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Procter & Gamble’s New Game

As Procter & Gamble shuffles its beauty holdings, industry insiders analyze the dynamics that led to its divestiture strategy.

When A.G. (Alan) Lafley was named chief executive officer of Procter & Gamble Co. in 2000—the first time around—he set about to affect a total transformation of the company.

Some of his changes were more cosmetic than others. He redecorated the 11th floor executive offices, dismantling the burnished-wood men’s club vibe in favor of an airier, open-plan design scheme. He actively sourced innovation from outside the historically inward-facing company, making external collaborations a hallmark of his tenure. And, per- haps most significantly, Lafley spent an estimated $69 bil- lion on acquisitions in the beauty and grooming sectors to transform P&G into a personal-care powerhouse.

Fast-forward 15 years and Lafley—now serving his second tour of duty as chairman, president and ceo of the consumer-goods giant—is in the process of dismantling the very empire he erected, as P&G pursues the divestiture of some of its key beauty brands, possibly including Cover Girl, Max Factor, Wella, Clairol and a slew of prestige licenses such as Dolce & Gabbana, Gucci and Hugo Boss.

At a time when many of its global competitors, including Unilever and Henkel, are going deeper into the category, P&G is retreating, seemingly unable to transform itself from a need-based marketing organization into a want-based one.

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In its heyday, from 2005 to 2007, P&G’s beauty and grooming revenue was estimated to reach $23 billion—a figure that had it knocking on the door of the number-one position in the global beauty industry. It was led by six brands that did more than $1 billion in sales—Olay, Pantene, Head & Shoulders, Wella, Mach 3 and Gillette—and seven brands in the “on- deck” circle, those between $500 million and $1 billion in sales. They were Hugo Boss, SK-II, Cover Girl, Herbal Essences, Rejoice (a value-priced shampoo sold in China) and Gillette’s Fusion and Venus franchises.

Compare that to 2014, when WWD Beauty Inc’s Top 100 ranking estimated P&G’s beauty sales to be $19.8 billion, a 3.4 percent decrease that reflected the ongoing struggles of Olay, Pantene, Cover Girl and others.

The 1985 acquisition of Richardson-Vicks—which included Pantene, Oil of Olay and Vidal Sassoon—jump-started the company’s beauty business. Next came Noxell and Cover Girl in 1989, followed by a deal with Revlon for Max Factor and Betrix, which incuded SK-II and Hugo Boss fragrances, two years later in 1991. All was quiet on the acquisition front for about a decade. In 2001, Lafley made his first big move, acquiring hair-color giant Clairol for a reported $4.9 billion, a deal that signaled a systematic acquisition drive. In 2003, there was Wella, for a reported $7 billion, which made P&G a major player in the prestige fragrance category as well as professional hair care and color; in 2005 came the $57 billion acquisition of Gillette, and then, for the next two years, a series of smaller brands including Frédéric Fekkai (sold in May to Fekkai Brands for an estimated $50 million), DDF, Zirh and Nioxin, culminating with the Art of Shaving in 2009. Along the way, there was the launch and demise of the online beauty play Reflect. com, plus the addition of multiple high-end fragrance licenses.

So what went wrong? In a series of wide-ranging interviews with in- dustry analysts, bankers, retailers and former P&G executives, a picture emerges of a confluence of causes, all exacerbated by the Great Recession of 2008.

First and foremost, the landscape changed, as the rise of beauty specialty retailers, e-commerce and niche brands siphoned off mass shop- ping dollars. “Since 2009, $14 billion in sales has been created from brands under $100 million,” says Andrew Shore, managing director of the investment bank Moelis & Co. “That is 2.4 percentage points of mar- ket share that has shifted from big companies to smaller companies.”

Then there was the retirement of key executives, including Lafley himself and Susan Arnold, who was vice chairman of beauty and health before being named the president of global business units in 2007, both of whom were the primary architects of P&G’s beauty strategy. Their departures were followed by years of talent turnover and the loss of many key players.

Finally, there is a sense that beauty was never a great cultural fit for P&G. While the company was able to effectively harness its internal and external R&D for a continual stream of innovation, it was less successful at creating the emotional connection between its brands and consumers that marketers say is crucial to success in the beauty category.

William Susman, managing director of Threadstone, says, “They spent money and tried to use their leverage with retailers, but [this business] isn’t about chemistry. Tide can make your laundry whiter and brighter,” he points out, “but beauty is a romance product.”

