P&G WORKS OUT A NEW MATH
Byline: Pete Born
NEW YORK — Procter & Gamble Co. is a company that can see glamour in an invoice.
The firm had a plan for its mass market cosmetics business: Wring efficiencies out of back-room dynamics, like inventory flow; funnel some of the resultant savings back to retailers through invoice reductions, and plow the rest into marketing with glitzy, eye-catching shade statements and TV spots enlivened by gorgeous models.
Although some drugstore chain executives say the benefits haven’t filtered down to them yet, P&G has some preliminary figures indicating the strategy is working. Sales have perked up with a series of TV-driven color promotions.
Less than a year ago, Marc S. Pritchard, then the new vice president and general manager of P&G cosmetics, gave his initial ideas on what was needed to give the Cover Girl and Max Factor brands a spark. Among his priorities was to raise the company’s color profile to cash in on a rising tide of consumer demand that has buoyed most of his competitors.
“We needed to get back into color,” Pritchard said last week, while recapping the developments of this year. “The consumer really wanted color; there’s an explosion of self-expression.”
But first the company had to pave the way, and the road led through P&G’s back room. As previously noted, P&G launched a new program, called Streamline ’97, that is predicated on the belief that a manufacturer’s first priority is to get products on store shelves.
“The number one complaint of mass shoppers involves a lack of product in stock,” Pritchard said. “By having a product in stock, it creates more store loyalty and frees up cash for growth and innovation.”
The idea, he continued, was to create efficiencies in ordering, distributing and discontinuing products — all activities that add no value to customers.
The program, which began July 1, is designed to work in conjunction with the company’s computerized inventory management system. John Devine, P&G’s cosmetics business development manager for the chain drugstore industry, noted the computerized system is now wired into retailers that account for 74 percent of P&G’s cosmetics volume, or more than 30,000 doors.
The first move was to simplify pricing from eight price brackets to four. Then there was the number of shipments, a key issue, considering the Cover Girl and Max Factor brands combined consist of 1,000 stockkeeping units.
The company provided two incentives. If a retailer placed orders that resulted in full-case shipments, rather than partials, P&G gave a discount.
Another new method is “cross docking,” which involves shipping one big, combined order to a chain’s central distribution center. The retailer then breaks up the order and sends the proper items to the right branches.
Under the old system, P&G would send items to each store, resulting, as Pritchard said, in “2,000 different bundles, representing 2,000 different orders, all shipped to 2,000 different stores.”
With cross docking, the retailer also gets a discount. According to P&G, in the first three months, $1.25 million was saved and turned back to stores on the inventory acquisition alone, and $5 million is expected to be saved the first year.
As part of the initiative, P&G opened a new $28 million distribution center in Joppatown, Md., near Baltimore. In the first fiscal quarter this summer, P&G shipped 99.7 percent of orders correctly, despite a UPS strike, Pritchard said. In years past, it was common for 10 percent of ordered items to be missing.
In another category, 83 percent of orders were classified as perfect — filled correctly and delivered on time. A year ago, that rate was 25 percent less.
P&G also dealt with the issue of damaged goods, which usually amounts to about 1 percent of volume. Instead of having retailers ship back defective products, P&G simply sends retailers checks covering the cost of goods for 1 percent of volume at the beginning of every quarter. It amounted to $1.5 million for the first quarter.
The company took a cue from the fashion industry on discontinued items. P&G decided to give retailers a 12-month warning, giving them time to sell through the goods before a phaseout. The company then gives retailers markdown money. At the six-month mark, P&G will pay 50 percent of the value of the discontinued goods that the store still has on hand. At the 12-month deadline, the stores will be given another 50 percent.
Bryan Stuke, sales director of the division, estimated that the amount of damaged and returned or discontinued merchandise in the industry ranges from 5 to 15 percent of volume.
“The beauty is that this gets sold through and doesn’t get handled again,” Pritchard noted. The company has calculated that each time an item is handled — because it was damaged, discontinued or simply returned — it costs 34 cents.
Some retailers said that although the program looks good on paper, they haven’t yet seen savings. Devine said they should have started seeing discounts on shipping invoices, and P&G has begun sending out the quarterly allowances for damaged goods.
The money P&G saved was invested in its color business, Pritchard said. This is the first year Cover Girl has done full-blown shade promotions, beginning with Ice Creams in the spring and Spice It Up in the fall. The holiday promotion is called Northern Lights, and the spring event will be called She Sells Sea Shells.
TV advertising has been added; so has in-store merchandising.
While Cover Girl’s NailSlicks enamel was included in the TV advertising for the color promotions, in October the nail enamel was given its own TV and print campaigns, the first time in three years Cover Girl nail enamel had been advertised alone.
The effort has paid off. P&G quoted numbers from Information Resources Inc. showing that from July through September, Cover Girl lip color was up 8 percent in dollar terms, compared with being down 6 percent a year ago. Nail color was up 17 percent in the quarter, versus only 4 percent ahead a year ago. Also in the quarter, eye pencils were up 28 percent; blush, 10 percent, and eye shadow, 5 percent.
Pritchard has put similar programs in place for Max Factor and he is thinking of other parts of the Cover Girl line, particularly traditional face products, the heart of the business.