CEO Alan Lafley talks Procter & Gamble
Following in the footsteps of a controversial predecessor nicknamed "Dark Vader", mild-mannered "A.G." has successfully refocused the US consumer goods giant on its core brands, countries and markets. To do so within less than three years is nothing short of a feat of arms.
Following the controversial restructuring and cost-cutting programme "Organization 2005" P&G is now a meaner and leaner animal.
As Alan Lafley spoke about marketing billion-dollar brands to a hundred-or-more countries, the quiet American projected the tone: "Nothing much really, all in a day's work." Don't they call this "laid-back" on his side of the Pond?
"I had a lot of help"
At the time, our 166-year-old company was undergoing a major reorganization of its structures. We wanted to be more responsive to retail customers and consumers in a global marketplace, accelerate innovation, get new products to market faster and increase our growth rate.
You make it sound like a cakewalk, but more than 16,000 P&Gers lost their jobs in the process.
Most of these resulted from divestitures and closures of operations when, for example, we spun off the "Jif" peanut butter and "Crisco" cooking oil brands to Smucker's Company who gave virtually every P&Ger a job.
In June 2003, you will end the massive "Organization 2005" restructuring and cost-cutting program more than a year ahead of schedule. In fact, you have revised earnings prospects upwards in each of the past seven quarters. How did you turn the rudder around?
I had a lot of help. Firstly, we focused on the consumer who is the real boss at P&G.
We need to win two moments of truth with the consumer. The first is her purchase decision in the retail store; the second is in the home when our brands are used: they will either satisfy and delight, or they won't.
Secondly, we refocused our strategy in order to play to our strengths. We now concentrate on our core business categories, countries, retail customers and competencies. Thirdly, we reminded ourselves of both our corporate purpose, which is to create brands which make everyday life better, and our values.
Could you be a little more specific as regards what you mean by 'core'?
We have refocused on our baby care, fem-care, and fabric care businesses and have lead innovation in these categories. We have refocused on our $12bn-brands and will have a 13th, i.e., Olay by the end of this fiscal year.
While selling our products in 160 countries, we have refocused on ten core countries, including Germany, where we make 70 per cent of our sales and 90 per cent of our profits. We have refocused on those core retail customers who are really changing the market.
Where are you reaping the real advantages from this corporate refocus?
Our long-term goal was to grow volume and net sales 4 to 6 per cent p.a. In fact we are now growing our top line by 6-8 per cent p.a. even against a weak global economy so we are also building market share.
Some analysts claim that your recovery has been fuelled by the cuts made through your reorganization program and fear that you could run out of steam?
We have been driving our top line. Had we just made cost savings, you would have seen double-digit earnings growth with only modest growth on the top line.
Also, our top line hasn't been driven by dumping prices. P&G still sells most of its brands at a premium, and continues to cover the middle and the upper end of the market. Finally, I should point to our strength in innovation which is the lifeblood of any successful brand manufacturer and its best defense against own label.
According to the American consumer research institute IRI, we are industry leader in delivering new products to the USA and a number of other countries. One example would be the osteoporosis drug we introduced about three years ago which already sells over $600m p.a. and is heading for a billion dollars in sales.
Such innovations reassure analysts because they drive top line in a sustainable way. In our industry good innovation doesn't just hit in one year, it drives your top line for several years.
How are you securing innovation flow?
We believe in an open market place for ideas and innovation. In our industry we are one of the biggest investors in R&D, and our view is that we can make that investment much more productive if we open our doors to outside ideas and innovations.
There are a number of technologies we brought in from the outside, and, in the case of SpinBrush, even bought the whole company. Last year we formed a partnership for a new drug to treat diabetes.
We're also promoting inter-company know-how exchange e.g. the white strips in our oral care business are a combination of the technology that came from our paper business and a mild, safe chemistry that came from our fabric & homecare business.
P&G products demand a premium on a market that is in recession. How can you stop consumers turning towards cheaper own label products?
We are in the business of delivering superior consumer value, and if our brands fail to do that, she won't choose them. We are therefore moving the center of gravity of a number of our brands downwards. So you will see in our washing detergent, baby care and fem-care ranges that we are covering more and more price points.
In the USA and Canada, our starting price for a shampoo is now 99 cents and we go all the way up to $7.99, i.e., we bridge the gap between private label price levels and those where hair salon prices begin.
Ideally, I should like our opening price point in retail stores to be at the premium private label level and our top price to be at whatever level selective retail channels sell our products because that meets virtually all of the consumer needs.
That's much easier said than done…
We're not there in all our categories yet, but that's our intention.
How big a problem for you is it that your retail customers with their growing own label programs are also increasingly becoming your competitors?
I think own labels are good for us because they keep us on our toes in terms of value. It all depends on the retailer's strategy. We are the perfect complement to retailers with strong private label programs.
If the private label program aims to build the retailer's brand equity as well as to serve and delight shoppers, then I think that is how they should be using their private label program. But, unfortunately, too many retailers still use their private label programs exclusively as a means to boost their gross margin.
