Great Companies: Procter & Gamble
 
A couple of weeks ago I bought the first stocks I have bought in a long time. I did not invest much, just enough to get my toes wet and begin watching the market. Any investing I do is always for long-term capital gains. My method, for what it’s worth:
 
1.     List my favorite long-term companies. This list contained 19 companies. With more time and thought I probably would have added a few more, but I certainly covered the top ones on my list.
2.     Compare their Price/Earnings ratios, looking for companies that appear underpriced to me.
3.     Compare where they stand along their stock price range for the trailing 52 weeks. In other words, if they were near the bottom of their range, that is good; if they are near the top, less good.
4.     What percent they are off from their 52-week high. Again, the more they are off from their peak – assuming I still believe in the company – the more attractive they were to me.
 
From these comparisons, with most of the emphasis on where they are in their 52 week range, I bought four stocks: Caterpillar, Deere, Walgreen’s, and Procter & Gamble.
 
To know how I feel about Walgreen’s, read my post here: http://hooversworld.com/archives/2803.
 
Caterpillar and Deere, while in a rough patch now, are the best in the world at what they do; they are great American manufacturing companies who know how to make the best products, often with American labor, sometimes even unionized labor; they are global companies and big exporters; and they stand to prosper as the US and the world invests in infrastructure projects. These companies were both off over 40% from their 52-week highs, and only about 35-40% of the way up from their bottoms toward those highs. (Another long-term favorite, Kenworth and Peterbilt truck-maker Paccar, was not nearly as battered in the market so I went with these two instead.) These two stocks have done well in the short period since I made my investments.
 
And lastly, P&G, while only 24% off its high (at the time I did my research), has been harder hit than some of the other great consumer product companies: Coca-Cola off 12%, Johnson & Johnson off 16%. PepsiCo, off 25%, was a close runner-up for my investment decision, but its PE was 17.5 vs. 12.8 for P&G which seemed like perhaps too big a premium for PepsiCo. 
 
Since I made my investment, P&G has reported down sales and earnings, and is the only stock among the four I bought that I have lost money on, as of this writing. It closed at $51.46 on August 6, 2009. This is down about 7% from where I bought it.
 
This of course is the real test as to whether I believe in a company or not. Is this really is a great, lasting company? When the market shudders or the stock drops, should I run for cover and sell my stock? Or do I hang in there with faith and confidence?
 
My reaction is that “Maybe I should buy some more P&G.” So why do I believe in P&G?
 
First, it has established an incredible track record. Founded in 1837, this year makes number 172. Few companies make it to 50 years, let alone 100. And P&G has been very profitable for almost all of those many years. 
 
Second, in my observation of thousands of companies, one of the ways to increase your likelihood for such a long life is to make mass produced, branded, inexpensive consumer products. The kinds of things people use up and buy over and over again. Soap, toothpaste, beer, soft drinks, candy bars, cigarettes, bandages, toilet tissue, aspirin, coffee, and razor blades are typical examples of the kinds of products in which you can build brands that last many years if managed with loving care. Even if you come “off track,” it is possible to get back into a leading marketing position if you change management and get someone smarter back in. That’s why Johnson & Johnson, Colgate-Palmolive, Church & Dwight, Nestle, Coca-Cola, and PepsiCo were also on my favorite companies list.
 
Third, and most important, within that intensely competitive world, P&G has the longest history of being smartly managed. The company is known for its marketing power and prowess, but a study of the details shows that technology matters as much as marketing. P&G has always been committed to making better products – shampoos, soaps, and detergents that work better.
 
P&G is reported to have a greater sense of history than most companies – they keep files on their marketing successes and failures and do not hesitate to look back 10, or even 50 years. Think how much they can learn from the times they introduced innovative breakthrough products, like the first successful detergent (Tide, 1940s) and the first fluoride toothpaste (Crest, 1950s – which conquered historic leaders Colgate and Pepsodent).
 
