25 percent over the last three years, Arnold says, while Total Effects marked the beginning of a number of different “boutiques” within the Olay family, each of which brings advanced benefits and higher price points to the market, creating an architecture for Olay based on consumer demographics and desires that allows the brand to reach an ever increasing audience. The most recent additions are Regenerist, a pentapeptide-based antiaging line, and Definity, created to eradicate brown spots, dullness and uneven skin tone. A Regenerist at-home microdermabrasion kit is $24.99, while Definity’s daily moisturizer rings in at $27.99.

Arnold calls the strategy “launch and leverage.” “We don’t just launch them and leave them, baby,” she says. “We want to leverage them and grow them over time,” she says, noting Regenerist continued to grow during the introduction of Definity. “We like that. It gives us an opportunity to trade up, while making sure we’re providing good customer value.” Arnold says Olay currently has a total market share of 30 percent, and a leading position in the “super premium tier” of the market, thanks to Definity.

“When you have a very big brand, you have to give it an architecture that consumers can see themselves in and feel a part of,” she continues. “Otherwise, if you’re just a big brand with no architecture, no way to plow through it, it becomes bland.”

In other words, creating an emotional connection with consumers is key. While Olay has successfully achieved just that, Arnold admits hair care giant Pantene—despite its size—hasn’t yet. She and her team are focused on rectifying the perceived deficiency. “We’re working hard to strengthen the emotional connection and to do it in the context of what’s meaningful to the consumer and to the brand equity,” Arnold says. In the U.S., for example, Pantene products are known for helping women grow their hair longer, so the line has partnered with the American Cancer Society on its Beautiful Lengths program. In Asia, meanwhile, it has played up its shiny hair equity with a campaign encouraging young women to let their personalities shine through. And then, of course, there’s solving the biggest mood buster of them all: the bad hair day.

“There are about six billion consumers in the world for hair care, and if you talk to them, about half of them will tell you they have one bad hair day a week,” says Arnold. “If I could provide benefits that reduce those bad hair days, one head at a time, we’ll grow our business. And that’s really what we’re focused on doing [with hair care].”

When it comes to skin care, Arnold has continued Olay’s onslaught of the market, taking it into new categories such as body products, as well as cobranding it with Cover Girl and Secret for products such as antiaging foundation and conditioning deodorants. In terms of an Olay color line, though, a move that P&G unsuccessfully attempted about eight years ago, her response is terse. “We think about it.” When asked her assessment of why the previous effort failed, Arnold will say only, “I think it was a good idea and our execution wasn’t up to par. And I wasn’t the one who executed it so I don’t want to discuss it in detail.”

Industry analysts believe part of the problem with the Olay color launch was the inordinate amount of time—six years, by some accounts—that it spent in test markets. At one time, that approach was typical of P&G’s launch strategy, for products in virtually any category. Although she’s a P&G lifer—Arnold has been there since earning an MBA at the University of Pittsburgh in 1980, starting off as a brand assistant on the Dawn/Ivory Snow business—she’s the first to admit the approach isn’t viable when it comes to beauty. “This isn’t a business where you can cross every T and dot every I and research everything ad nauseam,” she says. “You’ve got to be able to move at a different pace. You’ve got to have some gut, some instinct, some experience that lets you keep moving.”

By all accounts, Arnold, who describes herself as “not having the world’s largest attention span,” likes to move very quickly. After all, this is a woman who trains for and participates in sprint triathlons—consisting of a 1/2-mile swim, a 12 1/2-mile bike ride and a 3-mile run—in her spare time.

“If I have a 30-minute meeting scheduled with Susan, it’s going to last 10,” says Marc Pritchard, president of global strategy for P&G. “If I have a 60-minute meeting it’s going to last 20 and my average interaction is about two-and-a-half minutes,” he quips. When asked if Arnold also has the capacity for patience, though, Pritchard’s answer is immediate. “Absolutely,” he says. “She’s quick, but she’s also willing to debate and discuss things. She has an uncanny knack for knowing how to feed the winners and starve the losers.”

As an example, Pritchard cites the launch of Clairol’s Nice ’n Easy Root Touch-Up. “Every hair color company asks whether they should try a product like that or if it will take away from consumption,” he says. “She looked at it and said, ‘This is great. It’s going to build consumption and build the market.’ She sees for the industry that P&G Beauty can grow the market so there’s more consumption.”

Arnold considers Root Touch-Up a beacon, noting that 46 percent of the product’s users have their hair colored at the salon. “So we’re bringing new shoppers into the [hair color] aisle and it’s grown the category and the market for the first time in years. We feel really good about that.”