This doesn't make financial sense because such retailers forget to look at their return on cash invested and end up in a confused situation where they don't really understand what the role of their own private label is.
In the end, we believe in consumer choice and prefer those retail formats which deliver choice. Those retailers who don't are by definition asking the shopper to go to more than one retail format.
You are widely credited in the financial community with having restored focus on P&G's biggest brands. What role do purely local heroes play within your company?
If you define global brands as those which sell in 100 or more countries, we only have three: Pampers, Pringles and Pantene. But even in fabric care half the world is "Ariel" and half-the world "Tide".
In fem-care the leading brand in maybe 60-70 per cent of the world is "Always", but elsewhere it has other brand names. In fabric conditioner it's "Lenor" or it's "Downy". So brands always have strong local appeal.
How broad-shouldered can you make your global brands?
We believe that the consumer suffers from more choice than she really wants so we tend to try to simplify her choices and categories. When I joined the company in 1977, we were selling 15 laundry brands in the US with a market share of 45 per cent, today we sell six and have 60 per cent.
So I think we have demonstrated that, if you simplify consumer segmentation and the brand choice, you actually grow faster.
How about local brands which are struggling for market share as some are, for instance, in Germany? Are local disinvestments conceivable?
We're very persistent. A good example of this is Pantene where we had to keep on trying before we made a success of it. At first, it didn't take off in the US, but was popular in Taiwan where they figured out the simple idea that pro-vitamins make hair healthier and shinier.
We're going to persist with Pantene in Germany because we know the product is preferred in blind tests, so we simply have to work on improving our marketing. As Pantene is very advertising-sensitive, we think that it will be a success once we get the advertising copy right.
What do you intend to do with the rest of your hair care portfolio in Germany?
We're going to fill out our hair care portfolio and focus on "Head & Shoulders". In fact it's doing considerably better than many retailers realize because it's one of the most productive SKUs in the entire category.
Once the Wella acquisition closes, we will build our brand assets and test some of our Clairol brands, as we are always looking for brand avenues to connect with the local market. We are very confident in this respect because we consider our technology program in hair care is quite good.
Partly for historical reasons, and partly due to local competition, we are five to ten years behind where we want to be in western Europe compared with the States, but we shall catch up quickly.
How about your detergents in Germany?
The other thing we do, if we struggle, is to look at alternatives. That's why we introduced "Mr. Proper", which I am very hopeful about, as I believe it is an underexploited asset at P&G. I grew up in the 50s watching "Mr. Clean" commercials and can still remember them.
It's a brand that resonates with consumers around the world, and we've under-exploited it. So it's a very important test for us because, if it works here in Germany, you will see the brand in other markets.
Are you also looking for an alternative to Vizir?
As persistent as we are, we are very pragmatic.
How about Pringles, which is big in the States, but relatively small in Germany?
We had some good launches in a number of countries, but failed to follow up with strong marketing, new flavors, and new sizes for different occasions. But we've got that going again now.
Pringles is a brand that's novel, unique and a lot of fun. When we market it well to retailers and consumers, the brand goes well, and when we don't, it stagnates, so shame on us, if we don't get Pringles right!
How can P&G get retailers away from unproductive discussions over pricing & terms towards joint-value creation?
There are a lot of retailers out there who believe that the pie is shrinking and who want to carve out a bigger piece of pie, usually at the expense of the manufacturer, but I don't think they will be the winning retailers.
The winners will be those who think about how they can create a bigger pie and provide better value for their shoppers, while benefiting both themselves and hopefully also those manufacturers who serve their strategy. We also believe in consumer choice so our goal is to win with those retail customers who offer more choice.
However, we still want to work with those retail customers who have only a limited distribution format and who usually also place more emphasis on private label, because if they list our brands there will be more consumer choice. Hence we are working with discounters to expand our distribution and presence.
That sounds like one price list for one retailer and one price list for another?
We have only one price list and are very public and transparent about it. Some think it naïve and a disadvantage; we see it as an advantage and good business to boot.
I can't tell you how many retail CEOs have called me after acquiring a competitor to say how surprised they were to find that we really do have one price list and set of terms. Because they always think somehow the other guy is getting a better deal.
How can you assist retailers with their international expansion?
With one price list you can go anywhere in the world and retailers understand that when they trade with P&G they know what they are trading with. The other thing they can count on is that that our brands will be wherever they go and that these brands will be leaders in their categories and that we'll invest in innovation.
This is important because what retailers are really worried about is their top line. In each new country they are permanently asking themselves where they can get organic growth for their company. This is where we can help them.
Despite buying a number of larger companies during the last four years, if you net out our disinvestments, less than ONE per cent of our annual growth has been generated through acquisitions. In fact, 2 to 3 per cent of our growth has come from organic innovation.
What kind of a boss are you?
I think I'm very focussed and do not fear making decisions. I've tried to help the company refocus on its core. I am very involved in the selection of the company leadership. I'm also a tracker and a measurer so every month I go through whether we are on or off track and work on what's off track.
Then I am a delegator. There is absolutely no way that I can possibly understand, for instance, the German market one per cent as well as local management.