P&G does not drop the CEO because they have a bad quarter or even a bad year. I believe their average CEO tenure must be around 10 years.
 
P&G at one point was very troubled as the old coupon system went into disuse and “everyday low price retailers” like Walmart wanted good prices on each shipment, rather than a bunch of promotional specials and advertising offers. P&G weathered this revolution in excellent shape, actually increasing profitability at the same time that Walmart became their most important customer, and they became one of Walmart’s most important suppliers (some of Walmart’s highest product market shares are in key P&G categories like paper towels).
 
P&G got a bit sleepy in the 1990s, but then a new CEO named A.G. Lafley reconnected them to their customers. Putting customers first is always what pays off, and he understood that. The best stories are in the Fortune article reprinted below, which is an excerpt from a book by Lafley and management consultant Ram Charan called The Game Changer. The Fortune article is one of my all-time favorite marketing articles. It is in line with one of my sayings, “You can never know too much about your customers.” I think Lafley was one of the most impressive Fortune 500 CEO’s of the 2000’s.
 
My greatest concern during his reign was his acquisition of Gillette, in one of the biggest consumer product mergers of all time. I think highly of Gillette, but mergers make me nervous – they often take management’s eye off the ball, call for enormous resources going into cultural integration, and usually do not pay off as much as management expects. Often they are more about ego than about what is best for the customer. So far, thankfully, this merger seems to be working out okay.
 
Now Lafley has handed the CEO slot to a new fellow, but he remains Chairman for a while. Hopefully Lafley has trained his successor well.
 
Today P&G is finding that its premium brands like Tide – although still a $3 billion brand which holds about half the market in the US – are under pressure from less expensive competing brands, and from private label “store brands” at Walmart and other retailers. P&G has taken a fair amount of bad press, and they are dealing with these challenges. This situation is covered in excellent manner in the second article pasted below, from the front page of the 8/6/9 Wall Street Journal.
 
The Journal article reconfirms my faith in the company, how seriously they take their products and their customers, how much care they put into their decisions, and how much respect they have for their brands. (As opposed to so many companies which continually reshuffle their brands, buying and selling them like mere properties on a Monopoly board.)
 
In such times as these, there is tremendous pressure to cut corners, lay off masses of people, cut spending to the bone and beyond, and as a result make stupid mistakes. 
 
When times improve, I do not believe the fundamental nature of customers will have changed. In many product categories, people who may have cut corners during the recession will return to buying better quality or more satisfying products. If they move to a lower priced product and find out it serves their needs just as well as your higher priced product, you are in deep trouble. But if your product is truly superior and you can demonstrate that to your customers, they will come back when times are better. People don’t really care about price, they care about value – what they are getting for their money. If you offer good value, whether you are Hyundai or BMW, whether you are Family Dollar or Neiman-Marcus, you will get your share of business over the long run.
 
Decisions like the one described in the Journal article – about whether to “cheapen” Tide or not, and if so, how to do it gracefully – are at the core of any business. Fearing change and not taking any chances does not work very often, but neither does turning everything upside down and rewriting all the rules.
 
I believe that, with important globally-known brands, with leadership positions in categories that households use every day, with strong relationships with global retailers, and with pride in their 172-year heritage, Procter & Gamble may go on to another 100+ years of success. At least that’s where I am putting my money. If I’m right, this could be a great time to stock up on their stock.
 
[At some point I plan on writing a major post about my long-standing studies of “What are the greatest American companies? What are the criteria to be used in determining the best? What are the causes that lead a company to be one of the best?” And I expect P&G to be one of the companies I talk about the most.]
 
 
 
 
FORTUNE:
Last Updated: March 10, 2008: 12:53 PM EDT
 

‘The consumer is boss’

 

Back in 2000, P&G was stumbling; earnings, execution, and morale were all poor. Now this historic company, founded in 1837, is on a roll. How did it regain its footing? One key: getting to know its consumers better.





A.G. Lafley took over the CEO job at P&G when the company was stumbling.

