by Greg Thain
A profound by-product of segmentation is an increase in overall demand, as P&G soon found: it was only when brands began to compete with each other by staking out a relevant point of difference that increases in per capita demand were stimulated. Until that point, soap had grown largely in line with population growth. Such segmentation encouraged the consumer to buy not just one large slab of generic soap at a rock-bottom price but also a whole range of higher-priced branded offerings, each of which performed a different task. And once all that soap was in the house, washing frequency unsurprisingly increased. Thus differentiated, the brands could coexist on the shelf without competing head-on with each other, retaining the benefits of vertical integration and avoiding price competition while minimising the wastefulness of internal overlap.
As a one-off exercise, this would have been impressive enough, but it was followed up by an insight of equal importance. Rather than having one internal management group supporting a mass of competing products, the range of now segmented, non-competing products could be supported by a Darwinian internal competition for resources and focus. This system developed into the brand management structures with which we are familiar. The development of brand management at P&G was an organic process, but one that fit perfectly in a segmented world. Once brands were targeted at different market segments, the currency of success shifted from low input costs and prices to data: about markets, consumers, consumer behaviour and channels of distribution – brand manger fodder.
P&G had also made a head start in building a market research capability when, to fill a sales forecasting assignment in 1924, it hired a PhD economist who had been quick to realise his sales forecasts would be a lot better if he understood what was truly driving demand. He soon rewrote his job description: bringing consumer understanding into the business. From a springboard of market research, the brand management finally coalesced as a function in 1931, driven by the initiative of the company’s promotion department manager and future CEO, Neil McElroy. The initiative had been prompted by P&G’s launch of Camay, a perfumed ‘beauty’ soap developed as a response to the launch of Palmolive. It soon became apparent that Camay could only succeed if it was allowed to compete against not just Palmolive but also Ivory itself, against which Palmolive was making big inroads.
It is no exaggeration to say that brand management is the management of segmentation, together with some implementation tactics. It would become the bedrock of P&G’s subsequent success. It invented brand management at just the right time and the concept of internal competition would never be more tested than in P&G’s defining moment: the launch of Tide.
The technology behind Tide, a synthetic detergent rather than a soap, had come to P&G’s attention in the same year McElroy was defining the brand management. But it had languished for years - no-one had been able to find a way to make it work and it had been looked upon as a potential niche brand better suited for washing clothes in hard water areas: it was just not effective enough to cope with heavily soiled clothes. Worse, the more the formulation was strengthened, the more deposits it on the clothes, making them unacceptably stiff. By 1939, it was firmly on the back burner, kept alive by one maverick P&G chemist working in secret to avoid upsetting his bosses. But by 1945, he had actually solved all the problems and revealed its vastly superior cleaning power to his dumbfounded colleagues.
Normal P&G product launch disciplines at that time would have called for six months’ worth of blind tests in a few cities, another six months for test-driven tweaks, then another year of shipping tests and advertising development before a test market lasting another couple of years. But in the sure knowledge that Lever and Colgate-Palmolive would get hold of blind test samples, figure out the technology and quickly develop their own versions, P&G decided to bet the farm on an immediate national launch to steal as much of a competitive march as it could.
But fast tracking the launch in 1946 was not the limit of P&G’s boldness. Within three years, Tide had shot to a market share of over 25%, more than twice as big as the previous best seller, growth limited only by P&G’s ability to build production capacity. Nevertheless, P&G faced a twin dilemma: Tide was stealing share from all brands, including its own, and was based on a completely different technology from its existing brands. In other words, Tide was busily making redundant brand assets and manufacturing assets built up over decades. But the genie was out of the bottle. By 1948, both Colgate and Lever had launched their own synthetic detergents, so there was no turning back. P&G put everything it had behind Tide irrespective of the damage to its existing brands. As a company, it never looked back
How International Are They?
P&G’s first operation outside of the United States had been as early as 1915, when it opened a manufacturing plant in Hamilton, Canada, and it was another fifteen years before its first venture beyond North America, when it purchased the UK’s Thomas Heldey & Co., primarily to compete against Lever Brothers in its home market. Having set up an International division in 1946, the next baby step came in 1948 with an acquisition in Mexico, soon to be followed by Venezuela and Cuba. P&G’s experience in Mexico turned out to be an object lesson in what would be required to operate successfully in new and culturally distinct markets.
As it turned out, P&G was very slow to understand the very different attitudes and behaviours of Mexican housewives: it was also up against an entrenched competitor in Colgate, who had been in Mexico for decades. Its early product launches flopped and it would be a full decade before it had its first success there, with Rapido and another decade again before P&G entrenched itself, via the launch of Ariel. But the effort proved to be worthwhile for two reasons: first, what it taught P&G about how to compete in lower-income markets and second, the fact that it required P&G to build a very robust, broadly spread Mexican operation. By 1990, it was operating in sixteen product categories. Today it has a share of around 25% in the $4 billion and rapidly growing Mexican household products market, among other sectors.
