Corporate turnaround: Dial pegs promotion to sales, seeks innovation

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After defying skeptics by turning around Dial Corp. in under two years, Chairman-CEO Herb Baum now plans something seemingly more preposterous. He wants to make Dial, long content as a "fast follower," into an innovator.

"We want the next Swiffer," Mr. Baum said. To that end, he's involving all employees in innovation sessions, such as a recent "Grime Scene," organized by consulting firm Play, in which they descended en masse into filthy test kitchens and showers in search of inspiration. He's also made coming up with at least two patentable ideas a year the price of keeping a job at the R&D center across from his corner window in an unpretentious office at Dial's Phoenix headquarters

Leading innovation seems like a long shot for Dial. Many of its new products in recent years have been knockoffs, such as a lower-priced version of Procter & Gamble Co.'s Downy Wrinkle Releaser. One of Dial's more novel products of recent years, Dial Complete foaming hand soap, was based on licensed technology.

Then again, it was also hard to believe a company that spent more than a quarter of its revenue on trade promotion and still had falling sales when Mr. Baum took over in August 2000 could be anything but someone else's lunch.

More than two years later, Dial still spends about a quarter of gross sales on trade promotion, but they are now spent differently. The company now uses a pay-for-performance system installed with the help of consultants Bain & Co., so trade promotion dollars are pegged to higher sales. As a result, sales rose 4.9% to $988 million for the first nine months of 2002, up 7.9% excluding devaluation-depressed results in Argentina. That's on top of a 9.1% gain to $1.2 billion in 2001.

Dial hasn't officially taken down the for-sale sign it put up more than a year ago, but Mr. Baum doesn't expect the company to be sold for at least the next two years. He also has begun evaluating four possible successors for when his contract expires in 2006. And he plans to start considering small tack-on acquisitions for Dial's existing product categories early next year.

Mr. Baum said Dial turned around faster than he thought it could. "We just got the company focused," he said. "We sold off the bad businesses. We stopped trade loading," or the practice of using heavy quarter-end trade deals to hit earnings targets. He added, "My lawyers don't like it when I say that part."

This points to what some insiders characterize as a secret of Dial's recent success: Mr. Baum tends to tell it like it is.

`people-oriented'

He also likes plain talk from his agency, Omnicom Group's GSD&M, Austin, Texas, which he appointed in place of sibling DDB Worldwide, New York, within a year of taking charge. GSD&M is "just closer to the consumer," he said. "Their stuff is colloquial. They do Southwest and Wal-Mart-very people-oriented advertising."

Mr. Baum has rewarded that with increased marketing support, which, excluding trade spending and coupons, is up from 3.2% of sales when he started to 3.8% now. Almost all goes to the flagship Dial brand, though Purex detergent has print advertising and is preparing to test TV spots via independent Cramer-Krasselt, Chicago. Dial's Coast brand recently began a radio campaign from GSD&M.

R&D spending is up, too, by 80% from three years ago, Mr. Baum said. "A year ago, we had five patents applied for, and this year we've had 24. ... New-product development is a marathon. It's going to take 12 to 24 months, but I'm really pleased with the progress we're making."

"Under prior management, Dial was really private label in drag,"but with the cost structure of a brand marketer, said Ann Gillin, analyst with Lehman Bros. She said Dial has also done a good job of aligning itself with faster-growing trade channels such as Wal-Mart Stores and dollar stores.

Still, being a fast follower has a profitable history. Unilever's Suave brand, for one, wears its fast-follower badge proudly. And Dial has modeled strategy for its Purex brand on Suave's $700 million value brand, making it a fast-follower follower of sorts.

not truly following

Yet, strangely, Unilever now finds itself defending Suave against accusations by some retailers that it's trying to innovate, thus going off strategy. Suave for Men, rolling early next year, is the first mass hair-care line for men. "We're fast following by different means," a Unilever spokeswoman said, pointing to such trends as mass skincare, hair-color and beauty magazines for men.

"Incremental shelf space right now is going to new products rather than fast followers," said Ms. Gillin. "I think historically innovation has not been a strength of [Dial's], but clearly they have increased their investment in R&D."

Early results, however, have not been promising, she said, noting that Dial has quietly backed away from its "Project Leapfrog" effort to develop a new air freshener technology.

While brands at big companies can be followers, many innovations in package goods have come from smaller players, such as oxygenating and orange-scented cleaners from Orange Glo International, electrostatic mops from Japan's Kao Corp. and pull-up diapers from Japan's Unicharm. Mr. Baum doesn't see why Dial can't join those ranks, and has good reasons to try. "Being first to market gives you higher margins, higher market share and pricing power," he said. "I can't even spell [price], we haven't taken [an increase] in so long."

Banc of America Securities analyst Bill Steele doesn't believe Dial has to be an innovator to succeed, noting success in improving its top-to-bottom line as a fast follower.

"They certainly have the capability" to be an innovator, he said. "I wouldn't bet against them."

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