Management consultant Ram Charan
FORTUNE Most Admired Companies 2008
(Fortune Magazine) — In this adaptation from their forthcoming book, The Game-Changer, A.G. Lafley and management consultant Ram Charan describe the principles of innovation and give a grass-roots example of how listening to the bosses in this instance, Mexican housewives – can pay off.
The first section describes, in Lafley’s own words, the difficult circumstances he faced on becoming CEO of Procter & Gamble (PG, Fortune 500) in 2000. The rest is the work of both authors.

A.G. Lafley: A few minutes before a business meeting in California on June 6, 2000, I received an unexpected phone call from John Pepper, former chairman and CEO of P&G. John got right to the point: "Are you prepared to accept the CEO job at P&G?"

I was stunned. Just the afternoon before, I had been speaking with chairman and CEO Durk Jager about our plans.
"What’s happened to Durk?" I asked.
"He resigned."
"Why? What happened?"
"I don’t have time to go into that now. I just need to know whether you’re prepared to do the CEO job for P&G."
"Of course I am."
"Then get on a plane as soon as you can and come directly to my office when you arrive back in Cincinnati."
"Okay." I turned to my P&G colleagues and told them I had to leave.

On the plane, I considered this sudden turn of events. I tried to put first things first: What would I need to do in the next 24, 48, 72 hours? What about the first week, first month?

No question, P&G was struggling. We’d issued a big profit warning in March, and the business was still performing below expectations. We’d moved to a new global-business-unit-led strategy. We’d totally changed the organization structure. We were adjusting to more global competition, a faster-changing industry landscape, and the challenges of the Internet. In the midst of all this, we’d raised the company’s goals to unprecedented levels. In hindsight, we were trying to change too much too fast.

Job one was to determine the state of P&G’s business. When I began digging into the numbers, I found that we were in worse shape than I had suspected. On June 8 we issued another profit warning, and the stock fell further. We had lost more than $50 billion in market capitalization in six months.

I knew it would take another three to six months to know whether we had bottomed out. In the meantime, I had to retain key people. I talked one-on-one with each leader to come to a clear understanding of the business challenges and opportunities. I encouraged them to compete like hell externally but to collaborate like family internally. Just about everyone signed on to this vision. Proud P&Gers, we were embarrassed by recent results. To turn the company around, we focused on a few simple, powerful things.

1. We put the consumer at the center of everything we do. Three billion times a day P&G brands touch the lives of people around the world. Our goal is to delight consumers at two "moments of truth": first, when they buy a product, and second, when they use it. To achieve that, we live with our consumers and try to see the world and opportunities for new products through their eyes. At P&G the CEO is not the boss – the consumer is. In ways large and small, we were not living up to the "consumer is boss" standard – and we were paying for that lapse.

2. We opened up. Long known for a preference to do everything in-house, we began to seek out innovation from any and all sources. Innovation is all about connections, so we get everyone we can involved: P&Gers past and present, customers, suppliers, even competitors. The more connections, the more ideas; the more ideas, the more solutions. And because what gets measured gets managed, we established a goal that half of new-product and technology innovations have some contribution from outside P&G – such as licensing or buying a technology, finding a partner, or making an acquisition. We are already beyond that figure, compared with 15% in 2000.

3. We made sustainable organic growth the priority. Organic growth is less risky than acquired growth and more highly valued by investors. This strategy also suited our decision to increase the emphasis on core brands like Tide and Crest, where adding a few points in market share can mean hundreds of millions in new revenue.

4. We organized around innovation. To get organic growth, we needed to innovate. Innovation enables expansion into new categories, allows us to reframe businesses considered mature, and creates bridges into adjacent segments. By running a disciplined development, qualification, and commercialization process, we have proved that we can manage a large portfolio of innovations in various stages of development. Innovation is at the core of our business model.

5. We began thinking about innovation in new ways. We started from the premise that it is possible to run an innovation program in much the same way we run a factory. There are inputs; they go through a series of transformative processes, creating outputs. It is possible to measure the yield of each process, including the quality, the end product, and the financial and market results. We also developed tools and know-how to manage the risks of innovation.

