Proter and Gamble might not be the sexiest company out there right now; it isn’t a FANG; it isn’t a start-up; it sells boring consumer products, not technology, and is over 180 years old and not recently released from Y Combinator.
It is precisely the type of company that should be suffering from the headwinds of disruption. Many commentators predicted its demise as its business became under-attack from a wave of start-ups picking away at its brands and their category spaces.
Via: CB Insights
However, despite what the experts were suggesting a few years back, P&G’s financial performance tells a different story as its accelerating share price shows.
Last quarter despite the company facing considerable challenges in critical markets like UK, Australia, and Hong Kong, the company grew organic sales 5% in the quarter and 6% for the first half of fiscal 2020. It also achieved market-beating growth in its core US and Chinese markets. It also had the financial discipline to drive gross profit margin up 2%. As a result, fiscal earnings per share were up 19l% on a constant currency basis.
All this from a company that just two years ago had attracted the attention of activist investor Nelson Peltz who had been highly critical of the management, the lack of innovation, and the lackluster performance.
Peltz benefited from his involvement, and after an angry start, it seems like he provided the stimulus and put some pressure on the company to accelerate the actions that were already underway. For example, consultants, McKinsey had been brought in before Peltz, the rationalization of the brand portfolio to be more focused around daily use had already happened.
So what exactly has P&G been up to deliver these results?
I have identified five areas where the company has focused considerable discipline and attention; some of these are part of a continued evolution of initiatives started years ago, and others are relatively new.
Inspiration
Procter has been extremely good at communicating with both internal audiences and Wall Street what it is attempting to achieve, and they do this in a way that is extremely easy to understand and very clear. The objectives are always the same as the company looks to deliver results across five key measures- market growth, new users, sales, share, and profit. What changes is how that growth happens.
The driver for all of this is about brand superiority- this is the core imperative for innovation and communication efforts. Products have to deliver it, and consumers have to understand it.
The mantra they have been using for the past year or so is Constructive Disruption as the term they are using to describe the disciplined approach they are taking to transformation. The use of the word Constructive is both considered; this is not disruption for the sake of it or disruption without a plan; it is very deliberate and disciplined.
Innovation
While not opposed to buying innovation- as with the recent purchase of women’s grooming brand Billie, the culture has been shifting to internal innovation.
The Ventures Arm or Start-Up Studios is charged with bringing ideas from the outside in and for incubating internally generated business.
The focus for the unit was established by analyzing data from over 2,000 categories, which predicted what consumers would be buying by 2025. The analysis revealed three core targets, city-dwelling millennials, aging baby boomers, and China’s middle class.
It also identified areas of consumer interest-“natural” products, hyperconnected devices capable of anticipating individual needs, and concern about scarce resources, from clean water to personal time.
Layered on top of this to give the Arm its marching orders were specific categories that could be new additions to the business. These are elder care, mental and physical performance, non-toxic homes, menopause, chronic skin conditions, environmental sleep enhancement, male wellness, and side-effect-free pain management.
One of the first products to come out of this unit could be a range of non-toxic insecticides called Zevo. For this team, the start-up mentality means they do their product testing and marketing with team members happy to adapt to taking on multiple roles. The person responsible for perfecting the spray’s particle size also translated product labels into Spanish and worked on some Instagram ads for a DTC trial.
Much of the internal innovation process has been inspired by the Lean Start-Up, which has forced a changed mindset on the company to think first about the problem before the solution, which is a challenge for a company that all about the answer.
The challenges the company faces in successful implementation are predominately cultural; the existence of a consensus culture where ideas are shot down before they have a chance to breathe and the demands to predict volume estimates, rather than relying on consumer passion and interest as the initial sign of potential.
Estimates suggest there are around 180 internal start-ups currently in operation at Procter.
Finally, on the innovation front, CES has been used in recent years to showcase the fusion between technology and consumer products.
This year- they highlighted a heated razor from Gillette, a smart toothbrush from Oral-B, an electronic scent dispenser, and a piece of tech for Pampers called Lumi, which for $349 allows parents to monitor their baby’s sleeping and eating times and other key metrics.
Lumi-Baby Tech
These are halo products that show the potential of these technologies to help consumers get more engaging experiences and, in some cases, useful data that can make lives healthier and better.
Insight
“Increasingly, with the pace of change in technology, changing consumer needs, vast amounts of data, competition, and business leaders’ expectations – what’s needed from today’s analytics and insights professionals is dramatically different than just a few years ago. In a world of exponential change, the new need and expectation call for a radical transformation in the speed, cost, and quality of insights. “
Kiri Singh- Head of Analytics and Insights
The Insight function is not some nice to have or occasionally used and accessed piece of the business. It is fundamental to uncovering real actionable insights that can drive growth.
The insights process starts with an identification pf the business problem or opportunity that is trying to be solved. After this comes the learning and experimentation phase followed by the delivery of actionable insights.
P&G has access to very detailed and granular geo-demographic data so it can look at similarities and differences at a household level.
For qualitative insight, it can fast track consumer responses in the form of videos and emails in a matter of days rather than weeks that the typical focus group process can take weeks.