Successes like Root Touch-Up hold the key to P&G’s long-term growth strategy, which Arnold discussed during a recent wide-ranging 90-minute meeting. Her office is on the 11th floor of P&G’s Cincinnati headquarters, home to the company’s top 11 corporate officers and remodeled by Lafley. Rather than the male, wood-paneled bastion preferred by his predecessors, Lafley created an airy, open-plan floor, an oasis of blond wood and stainless steel with a vibe of hushed tranquility. Each senior executive has an area consisting of a cubicle for his or her assistant, behind which is situated a “viewbicle,” essentially a three-sided desk with a window. A small glass-walled conference room completes each suite.

For Arnold, the real action happens on the building’s third floor, where the majority of the hair and skin care teams reside. Just as Lafley revamped the 11th floor, Arnold modified the third, to better reflect the beauty culture she’s trying to create at P&G. “When Susan Arnold came in, she said, ‘We’re a beauty company. I want us to look like a beauty company,’” remembers Claudia Kotchka, vice president of design innovation and strategy. “It was a major statement,” she continues, noting the decision wasn’t without controversy. “Susan said, ‘We’re not Procter & Gamble making beauty products. We’re a beauty company and we’re going to look and act like one.’” To that end, the space is clean, colorful and bright. Large beauty photographs line the walls, while scented candles and fresh flowers adorn conference rooms and communal work spaces. Arnold, too, treats herself to fresh flowers every day.

Though that seems like a perk better suited to a swanky prestige beauty company, Arnold doesn’t seem particularly interested in mining the upper ends of the industry for growth. When asked about the constant speculation of acquiring a prestige market leader, particularly the Estée Lauder Cos., Clarins or Shiseido, Arnold’s response is tepid. "If you look at the numbers, in the global beauty market, about 70 percent of the sales are done through mass, 30 percent through prestige,” Arnold says. “P&G’s beauty business would skew a little more to the mass, about 80 percent. My goal is not to drive to 70-30,” she continues. “My goal is to follow consumers. I want to delight consumers wherever they shop, in whatever channel, in whatever country. We will follow her.”

Most recently, Arnold has followed consumers into the specialty store arena, with the acquisition last January of HDS Cosmetics Lab Inc., the marketer of Doctor’s Dermatologic Formula, or DD F, skin care. Market sources estimate that P&G paid $50 million to more than $90 million, or about three to four times the sales volume of DD F—seemingly small potatoes for a company the size of Procter. (Olay’s Quench Body Lotion, for example, rings up over $80 million in sales annually.) Not so, says Arnold. “This is what we do,” she says, reiterating the relatively small size of Pantene, SK-II and Lacoste fragrances when they became part of the P&G brand family. “It is exactly our model and it gives us an opportunity in the dermatological part of the business and in specialty retail.”

The acquisition made sense to Wall Street as well. “DD F ties into the cosmeceuticals trend,” says William B. Chappell, an analyst with Suntrust Robinson Humphrey. “P&G can now dip its toe in and gauge how big the segment is going to get.” What’s more, Chappell adds, the acquisition is an example of P&G “filling in holes where it can’t internally” by creating a brand.

When it comes to skin care, Arnold singles out three major areas as ripe for disproportionate growth: antiaging, at-home treatments and natural/botanical products. The last is a category where P&G lags behind traditional market leader L’Oréal, which acquired natural beauty retailer The Body Shop in March 2006 and the organic beauty brand Sanoflore last October. “We’re working on ingredients and we have a lot of connect and develop partnerships going on so we can access it,” Arnold says, using the company’s terminology for the research and development alliances it develops with outside companies. “But the right acquisition, right time, right place, maybe. I don’t rule it out.”

Connect and develop has also been instrumental in providing a much-needed dose of newness to P&G’s color business, particularly with the launch of Cover Girl’s LashExact and Max Factor’s Lash Perfection last year. The company was first to market with a molded plastic brush, developed by Gekka and arguably one of the most important innovations in mascara since the transition from a cake to a liquid formula around 1957. “The way we’ll drive business in color cosmetics is pretty basic,” Arnold says. “It comes back to our formula, which is breakthrough innovation, additional benefits and associations that bring credibility, like Cover Girl’s spokeswoman Queen Latifah.”

Though many on Wall Street would like to see more momentum behind color cosmetics—“Max Factor, which has been cut from drugstores, is essentially Wal-Mart’s private label business,” says one—for the moment, Arnold’s got her hands full integrating some other large acquisitions into the company, notably Clairol and Gillette. “The amount of time it takes us to really get a business going is directly related to the health of the business when you make the acquisition,” says Arnold, noting that the Clairol product cupboard was relatively bare when P&G acquired it in 2001. “In terms of innovative product technologies and brand image building, the Clairol businesses were challenged.” P&G has focused on two main areas to rectify that: Herbal Essences and hair color. Last May, Herbal Essences was restaged, with new formulas, new product names, a new design and a new marketing campaign. By all accounts, Arnold was intimately involved with the relaunch, determined to prevent the brand from being pulled off shelves, as some retailers were threatening to do, says Kotchka. A multifunctional team, with designers, marketers, product developers and engineers, was put together, to which Arnold was a frequent contributor. “She is not hierarchical at all—she’s a straight shooter and says what she thinks,” says Kotchka. “At P&G we’re very data-driven, but Susan is very decisive and also uses her gut a lot. She doesn’t have a long attention span, which is great. She’s like, ‘Give it to me,’ ” Kotchka continues, snapping her fingers in succession. “She makes stuff happen.”

