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Every Monday morning, Procter & Gamble (PG) Chief Executive Officer Bob McDonald gathers with a half dozen executives around a football-shaped table at company headquarters in Cincinnati. He and his team gaze up at a 360-degree digital map of the world and plot their next moves. Red areas of the map signal regions where P&G is being challenged by Unilever, Kimberly-Clark (KMB), and others. Areas where the company is meeting or beating goals are highlighted in green.
McDonald, a graduate of the U.S. Military Academy at West Point, is crafting P&G's strategy as he would a military campaign. After taking P&G's helm two years ago, McDonald, 57, bet he could build the consumer-products giant the hard way—by systematically converting more of the world's people into P&G customers. Unlike his predecessor, A.G. Lafley, who spent $57 billion in 2005 to acquire Gillette—which last year accounted for more than 10 percent of P&G's $78.9 billion in revenue—McDonald isn't hunting for a big acquisition. Instead, he's counting on myriad extensions of existing brands. That means persuading men in India to shave with disposable razors, convincing African women of the benefits of Western feminine hygiene products, and selling more teeth whiteners to Americans.
"It's my and other executives' responsibility to figure out how to get our growth goals without an acquisition," says McDonald, who spent eight of his 31 years at P&G working in Asia, with additional postings in Canada and Europe. "If one comes along, it's serendipitous." Still, he says the bar would be high. "We have so much opportunity that, any acquisition that would come along, we've got to measure the value of that acquisition against, for example, [the potential of] entering oral care in Brazil."
That's why McDonald has adopted a plan of "serving more customers in more parts of the world at both higher and lower price tiers." To do this, McDonald walks the aisles of drugstores and supermarkets as he travels around the world to make sure P&G products are prominently displayed. He regularly e-mails the company's largest retail customers, whether in Boston or Bangalore, as well as ordinary shoppers. And he endlessly analyzes data gleaned from P&G's proprietary computerized marketing information systems, which can crunch up to 10,000 scenarios simultaneously and predict, say, whether premium-priced diapers will be a bust in Morocco or the impact a toothpaste promotion could have in Brazil.
McDonald's focus on internal growth carries plenty of risks. First, P&G's sheer size means it needs a massive flow of new sales—more than the total revenue of competitor Church & Dwight (CHD), maker of Arm & Hammer products—just to achieve the 4 percent sales growth analysts forecast for this year. The current strategy of expanding further into markets outside the U.S.—already the source of 60 percent of P&G sales—also means the company will have a harder time increasing profits because its foreign margins are lower than those for its American businesses. That's why some investors worry that McDonald's organic growth focus may not be sufficient to jog the company's stock price, which now hovers around $65 a share, well below the $73 mark it hit in December 2007.
"We haven't seen an obvious short-term catalyst that would help them blast through," says Peter Kwiatkowski, a portfolio manager at Fifth Third Asset Management, which owns 1.9 million P&G shares. "It's difficult at this point to say, 'Wow, this is going to move the needle.' "
McDonald predicts P&G will have 5 billion customers by 2015, up from 4.2 billion last year. It currently offers only half its 38 product categories in many of its top 50 markets. He says pushing consumption of P&G products in China, India, Indonesia, and sub-Saharan Africa to the level the company has reached in Mexico would generate an additional $60 billion in sales annually.
That's why he's working hard to entice emerging market consumers with products that are hits in the West. In India, where 50 percent of men go to barbers when they want a shave, P&G last year launched a "Women Against Lazy Stubble" campaign to increase at-home grooming. It featured surveys indicating that women favored clean-shaven men and television commercials where women in vans snatched men with stubble off the streets and shaved them with Gillette's mid-priced Mach3 razor. The campaign, along with another touting a new, lower-priced razor, helped P&G capture almost half of razor sales in the country in less than two years, it says.
To win over mothers in India to its disposable diapers, P&G chose a marketing pitch different from the one back home. Instead of emphasizing the convenience of Pampers, it highlighted research showing that babies who wear disposable diapers overnight sleep better—and consequently develop better. The result: P&G now has the biggest share of diaper sales there, it says.
While McDonald expects employees to spend time in customers' homes, observing how they mop floors or dye their hair, he's increasingly using technology to gather data. He has joined with Cisco Systems (CSCO), SAP (SAP), and others to develop IT systems that help P&G decipher its extensive consumer research and sales data for its products. Gazing at their digital map during meetings, P&G executives can click on a country and see what consumers are buying, which promotions are working, where inventory needs to be replenished, and how sales compare to plan.
McDonald and his team in recent months were debating whether to launch a line of lower-priced diapers in Germany when data indicated they'd begin to lose customers within six months without a bigger offensive. So they decided to release the cheaper brand along with a premium line and subsequently captured two-thirds of the market in Germany, an all-time high.
In March, P&G struck an agreement with Israel's Teva Pharmaceutical Industries (TEVA), the world's biggest maker of generic drugs, to jointly develop over-the-counter medicines. The agreement should expand P&G's market for Vicks cough and cold products and other health brands. While the payoff from developing new brands can take longer, McDonald says, it's worth the investment. He's also tiptoeing into providing services with two franchise businesses in the U.S. built around hit P&G products, Mr. Clean Car Washes and Tide Dry Cleaners. They will have 15 and seven of the outlets, respectively, by August.
"I'm not going to argue that the Mr. Clean Car Wash we have here in Cincinnati or the Tide Dry Cleaners stores are the next Swiffer," McDonald says, referring to the hot-selling mop that has become a billion-dollar brand for P&G. "But this is an example of how far afield we're willing to go in order to continue learning and to try new things."
Whatever products P&G launches—often after hefty spending on research—can be quickly copied by private-label manufacturers that offer knockoffs at lower prices. Drugstore operator CVS Caremark (CVS), for one, sells its own package of 56 teeth-whitening strips for $17, compared with a package of 20 Crest 3D White Whitestrips, which P&G sells for $28. Still, McDonald says he isn't planning to cut the annual research budget of almost $2 billion because it generates new-and-improved products that give P&G an edge. That's one reason, he says, that in the past year "we've grown share in the U.S. and Western Europe while private-label share has been declining in Europe and flat or declining in the U.S."
Such gains come slowly. But Roger L. Jenkins, dean of the Farmer School of Business at Miami University in Ohio, likens McDonald's emphasis on slow and steady growth to the parable of the tortoise and the hare: "Bob is like the tortoise—he's going to get there."
The bottom line: P&G must grow 4 percent to meet expectations. Changing consumer behavior abroad is its key strategy.