A.G. Lafley and Ram Charan: Great innovations come from understanding the consumer’s unmet needs and desires. Regardless of the market, innovation must be consumer-led. That is not the same thing as consumer-decided. As Henry Ford once put it, if he had listened to the marketplace, he would have built a faster, cheaper horse. He understood that what people really wanted was a better way to travel. Consumer insights lead to innovation opportunities. You must develop an appreciation for who your consumers are and how they live, to know their needs and also their aspirations. Only then can you figure out how to deliver a product that can improve their lives.

You might think that P&G, of all places, would know that. After all, it created the first market research department and has long been acknowledged for the almost relentless way it seeks knowledge of consumers. For a long time, though, P&G did not really see consumers as active participants in innovation.

Their role was essentially passive: responding to stimuli in experiment after experiment to provide "quantitative research data." P&G was talking to a lot of people, but not listening to them. The company also tended to narrow in on only one aspect of the consumer – for example, her mouth for oral-care products, her hair for shampoo, her loads of dirty clothes for laundry detergents (most P&G consumers are women). P&G had essentially extracted the consumer (and at times a particular body part as well!) from her own life and focused on what was most important to the company – the product or the technology.

Recognizing that it needed to look at consumers more broadly, P&G has moved away from traditional behind-the-mirror focus groups to more immersive research techniques, increasing its spending on such research more than fivefold since 2000. How does it do this? Among other things, thousands of infants and toddlers crawl through the Baby Discovery Center every year as P&G researchers watch how infants interact with their mothers, how they move, how their diapers work.
 
There are also specially designed innovation labs. One looks like a grocery store, another a drugstore, and another the different rooms in a typical middle-class American home. Consumers might be asked to come in and be given $100 to spend. By watching how they navigate the aisles and what catches their eye, the company is able to unlock deeper insights into their behavior. The Feminine Care unit once even created a club for teenage girls to get them to relax and talk about menstruation.

LEARNING FROM CARLOS AND MARTA

This kind of research is particularly important when P&G ventures outside the U.S. The most promising sources of business opportunity these days are in countries that are not yet rich but are growing fast, such as China, India, Russia, Mexico, and Brazil. P&G needs to listen to these bosses particularly closely, because it does not know them as well as its neighbors in Cincinnati.

Through a gate on a back street in Mexico City, into a courtyard, and up two flights of stairs is the modest two-bedroom apartment of Marta and Carlos. Marta, 32, is a stay-at-home mother of two basketball-crazy girls; Carlos is an accountant at a car repair shop. Their home is no larger than a good-sized hotel room, with a tiny kitchen and a dining room just big enough to hold a table and four chairs. There are no closets, so the couple has put up wooden shelving for the family’s clothing. The walls are covered with family pictures; on the door is a printed prayer and two crosses. This home is truly their castle. They saved for 12 years, living with Marta’s parents, to buy it. Marta takes meticulous care of every inch: Even the family toothbrushes are kept in order, snapped to attention by a device that hangs on the wall above the sink.
 
Marta is P&G’s kind of consumer. In fact, she is a P&G consumer – Ariel laundry detergent, Downy fabric softener, and Naturella sanitary pads.

Carlos makes the equivalent of about $600 a month, making the family part of what P&G terms the lower-income consumer market – households with income between $215 and $970 a month. These families account for about 60% of the country’s 106 million people. The poorest 25% of Mexicans do not have the disposable income to be much interested in what P&G has to offer; as for the top 15%, since P&G entered the country in 1948, its products have done pretty well.

But for a time the company was not as successful with the middle 60%, which is where the most population growth is. "We tend to hire from relatively high [Level A] socioeconomic classes," notes Carlos Paz Soldán, vice president of P&G Mexico and Central America, but most consumption comes from C and D household incomes. Continues Paz Soldán: "We were pretty ignorant about them in a deep way." That ignorance represented opportunities lost. "We have to win in this segment today," the P&G Mexico office concluded in an internal study. It went on to ask, "What are the business opportunities we have with them, and why?"
 