P&G’s sheer size also mitigated against success in a time when agility is a strategic advantage. “Basically they were too big,” says Susan Babinsky, the head of management consulting at Kline Group, which recently published a report titled “P&G’s Beauty Divestitures are a Treasure Trove of Opportunity.”

“There were too many brands, too many stockkeeping units, and they lost focus in terms of what they were about,” she continues. “There were so many moving parts, plus trying to grow the business globally—it be- came unwieldy. At that point, you’re putting out fires and you have lost your ability to strategically grow the business.”

Some sources were not willing to be quoted on the record. After all, P&G still wields considerable clout: If the Cincinnati-based company holds onto the skin-care brands Olay and SK-II and the hair-care brands Pantene and Head & Shoulders, as it has indicated it will, the firm would still have estimated annual beauty sales of at least $8 billion, which would keep it among the top five beauty companies in the WWD Beauty Inc Top 100.

Lafley and other P&G executives declined to comment for this story.

“P&G was culturally unprepared to succeed in cosmetics,” says one insider. “Their big play was to make the beauty business look like their other successful businesses, but the drivers of beauty are different. They never understood the emotional benefits, the purely female ben- efits, of beauty.”

“They were used to winning with product innovation and huge volume categories,” this person continues. “They weren’t used to image management and winning in a desire-based business. They never got the emotional benefit of making a woman feel beautiful.”

One oft-heard opinion is that P&G regularly used innovation, rather than emotion, as a marketing message. One example is Cover Girl’s LashExact mascara, which featured a first-to-market technology with a molded silicone brush. Historically, mascara is a category dominated by L’Oréal, which controls many design patents for bristle-brush wand technology. In 2006, Cover Girl spent an estimated $1 million on silicone brush molds to gain market share in the category in a major way. The plan worked—kind of. Cover Girl’s mascara business skyrocketed.

Eventually, though, competing brands acquired the technology—and in the meantime, Cover Girl’s marketers had taken their eyes off the bigger business.

“They took the lead in mascara away from Maybelline,” says one analyst, “but they spent so much time doing it that they lost their domi- nance in the face business, which was their traditional power base and has the highest loyalty factor in cosmetics.”

As the competitive landscape changed dramatically from when P&G first entered the market, particularly with the rise of specialty beauty chains and e-commerce, this poor “feel” for beauty became more acute. “If you’re a 26-year-old today,” says one person, “you’re not going to Cover Girl or Revlon—you’re going to Sephora.”

Industry insiders say P&G’s marketers also struggled with the most effective way to reach young consumers. The rise of cable TV and the Internet robbed P&G’s traditional medium—network television—of some of its influence, making it more difficult for the company to effectively disseminate its marketing messages. “It became harder for the message to reach the right consumer,” says one person. “Like many large companies, P&G doesn’t understand digital.”

In terms of Olay and Pantene, the problems were different. In the early Aughts, the brands were symbolic of P&G’s success in beauty: In a 2007 WWD Beauty Biz story, Susan Arnold estimated Olay was a $200 million brand when P&G acquired it from Richardson-Vicks in 1985 and had grown to almost $2 billion by 2007, while Pantene was between $20 million and $40 million at acquisition and had grown to almost $3 billion.

One major retailer says both brands became too big, with so many subbrands and variations that the marketing messages got muddled and consumers found them confusing to shop. Olay, for example, has six different facial skin-care lines, ranging from Classics, where a moisturizer costs about $9.99, to ProX, where a top-of-the-line antiager is $29.99.

“Olay was a great midpriced antiaging brand,” says William Schmitz, an analyst at Deutsche Bank. “As it grew globally, they tried to make it all things to all people. Ultimately, they were allocated too much shelf space, so it became unproductive for the retailer who then took the space away, and it becomes a vicious cycle.”

IIn the prestige fragrance category, a picture equally as bleak emerges. One industry analyst says that P&G was overreliant on promotional activity to drive its big fragrance licenses like Dolce & Gabbana, Gucci and Hugo Boss. While P&G Prestige effectively launched new fragrance master brands, like Gucci Guilty or Dolce & Gabbana Dolce, leveraging them with sustained investment was another matter. “They launch really well but they don’t reinforce the brand in a way that builds it for the long term,” says one prestige market analyst. “Look at Chanel and Dior—it’s not that the product is incredibly innovative, but they pump a lot of advertising money behind it to keep it cool and fresh. You have to be willing to do whatever investments are needed to make sure your brand is going to be top of mind.”

