|BUSINESSWEEK ONLINE : SEPTEMBER 27, 1999 ISSUE|
P&G Gives Birth to a Web Baby
Its reflect.com melds P&G's labs and Silicon Valley savvy
Last February, a group of executives at consumer-products powerhouse Procter & Gamble Co. (PG) had a bold idea. They wanted to start selling cosmetics and hair products customized to the looks and preferences of each woman who shops on the Internet. Sounds ambitious, even for the world's third-largest beauty-care provider, with sales of $7.5 billion on such brands as Max Factor, Vidal Sassoon, and Noxema. But the team went to work and, in just a few months, they came up with a business plan, developed a technology to customize products, and created a prototype Web site. They even picked a catchy name for the new venture: reflect.com.
But something still wasn't gelling. Sure, the Cincinnati-based giant had plenty of experience peddling everything from Pampers to Crest on its three-year-old P&G Web site. But reflect.com wasn't about repackaging the company's old brands for new online shoppers. Its goal was to introduce makeup and shampoos so personalized that no two individuals would get the same items. Not even online supermerchant Dell Computer Inc. (DELL), which customizes its brand-name PCs, goes that far.
So P&G's top brass started wondering how a far-flung $38 billion behemoth could best a flood of nimble, tech-savvy upstarts whose only mission in life is to win on the Web. And how could the company avoid the fate of such recent corporate dot.com flops as Toys 'R' Us Inc. (TOY), which struggled with conflicts between its stores and online efforts? The answer: become one of the nimble upstarts. ''We wanted to create conditions common in the most successful Internet companies,'' says Denis Beausejour, P&G's worldwide vice-president of marketing for beauty care and a chief backer of reflect.com.
The result is a corporate cyber-venture like no other. On Sept. 13, P&G announced that it will launch reflect.com, a startup that will bypass P&G's 162-year-old ways and surrender itself almost entirely to the frontier culture of Silicon Valley. It's part of Procter's extensive corporate makeover that will get new products to market much faster. For starters, P&G is teaming up with Institutional Venture Partners, a Menlo Park (Calif.) investment firm famous for backing Net pioneer Excite Inc. IVP is kicking $15 million into the $50 million venture (and getting a 15% share), compared with P&G's $35 million. And now that the upstart has been spun out into a separate entity, reflect.com is heading for San Francisco.
''BORN AND BRED.'' There will be no going back. P&G will force the dozen or so employees moving west to resign from the parent company so they can truly understand the risks of a startup. Many will take pay cuts in exchange for stock options. ''We wanted to combine P&G's consumer knowledge and innovation with an Internet-savvy Silicon Valley company and, frankly, with Silicon Valley speed,'' says Alan G. Lafley, P&G's president of global beauty care, who is serving as reflect.com's acting CEO until an outside candidate is found.
Perhaps the most novel aspect of the venture is that P&G won't be relying on any of its powerhouse brands. ''We want to learn to do something born and bred on the Net,'' explains Lafley. It's a strategy that's not only pioneering but smart, some experts say. Internet companies need to break the mold of traditional marketing, says e-commerce analyst Christopher E. Vroom of Thomas Weisel Partners.
How did the packaged-goods stalwart come up with such a radical approach? The tale begins last May, when Beausejour and a handful of other P&Gers flew to Silicon Valley. With the blessing of P&G CEO Durk I. Jager, they cruised the region's main artery, Highway 101, grilling executives and venture capitalists about their secrets of Net success. They learned about tapping into the Valley's huge talent pool, stripping out unnecessary layers of management, and juicing up the pace of innovation and decision-making.
That's not to say the cultural differences were easy to bridge. Indeed, even from the beginning, they have led to some hairy situations. For instance, when IVP flew to Cincinnati in May to make its pitch to win the reflect.com deal, they closeted their usual informal attire to avoid offending their Midwestern hosts. ''They came in dressed as investment bankers, and we were 100% casual,'' says Beausejour. ''Everyone started laughing.''
STICKING POINTS. No one was laughing, however, when it came to ironing out details of the partnership. IVP was accustomed to informal negotiations with young entrepreneurs that end quickly with a handshake. But with P&G, corporate lawyers went over every detail. Among the sticking points: how to divide equity in the company among P&G, IVP, and reflect.com's management, and who controls future financing events. IVP partner Geoffrey Y. Yang says the process, which typically takes about a day, dragged on for nearly three weeks. ''From P&G's point of view, closing a deal is what's relevant,'' says Yang. ''For us, once we have a handshake and a term sheet, the deal is done.''
Despite the more formal process, P&G threw caution to the wind on some key points. For one, the consumer giant took the unusual step of giving IVP the same number of board seats as it got, as well as an equal say over such pivotal issues as whether and when to take reflect.com public. P&G did, however, reserve the right to control any reorganization or sale of the company.
Now comes the nitty-gritty part of making this highly personalized Web site work. Reflect.com aims to use an interactive question-and-answer process to determine each woman's needs. Then, using P&G's research-and-development lab (and some technologies for mixing individual formulations that the company does not want to discuss), it will whip up truly personalized products and packaging per the specifications of each order. For instance, each product might bear the buyer's name. Reflect.com's ultimate vision is to offer as many as 50,000 unique hair, skin, and makeup combinations.
And reflect.com says it will do all that customization at a cost no greater than you'd pay for high-end merchandise at a department-store cosmetics counter. Sounds hard to believe, but P&G claims it can make the math work. It expects to save money by leveraging its existing infrastructure along with reduced inventories and lower sales costs.
Coming up with the next generation in personalization is where IVP comes in. Sophisticated personalization requires sophisticated technology. And from the start, IVP delivered a full plate of contacts to help beef up reflect.com's Web site. In August, for example, the startup team met with execs at Ask Jeeves Inc., an IVP-backed Net company that specializes in a technology that enables customers to pose questions on a Web site through a natural dialogue.
CEO SEARCH. With a launch anticipated in time for the holidays, reflect.com is in full-tilt startup mode. Office space has been found in San Francisco's multimedia gulch while the CEO search intensifies. But even at its rapid-fire pace, reflect.com won't outrun Web rival gloss.com, a San Francisco-based company that plans to sell upscale cosmetics starting on Sept. 27. Gloss.com won't make its own cosmetics. But it does hope to be one of the few e-tailers to sell popular high-end brands such as Calvin Klein or Chanel. And gloss.com will offer some personalized features, such as individual beauty analysis from professionals.
Still, with its novel approach, P&G hopes it has found a way to turn one of the nation's largest corporations into one of the Web's leanest online competitors. ''This is a learning experiment,'' says Lafley--one that P&G will likely put to many uses if it gets it right.
By Linda Himelstein in Silicon Valley, with Peter Galuszka in Cleveland
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