That was the right question, and P&G’s past failure to think it through has cost it. In one case, innovation did deliver a better product – but it still flopped because it didn’t deliver what consumers wanted. Launched in the late 1980s, Ariel Ultra laundry detergent was concentrated so that women needed to use only half as much detergent per load. P&G saw that as a significant benefit because most lower-income households have limited storage. Ultra’s enzymes also delivered better cleaning. P&G was convinced that it had a winner.

The bosses told them otherwise. For one thing, Mexican women didn’t believe that they could really get their laundry clean by using so little. For another, Ariel Ultra didn’t foam. Many members of lower-income households do manual labor and are acutely conscious of odor; they considered foam a signal that their perspiration was being rubbed out. In a matter of months, Ariel Ultra was gone.

One manager put it bluntly: "We could have understood. We should have understood. We didn’t, so we failed." Paz Soldán drew the correct conclusion: "We had to get out of our offices and become immersed in the real world and daily routines of lower-income consumers and in the stores of the retailers we partner with."

Starting in about 2001, P&G developed the "consumer closeness" program to create such experiences. "Living It" enables employees to live with lower-income consumers for several days in their homes, to eat meals with the family, and to go along on shopping trips. In a related program, "Working It," employees work behind the counter of a small shop. That gives them insight into why shoppers buy or do not buy a product, how the shopkeeper stacks the shelves, and what kind of business propositions are appealing. The idea behind Living It and Working It was to sit down with the bosses and to hear what they needed, even if they couldn’t articulate it directly.

Maybe that sounds vague, even touchy-feely. In feet, P&G employees report that those have been profound experiences for them. But that is not why these programs exist; P&G created them to help create new business – and it works. Downy Single Rinse proves that such understanding can, in feet, be translated into profitable products.

THE BOSSES SPEAK UP

In the early 2000s the Mexican market share for Downy fabric softener was low and stagnant. P&G wasn’t sure what could be done about it, since the assumption was that people who didn’t have modern washing machines didn’t use softener. Not wanting to compromise the Downy brand by dropping the price too much, P&G decided to try to come up with something specific to the needs of the lower-income consumer.

One of the things P&G people notice – often to their shock – by Living It and similar experiences was the problem of water. Before the Europeans arrived in the 16th century, Mexico City was surrounded by a lake; now the metropolis is parched. Suspicion of drinking water is high. Carlos and Marta buy bottled water, as do a large proportion of families who make much less than they do. Millions of rural women still lug buckets back from wells or communal pumps. In the cities, many have running water for only a few hours a day. Most homes do not have fully automatic washing machines; even fewer have dryers. All this makes doing the laundry a seriously draining chore.

At the same time, lower-income Mexican women take laundry very, very seriously. They cannot afford to buy many new clothes, but they take great pride in ensuring that their family is turned out well. Sending your children to school in clean, ironed clothing is a visible sign of being a good mother. On Marta’s wooden shelves and hangers, every single item, from jeans and T-shirts to Carlos’s suits, is tautly ironed – and she is the rule, not the exception. P&G found that Mexican women spend more time on laundry than on the rest of their housework combined. More than 90% use softener, even women who do some or all of their laundry by hand.

"By spending time with women, we learned that the softening process is really demanding," recalls Antonio Hidalgo, P&G brand manager for Downy Single Rinse at the time of its debut in March 2004. A typical load of laundry went through the following six-step process: wash; rinse; rinse; add softener; rinse; rinse. No problem if all this is just a matter of pressing a button every once in a while.
 
But it’s no joke if you are doing the wash by hand or have to walk half a mile to get water. Even semiautomatic machines require that water be added and extracted manually. And if you get the timing wrong, the water supply might run out in the middle. "The big aha!" says Paz Soldán, was discovering how valuable water was to lower-income Mexicans. "And we only got that by experiencing how they live their life."