Then there was the leadership exodus. While Lafley and Arnold recognized the value of longevity in the beauty category, things changed with the advent of Lafley’s successor, Robert McDonald. Leaders who couldn’t turn around the business were generally gone in 18 months, while at the lower levels, the company reverted to its customary practice of moving brand managers throughout various parts of the business—say from laundry to diapers to hair care—every 24 to 36 months.

“Successful companies today are a blend of people who have tried-and-true experience plus new talent that understands new technologies and is much more entrepreneurial in spirit,” says one former insider. “P&G acquired businesses and most of the employees and fresh talent they thought they were bringing in—very few stayed,” this person continues. “Beauty is a category where tacit knowledge is important. When I look at P&G, people change jobs so of- ten—they can apply some of their smarts, but not all.”

“It’s not that they have dumb people,” says another alum. “But they have basketball players playing hockey—they are out of their depth and L’Oréal has skated rings around them.”

In January, P&G disclosed the latest round of significant management changes for the beauty business, a move that many sources believe signals a new day for Procter & Gamble. Company veteran David Taylor was named group president of Global Beauty, Grooming & Healthcare and is seen as the clear frontrunner in the race to succeed Lafley as ceo, and Patrice Louvet became group president of global beauty. Alex Keith, a veteran of Olay who has worked on myriad categories at P&G, was promoted from vice president of North American Fabric Care to president of Global Skin Care and Personal Care. Many analysts see these as positive appointments.

The beauty division that they will oversee will most likely look very different in time. In August 2014, Lafley revealed a dramatic plan to sell off or shutter at least half of the consumer-product giant’s 160 brands. In terms of beauty, most analysts agree that the brands being sold include Wella, Clairol, Cover Girl, Max Factor and the bulk of the prestige business, except for SK-II.

In March, P&G sold the Rochas fragrance and fashion business to Inter Parfums for a reported $108 million, and in early May, it sold the Frédéric Fekkai business, acquired for an estimated $440 million, to Fekkai brands, a joint venture between Designer Parfums and Luxe Brands, for an estimated $50 million. P&G tried unsuccessfully to reate a dual-channel distribution structure for the brand straddling prestige and mass.
Executives who have been briefed say the company is looking for an entity to buy as much of its beauty business as possible—a difficult goal to accomplish given the size of the businesses.

Coty and Revlon are often mentioned as potential suitors for the Cover Girl and Max Factor businesses. Coty in particular, says one source, has an appetite for big deals.

Another plausible scenario is a large-cap private equity firm, such as KKR, the Carlyle Group or Blackstone, entering the fray. “There are multibillion- dollar funds that want to get involved in beauty but can’t because most of the time the brands are too small,” says one investment banker. “This is a unique opportunity with a lot of size.”

And, adds a source, there are a lot of free agents in terms of executive talent to run such an acquisition, noting that in the past three years, many seasoned ceo’s have re- tired or left their spots, including Alan Ennis, formerly of Revlon, and Michele Scannavini, who shepherded Coty through its initial public offering.

In terms of the hair-care businesses, Wella and Clairol, Henkel AG and Kao Corp. are often cited as likely buyers. The future of P&G’s fragrance brands is murkier, say analysts. In addition to the category being challenged, many big players would have a conflict of interest between P&G’s brands and ones they already market.

Another scenario that’s been floated is that P&G spins off its beauty holdings into a separate entity, although most observers don’t believe this is likely. “Spinning it off requires a full leadership team which they don’t have and can’t attract,” says Susman.

Even with the divestitures, P&G is expected to retain a sizable por- tion of its beauty business—one that it still needs to turn around. While one major retailer is less than optimistic that this will happen quickly, others are more bullish.

“They need to take prices down, which will impact profitability and margins, and they also need to rationalize the sku count, which will impact sales,” says Schmitz. “So they have some tough decisions to make. But part of it is the macroenvironment. Everybody is struggling.”

Mark S. Astrachan, an analyst at Stifel, takes a guardedly optimistic position on the future of P&G’s beauty business in a March report titled “P&G: Potential Beauty IPO?” “The global beauty category has a favorable long-term growth outlook, with an approximate 4 percent sales CAGR since the early 1990s,” he wrote. “Exiting two-thirds of its beauty business reduces the company’s exposure to a dynamic category, potentially hurting longer-term sales growth, assuming improving share trends.

“That said,” he concludes, “improving [the] performance of Olay and Pantene and maintaining current positive momentum for Head & Shoulders would positively impact company sales growth, all else being equal.”