It looked as though Tide would provide the leverage P&G needed to establish a bridgehead in Europe, where it would be competing against a dominant Unilever (in 1930 Lever Brothers merged with Margarine Unie to create Unilever), who, in the absence of Tide as a competitor, had been slow to bring its synthetic detergents into the market as they would devastate its own dominant non-synthetic brands. Through the 1950s, P&G built detergent plants in France, Belgium and Italy but steered clear of the largest market, West Germany, preferring instead to extend its technology-sharing agreements, which had led to the initial development of Tide with Henkel, Europe’s detergents giant.
But Tide had proved to be of limited appeal to Europeans, whose smaller, front-loading high-temperature washing machines were quite different from those in the US. It was only when P&G recognised it would have to develop brands designed for the euro-wash that it really broke through, initially with a low suds detergent called Dash but then with Ariel, first launched in West Germany in 1967 and its first brand to use enzyme technology. (P&G had terminated its non-competition agreement with Henkel a few years earlier). Ariel became P&G’s power brand in its overseas markets, and strong enough to overtake Tide and become the company’s largest detergent brand. Elsewhere, Pampers too became a very big brand for P&G across most of its European markets.
P&G’s next major learning experience in globalism came with its 1970s experience in Japanese, by then second only to the US in market size, but dominated by two very well established local players, Lion and Kao, who had already given both Unilever and Colgate something of a trouncing. By now, P&G had a fairly standard approach to entering markets: research the consumer and retail trade, form an alliance with a local player as a quick access route and a conduit for P&G technologies and brands until a critical mass for a P&G local operation was achieved. Japan was to show P&G this would not be good enough.
By 1985, thirteen years after entering the market, P&G still hadn’t turned a profit and pulled together a last-ditch attempt
to make a success of its venture. It gave the project a name Ichidai Hiyaku, The Great Flying Leap, a very fair description of the task in hand. But rather than see the market as an opportunity for US-centric brands and formulations, P&G started from the ground up, designing products exactly to Japanese consumers’ habits: detergents needed to perform in cold-water washes, Pampers needed to be slimmed down and advertising had to be locally developed and culturally spot-on. Finally, distribution needed to be efficient.
The plan worked three ways. Over time, P&G developed a large and profitable business in Japan, an experience that would inform its subsequent forays into Eastern Europe and the emerging BRIC markets (Brazil, Russia, India, China). And the new technologies developed for the exacting Japanese consumer, such as cold-water cleaning power and ultra-thin diapers, would become powerful brand developments in both new and old P&G markets. By the end of the 1970s, P&G had finally established itself as a genuine global company with one-third of its sales coming from outside the US. P&G entered many, mostly small new countries during the 1980s but the ones that would prove most significant to its business today were in Eastern Europe and China.
P&G was also determined to win first place in the race into the crumbling Communist markets of Eastern Europe. Even before the fall of the Berlin Wall, plans were being kicked around. As soon as it became apparent that major change was afoot, P&G sprang into action, eschewing its normal careful, country-by-country approach and coming up with a rapid rollout plan, prioritising the various markets according to based commercial attractiveness, perceived stability, availability of commercial television and government openness to free markets. On that basis, Czechoslovakia, Poland, Hungary and Russia’s two major cities became top priorities. The company also prioritised its categories, aiming to launch with its big guns of laundry, diapers, hair care, feminine care and dental care while allocating region-wide responsibilities for the production and marketing of each category to specific countries. Thus, Poland focused on hair care and diapers, while Czechoslovakia handled laundry. Acquisitions played a key role in cutting market entry lead times; P&G’s purchase of the Czech firm Rakona meant it was already manufacturing Ariel for the entire region by August 1991, a mere 21 months after the fall of the Berlin Wall.
Following the collapse of the Soviet Union, most Western companies found Russia was a more difficult nut to crack, especially after the economic collapse of the late 1990s. Up to that point, P&G’s Eastern European business had looked very rosy indeed, with annual revenues well over $1 billion in 1997. But the Russian economic crisis was in danger of leaving the company high and dry. An army of expensive expatriate managers pushed costs and therefore prices well above those of an emerging group of local competitors. P&G slashed wherever possible, replacing many of its expats with locals and emphasising the value, as opposed to price, of its products. The storm was eventually weathered but it taught the company valuable lessons in how to manage in crisis-ridden markets. P&G is now the number-one player in the Russian household products market.
P&G was also very quick into China, opening the biggest consumer products factory in the country in 1991. Only three years later it was shipping four million cases of product a year, already making China one of P&G’s top-ten markets. From an initial three – city focus on shampoo, skincare and personal cleansing, P&G again leap-frogged its global competition. It decided to attack every significant city in China, all 570 of them. In these cities, P&G would face stiff competition from local firms such as Nice, who had been rapidly upgrading its products and up-scaling its operations while keeping its costs extraordinarily low.