Putting it all together, P&G knew that Mexican women liked to use softener; they had high standards for performance; and doing the laundry was arduous and time consuming, and required large amounts of water. These ideas were put through the wringer, as P&G launched the kind of large-scale quantitative research it is known for. They stood up to the scrutiny.

Having identified a problem (making laundry easier and less water-intensive), P&G turned to the labs for an answer. Their solution: Downy Single Rinse. Instead of a six-step process, DSR reduced it to three – wash, add softener, rinse saving enormous time, effort, and water.

Launched in 2004, DSR was a hit from the start. Hidalgo recalls when he told one mother he had worked on DSR, her face lit up. "She thanked me," he says, with satisfaction, "and asked me to please bring more of these kinds of products to her life." Hidalgo is, of course, trying to do just that.

VALUE, NOT PRICE

Particularly when innovating for lower-income markets, it is important to think about value, not price. Lower-income consumers are price sensitive, of course, but they will pay for products if they deliver a benefit they consider worth the money. By listening to women like Marta, P&G created a trusted brand and a profitable product. Marta positively purrs when she recalls how her nieces tell her, "Your clothes smell so good."  To top of page

First Published: March 10, 2008: 5:01 AM EDT
 
 
 
 
 
  • The Wall Street Journal
  • AUGUST 6, 2009
Tide Turns ‘Basic’ for P&G in Slump

DALLAS — Procter & Gamble Co., under assault by penny-pinching consumers, has quietly rolled out a version of Tide detergent that the company freely admits isn’t "new and improved."
 
The product, Tide Basic, is currently for sale in about 100 stores throughout the South. It lacks some of the cleaning capabilities of the iconic brand — and costs about 20% less. Its very existence is one of the most telling signs to date of how the sour U.S. economy is forcing mass marketers to shift course. On Wednesday, the company reported an 18% plunge in fiscal fourth-quarter profits as sales of its premium-priced brands shrank amid tightened consumer budgets.

P&G Gets Back to Basics

The decision to develop Tide Basic didn’t come easily. For decades, P&G had held fast to a strategy of promoting new features to convince shoppers to pay a premium for detergent, shampoo and other household staples. Then, as cheaper store brands gained traction in the aisles, P&G began offering lower-priced versions of some products — Charmin toilet paper, Bounty paper towels — to suit leaner budgets.
 
P&G agonized over whether to go down a similar path with Tide, its top-selling brand in the U.S. A more "basic" version would balance Tide’s premium prices. It could also help expand its market share, which while dominant, has been slipping. For the four weeks ended July 12, Tide held 41.4% of the liquid laundry-detergent category and 44% of the powder detergent category, both down from a year ago, according to estimates by Information Resources Inc. Figures don’t include data from Wal-Mart Stores Inc.

Executives feared that a cheaper version might cannibalize sales of regular Tide, which accounts for more than $3 billion of P&G’s $79 billion in annual revenues. Marketers at the company have been so loath to sully their prized soap brand that they’ve wrestled with the matter at least eight times in the past three decades.

Last November, two managers at P&G’s Cincinnati headquarters walked into a roomful of executives to gently suggest another try. "Just listen and keep an open mind," Suzanne Watson, an associate marketing director, told them.

More
There was good reason to pay attention. Many people for the first time are clipping coupons, trying cheaper brands and buckling down in ways they never had to before. Economists aren’t sure how long the trend will last. But a recent report from IRI identified a new class of fiscally cautious consumers. Some 52% of respondents said that in the coming year they plan to buy store brands to save money; 47% plan to eat at restaurants less frequently; and 48% plan to use home beauty treatments rather than visit a salon.

In Houston, Jaime Ball, a marketing director for a local apparel maker, says she hasn’t really felt the effects of the recession but has started trimming her spending anyway, cutting down on trips to the mall and resisting impulse buys.