And instead of these insights being fed into a report that could gather dust on some shelf, the important element is being able to make actionable recommendations that can be taken to can alleviate the original business problem.
Experimentation
With the world of marketing communication influx, the smartest thing a company can do is to place smart bets recognizing the changing landscape allows them to reach consumers in new ways, but also in some very old ones.
For example, on one hand, it is partnering with National Geographic for series about extreme poverty produced by Radical Media or getting John Legend to write a song for skincare brand, it has also been making infomercials
Efficiency
The company is fastidious about cost cutting and is now onto its second Five-Year cost cutting plan to cut $10billion of costs out of operations. It is looking to drive efficiencies in the supply chain, but also in its advertising and media.
P&G is the world’s largest advertiser spending $7bn a year.
The mission with the media efficiency side of advertising has been to drive away from the wastage of a mass shotgun approach to generating mass reach with more precision by using data and digital technologies.
Instead of relying on the FANGS for data that they usually keep to themselves, Proter has built out its own 1.5 billion and growing database which helps it to find likely buyers and reach them efficiently. In China, they buy 80% of their media this way
The other advantage of the database is that because it contains multiple variables on each consumer and one can assume that both the size of the database and the number of variables is growing over time, there can be a shift away from demographics to what they call Smart Audiences, P&G has developed over 350 of these audiences, which include, first-time washing machine owners, first-time moms, and millennial professionals.
When it comes to working with agencies and driving efficiencies- it has halved the number of agencies it works with from 6k to 3k. It is also experimenting with new models like “Fixed and Flow” which allows it to bring creative ideas from small shops around the world and run that work through holding company networks.
Then there is Woven- an agency set up for P&G fabric care brands that bring personnel from Publicis, Leo Burnett, Grey, and Saatchi together to work with an in-house media team. Essentially creating one agency when there were previously three.
It is also bringing more work in-house- it buys around 30% of its media in-house and invited its in-house media team to pitch against media planning buying shops for business.
It recently brought the Secret deodorant brand creative inside the company where for a recent commercial The Producer was the Associate Brand Director and the Creative Director was the Brand Manager. It produced a commercial for 1/10th of the cost and in one month instead of five.
Sustainability and Purpose
Making products for daily use creates a sustainability challenge that the company knows it needs to take on and has set itself some aggressive goals to reach by 2030. : P&G manufacturing sites will cut greenhouse gas emissions in half and will purchase enough renewable electricity to power 100% of its plants. The company will also source at least 5 billion liters of water from circular sources.
Today, Procter’s factories detergents that do not meet company specifications sent to car washes. Scraps from feminine care products become cat litter, and old shipping drums turned into school benches.
Procter’s brands have to define their BRAND AMBITION. These articulate their social or environmental commitment, but it has to measurable, fit the brand equity and brought to life through tangible actions.
This means brands need a plan to make their packaging more recyclable, promote sustainable behavior in their communication, commit to ingredient transparency, that ingredients are responsibly sourced, and ensure the plants producing the products meet goals on climate, water, and waste.
In the case of Pampers- Brand Ambition and actions are articulated as follows. “to give millions of babies the opportunity for happy, healthy development, collaborating with healthcare professionals, parents, and NGOs.
As part of P&G’s Brand 2030 Fundamentals, Pampers is introducing its ‘7 Acts for Good’, including the following concrete actions: Keep innovating towards more sustainable diapering solutions to progress towards 30% less1 diapering materials used per baby over their diapering time.
By innovating and using more effective materials, the brand has reduced the average weight of its diapers by 18% already in the past three years, with the same trusted dryness—lead recycling for diapers and wipes and committing to launch recycling facilities in 3 cities by 2021.
In partnership with UNICEF, Pampers has helped eliminate maternal and neonatal tetanus in 24 countries. In March 2019, one more country – Chad, has now removed this disease, resulting in an estimated 880,000 newborn lives4 saved since 2006.”
And an initiative inspired by the challenges of Cape Town, South Africa, where water use is restricted to 50 liters per person/day. The women of the city cut their hair because it meant used less water to wash it. This was the motivation for the company to introduce the Waterless range of hair care.
Procter has undoubtedly proven that its various initiatives have paid financial dividends in the last couple of years, turning the company from a threatened legacy player to one with a new level of mojo.
But the challenge is to maintain the level of performance in upcoming quarters when the comps get harder.
Work is needed around the efficiency vs. creativity debate.
There is also the danger that cultural experiments with creativity might be interesting on paper but once realized are not especially entertaining. The experimentation story seems nice but is questionable if it ends up with work that is not compelling.
The drive to communicate superior performance could result in a lot of left-brain work that fails to engage emotionally.
Senior marketers at P&G would be advised to take a look at the IPA’s book Lemon, which provides some evidence of the rise and subsequent poor performance of TV advertising with a left-brain focus.
Innovation is going to be crucial, but it is only going to happen at a sufficient scale if the corporate culture can give executives the freedom to create and nurture ideas without significant constraints.
They are also going to need to do all of his while facing some economic headwinds and continued pressure on their grooming business and on core brands like Ulay and Pampers (because of the declining birth rate) in the US.