Having learnt from its experiences in Mexico and Japan, P&G progressively extended into fabric care, feminine care, oral care and baby care, eventually building China into its second-largest market, generating sales of $6 billion in 2012. The rate of growth in China for P&G products has been breath-taking. When Pampers was launched there in 2000, the sector size was around $200 million; ten years later, it had increased fourteen-fold to $2.8 billion. P&G sales in China are now more than double those of Unilever, P&G having mastered the distribution complexities that follow from no single retailer accounting for more than 3% of market sales and with the majority of sales going through an endless network of distributors.
P&G’s growth in developing markets has become the growth engine of the entire company. Sales of $8 billion in 2001 had grown to $21 billion by 2007 when they accounted for 29% of total company sales; two years later, that was up to 32%. In the decade since 2002, P&G’s compound annual growth has been 17% in China, 25% in Russia and 27% in India. But the potential is still mind-boggling both in terms of market size and market share. The per capita spend in China on P&G products is now around $4 whereas in Mexico it is nearly $20, and in 2007, P&G’s market share in developing markets was only 19%. By 2012, developing markets were accounting for 38% of P&G’s sales (44% of unit volume) – a $32 billion business in its own right, making P&G the world’s largest consumer goods company in developing markets, an amazing achievement given how uncertainly it started off.
How Did It Build Its Modern Business?
Procter & Gamble came into the post-war period better equipped than any other packaged goods company to benefit from the twenty-year consumer boom that was about to take place. It had the best marketing organisation and was comfortable entering new categories, especially at a time when the annual GDP growth rate doubled and the baby boom accelerated population growth. It was the country’s biggest advertiser at a time when television dramatically enhanced the ability to reach and influence consumers. And the Tide experience had changed the company culture to one where disruptive innovation became the over-arching goal, no matter how long it took, how much it cost and how much it made redundant its existing equities.
In the post-war era, what P&G manufactured and sold and how big it became would change the company beyond recognition – sales would increase 30-fold between 1945 and 1980 – but the attributes of how the company operated remained remarkably consistent. Tide and other detergent brands still drove P&G’s growth in the 1950s as household ownership of washing machines continued to rise, but the seeds of the next great breakthrough were sown in 1957 when P&G acquired a middle-of-the-road tissue manufacturer called Charmin. It would have been natural for P&G, following the breath-taking success of Tide, to have seen itself as the leading marketer to housewives, which it was. So to extend into other housewife-domain categories such as kitchen rolls and bathroom tissue would have seemed logical. Those markets were relatively unsophisticated so perhaps P&G thought that it could simply out-market the competition. Not so.
It would be a decade of intense effort before P&G finally got to grips with paper products and learnt the technical skills required to replicate Tide in paper form: similarly breakthrough products with breakthrough performance that could command premium prices and a large market share. Several of today’s billion-dollar P&G paper brands - Charmin, Bounty, Pampers and Luvs - were children of this era, powered by a technical breakthrough which dramatically increased absorbency, known in the company as Confidential Process F. But during its initial decade in the paper products business, P&G seriously considered exiting as it struggled to accommodate an entirely different business model. However, once the technical boffins had come up with Confidential Process F, P&G doubled down on its investments to reap ultimate reward.
Simultaneously with its paper business struggles, in 1955 P&G had decided to tackle Colgate head on with the launch of Crest toothpaste. The technical breakthrough behind the brand – fluoride, which prevented cavities – came not from P&G itself but from a research partnership with Indiana University. But P&G’s biggest challenge came on the marketing side: persuading an initially hostile American Dental Association to come on board and vouch for Crest’s key benefit. They were perhaps wary of seeing toothpaste, not their fee-earning members, deal with the cavity problem.
As Tide, Bounty, Charmin, Crest and other breakthrough b
rands such as 1961’s Pampers surged ahead year after year, driven by colossal advertising budgets, P&G focused on developing its skills in product enhancements. Acquisitions made during the 1960s into coffee (Folgers) and peanut butter (Jif), although decent businesses in themselves, failed to become springboards for the breakthrough innovation the company sought. Hence there were no major acquisitions through the 1970s. Why should there be? The company seemed more than capable of meeting its goal of doubling in size every ten years just by keeping on keeping on, doing what it was doing. In fact, in the 1970s it tripled its sales to reach the heady heights of $10 billion.
But it had become apparent that for a $10 billion turnover company to double in size in the next decade, P&G would have to relearn and enhance its skills in making, absorbing and growing acquisitions. So the company formally analysed every single category in the grocery store to seek acquisition targets that met with P&G’s needs. It looked for higher-margin, higher-growth categories that depended on innovation and branding for their success, which attracted to the soft drinks arena. It bought Crush International Ltd in 1980, followed by a citrus-processing firm the next year. But, despite much effort, P&G’s belief that it could win in this category through superior flavour technology proved unfounded, although its acquisition of the Sunny Delight brand in 1989 kept it interested for a while. It left Soft Drinks Town for good in 2004.