After years of spending $17 on bottles of Matrix shampoo and conditioner, 28-year-old Ms. Ball recently bought $5 Pantene instead. "Buying the more expensive stuff just isn’t as exciting to me — it’s not as important," she says. "I don’t know that you can even tell the difference."

High-End Focus

Her quandary cuts to the heart of P&G’s current dilemma. The 172-year-old company built its fortunes after World War II on Americans’ growing affluence and inclination to equate "better" with a higher price. P&G flooded radio and television with ads promising its products delivered superior performance in everything from teeth cleaning to floor shining. In return, P&G got a superior price.

The approach made household staples out of Mr. Clean cleaning liquid, Crest toothpaste and Tide laundry detergent. P&G sold lower-end brands but gave them scant advertising.

Now P&G’s model is under attack as retailers like Wal-Mart, Target Corp. and supermarket chains nationwide improve the quality and selection of their own brands, tempting penny-pinching consumers to forgo P&G’s pricier products and eroding the giant’s dominant market-share positions.

P&G reported that profits for the quarter ended June 30 fell to $2.47 billion, or 80 cents a share, from $3.02 billion, or 92 cents, the year before. Sales fell 11% to $18.7 billion. Company executives blamed the drop partly on wider price gaps between its brands and less expensive items. During the period, the company said it lost market share in its fabric-care, batteries, and snacks units. In 4 p.m. composite trading on the New York Stock Exchange Wednesday, P&G shares fell 2.79% to $53.91.

In response, P&G is trying to stretch its premium brand names across a wider range of prices. In a single store, shoppers can choose from what P&G executives call a "portfolio," including Olay skin creams that run from $7 to a kit for $68 and versions of Crest toothpaste that range from $2.25 to $4.25. Pampers Baby Dry diapers sell for about 20% less than Pampers Cruisers.

"Every one of our businesses needs a portfolio strategy," says Robert McDonald, a veteran of the Tide business who became chief executive in July. "Before I do anything else, I want to invest in getting our portfolio bigger and broader."

For P&G, Tide Basic is one of the company’s most daring marketing moves to date. "This product brings the enormous risk of tarnishing years of brand loyalty and emotional connections because shoppers start asking, ‘Why have I been spending all this money all along?’" says Eli Portnoy, chief brand strategist with Portnoy Group, a Los Angeles consulting firm. "With Tide Basic, you make price the marketing story, and Tide was never about price."

P&G introduced Tide powder in 1946, just as the spread of automatic washing machines revolutionized the way Americans did laundry. The company heralded Tide as the first heavy-duty synthetic detergent, a technological breakthrough superior to all other soap.

Tide quickly became the No. 1 detergent in the U.S. and its profits fueled P&G’s creation of other major brands, including Mr. Clean, Cascade dish detergent and Crest.

For ambitious P&G employees, the Tide business became a coveted stopover on the way up the corporate ladder. P&G Chairman A.G. Lafley worked on the brand, as did Mr. McDonald, the chief executive.
But last fall as the impact of the housing bubble rippled through the economy, the famous detergent started showing cracks. P&G forecast in October that the coming months would bring lower overall sales growth and profits. In the three months leading to November, Tide’s unit sales posted year-over-year declines as private-label and other bargain detergents sales rose, stealing market share from P&G.

Looking Back at Procter & Gamble Brands

Journal articles on Procter & Gamble brand innovations:
The erosion helped revive the question of whether P&G should again attempt a cut-rate Tide. Ms. Watson, the associate marketing manager, teamed up with Mark Christenson, a Tide brand manager, to try again.
 
Their first chore was to win support from P&G’s Laundry Leadership Team, a council of a dozen executives that oversees the company’s $6 billion North American detergent business. Beginning at 10 a.m. every Thursday, the team bears down on strategic issues for seven hours straight. P&G’s cafeteria delivers lunch.

At the group’s Nov. 6 meeting, Ms. Watson and Mr. Christenson pitched their plan, highlighting P&G’s successful launch in 2005 of cheaper Charmin and Bounty paper towels. The basic versions gradually drew new users while fighting off cheaper private-label products.