As involved with the relaunch as she was, Arnold says her style is not to micro-manage. “I try to only work on the projects where I can bring value add,” she says. “I don’t want to be a check step. I don’t want to double work.” Though the overall initial impression she conveys to outsiders is one of strength, steeliness, speed and an almost intimidating intelligence, Arnold’s team says she is a straight-talking decision maker who’s always approachable and occasionally even amusing. “We were in a packaging meeting where she was clearly of one point of view,” remembers Leigh Radford, manager of global skin design and global marketing and innovation, P&G Beauty & Health. “There was passion in the room for one of the options provided, but she made it clear it wasn’t working.

“About halfway through the meeting,” Radford continues, “she took the products and hid them behind the TV to make it very clear that she never wanted to see them again. It was really funny, but the point came across that the packaging was not right and she was not aligned to it, and everyone felt fine about going back and doing it again.”

Despite the successes, there have been missteps, too, most recently with the luxury skin care brand SK-II in China. The brand first was launched in that country eight years ago, but P&G was forced to halt sales last September after a watch group there claimed it found chromium and neodymium in nine of the line’s products imported from Japan, where they were produced. Both substances are listed as prohibited substances in cosmetics by China. P&G insisted that the presence of the trace amounts of metallic elements presented no health or safety risk and stated that neither substance is used in the manufacture of SK-II products.

In November, P&G reinitiated distribution, and today the brand is in 18 doors. Previously it was in 90. When asked how many doors the brand will reenter, Arnold says, “We’ll let the consumer lead us.” When queried about what she learned from the experience, she says, “We learned to communicate with the consumer better in China. And I think we learned to work more effectively with the government.”

The company has had more success in the prestige fragrance category. Its stable of brands includes Valentino, Escada, Hugo Boss, Rochas, Jean Patou, Lacoste and, most recently, Gucci and Dolce & Gabbana. The Procter & Gamble Prestige Products division, which is based in Geneva, was said to have reached about $2 billion in sales last year and is expecting to grow at a double-digit pace. “The fragrance market has been deluged with launches over the last few years, but we’ve worked a different strategy,” says Arnold, “which is fewer, bigger, better. We have worked on our portfolio so we have a combination of lifestyle, prestige and luxury brands. By focusing on the brand equity, bringing deep consumer understanding into the mix and working closely with the fashion houses, we’ve been able to do well.”

“Deutsche Bank’s Schmitz applauds the approach, noting that the company is able to achieve higher margins on fragrance than its competitors by developing much of its packaging inhouse. Industry sources estimate that P&G’s fragrance business has a 19 percent operating margin, compared with Lauder’s operating margin of 5 percent in fragrance.”

Fragrance also provides a point of interaction with other, nonbeauty-related divisions of P&G. A scent that’s not right for a fine fragrance, for example, might be perfectly suited for one of the detergent divisions. “There are hard points and soft points of interaction,” Arnold says. Fragrance is a wonderful business. It’s a great training ground for people; it gives us a great understanding of future trends, and is great for holistic design.”

Design, trends, fashion—not words that 10 years ago would have been associated with Procter & Gamble, a company built on the back of Ivory Soap and whose brands today include everything from Iams pet food to Pringles potato chips. But this is a firm, Arnold says, that’s continually learning from its acquisitions—and key among the lessons is how to be a beauty company. “About 40 percent of Procter & Gamble’s workforce have come from acquisitions and beauty is a business of acquisitions so that number would be even higher and we love that,” Arnold says. “People come from acquisitions and they teach us things. They challenge us, they complement us and they make us better all the time.”

No one has proven to be a more adept student than Arnold herself. When she was named president of global personal beauty care in 2000, P&G Beauty had net sales of about $7 billion. Since then, sales in the division, which includes feminine care, have tripled to about $23 billion and the company is neck and neck with L’Oréal for the claim of world’s biggest beauty company. Of the race for number one, Arnold says, “You have to define who decides what the definition of number one is. If I talk to business analysts, they would define us as number one, based on our sales today.” But that’s not the constituency she’s spent her career courting. “The only audience that matters is consumers,” she says. “So to be or become or maintain the leading beauty brand, for me, it really is all about delighting consumers. They are our boss and they are who lead us.”

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