"Before we shut this idea down, let’s take some baby steps; we just want to test this," Ms. Watson said.
 
The managers supported the idea but had concerns. Decades of marketing and sales of hundreds of millions of bottles and boxes of detergent had made Tide synonymous with one color, orange. Members of the laundry team were apprehensive over whether a less expensive version should be encased in orange, too.

The council also cautioned Ms. Watson and Mr. Christenson about costs. The pair couldn’t buy new materials for the detergent and instead had to use the company’s existing fragrances, whitening agents, stain-fighting enzymes and other technologies.

The decision to go with a test fell to Alex Tosolini, a P&G vice president responsible for its North American fabric-care business, which includes detergents.

"The first question was powder versus liquid," says Mr. Tosolini. About 75% of Tide’s detergent dollar sales are in liquid, though category-wide sales of powder detergent, which is slightly less expensive, have been increasing during the recession, he says.

Testing powder also carried less risk. "Given the importance of Tide, it’s better to learn first on a smaller segment of the business," Mr. Tosolini said.

In a subsequent meeting with Tide marketers, the packaging discussion focused on whether to abandon Tide’s trademark orange. Shoppers on average spend 45 to 60 seconds in the laundry aisle, devoting just seven seconds to choosing a product, making color a crucial guide for finding the right product, P&G research found.

The group considered yellow and blue, the other colors of Tide’s famous bull’s eye. A handful of other laundry brands used blue but few had yellow. "People kept insisting, ‘Tide isn’t yellow,’" says Mr. Tosolini. "But then we thought maybe it could discourage current Tide users, which is what we wanted."

As the meeting extended past dinner, Mr. Christenson and Ms. Watson suggested naming the product "Tide Basic," mirroring the success of Charmin Basic and Bounty Basic.

Again, red flags flared. The name raised concerns that "basic" contradicted Tide’s high-end image. Huddled over a thesaurus, the marketers found about 25 alternatives, including Just Tide, Simply Tide and Tide Essential. Tide Basico, inspired by a P&G detergent in Spain, might appeal to Hispanics in the U.S. They wrote down all suggestions, including Tidey Up.

Preliminary tests with consumers, held soon after the meeting, included Tide Simply Clean, Tide Basico and Tide Basic. Tests also judged yellow versus orange package mock-ups. Tide Basic, in yellow, won with consumers, who didn’t see Tide Basic as an oxymoron.

By January, Tide Basic was officially a go.

P&G scientists had long focused on concocting "new and improved" formulas, but in recent years had become better at developing low-priced goods for the company’s expansion into developing countries. "Now, some of the biggest innovations in our company are geared toward making products more affordable," says P&G Chief Technology Officer Bruce Brown.

Roll Out

With Tide Basic, that meant reducing features like anti-pilling and color-preservation technologies embedded in regular Tide.

By late June, P&G began stocking Tide Basic in Wal-Mart and Kroger Co. stores across the South, including Baton Rouge, La., New Orleans and Houston. Tide Assistant Brand Manager Lauren Stafford and several colleagues gathered in late July in Dallas to scrutinize the detergent in store settings.

Imitating the approach of a shopper, Ms. Stafford strolled down the laundry aisle. She was struck by how easily she noticed Tide Basic’s yellow boxes. In an orange Tide notebook, Ms. Stafford quickly jotted down the prices of P&G’s powder detergents and those of the competition.

"They’ve got [Tide Basic] down here with these midtier brands, exactly who we’re going after," says Ms. Stafford, pointing to All, made by Sun Products Corp., and Church & Dwight Co.’s Arm & Hammer.
 
In the coming months, P&G will closely monitor these test markets to determine whether Tide Basic can attract new users to the brand without also tempting current Tide buyers. Only then will executives decide the product’s long-term fate.

Write to Ellen Byron at ellen.byron@wsj.com
 

   

    

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