Why Some Think P&G's Innovation Is Slipping

Cincinnati Giant Pours $2 Billion into R&D to Prove to Investors, Consumers It's Still Got Its Edge

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Tucked in an area north of Cincinnati is an office-warehouse building that looks like a movie set. It contains fully functional mockups of two homes (one upper-middle class, one lower-income) complete with kitchens, bathrooms and laundry rooms. It has two mock grocery stores and a virtual-reality lab where you can fly over store shelves.

And, just like a front operation in a spy thriller, the complex is innocuously called BRI Research -- to avoid letting consumers know that they're involved in studies for Procter & Gamble.

This is the Beckett Ridge Innovation Center, or BRIC, in P&G parlance. And P&G, whose innovation record has come under growing scrutiny, hopes it can deliver.

Analysts and investors are decidedly unimpressed with P&G these days. After making progress last year to get toward the top of its competitive set in top-line sales, the company has slipped back to near the middle in recent quarters. P&G lost share in categories representing 55% of its global business last quarter, as neither consumers nor competitors completely went along with price hikes. Over the past two years, P&G's U.S. sales have risen only 3% and it's stock price has been flat.

Fed up, a handful of analysts doubt the power of P&G's innovation machine and voiced concerns that the company is too big and too complacent.

P&G is expected to address most of those concerns in a presentation this week at the Consumer Analyst Group of New York. With some fanfare, it took on the innovation question by inviting media to the BRIC facility last week to tout Tide Pods, billed as the company's biggest laundry breakthrough in more than a quarter-century.

But P&G stole a bit of its own thunder when Chairman-CEO Bob McDonald preceded his remarks by disclosing that a new buyer had been found for Pringles (after an accounting scandal at Diamond Foods scuttled a deal with that company).

The announcement highlighted how P&G, which built its reputation and much of its $80 billion empire as a creator of brands like Tide, Pampers and Swiffer, seems to be divesting or discontinuing more than creating. In just the past two years, P&G has spun off Pur and shut down Tag.

It has been five years since P&G launched a brand in the U.S., and that was niche probiotic Align.

In the meantime, rivals are moving in with their own new products.

Unilever introduced Simple -- a leading U.K. skin-care brand acquired last year in the Alberto-Culver deal -- in the U.S. last month. And in May, it will take aim at P&G's billion-dollar Head & Shoulders by launching Clear dandruff shampoo , according to people familiar with the matter.

Defending its innovation record, P&G points to the SymphonyIRI Pacesetters, the list of top-selling new products. The packaged-goods giant had eight of the top 25 nonfood products in 2010, the most recent year calculated, and 132 of the 400 items on the Pacesetters list over the past 16 years -- more than its six largest competitors combined.

But because the Pacesetters ranking considers only sales of new brands or extensions rather than net sales, the cannibalization of existing products in a brand isn't a factor.

The biggest brands, which generate the most line extensions, also tend to make the list, and P&G has the biggest brands in the U.S. The company's $30 billion in domestic sales are about three times Unilever 's and six times L'Oréal's U.S. sales, and about the same as its six-biggest competitors combined.

Winning against its competitors has become tougher, as Mr. McDonald's responses to analysts on a January earnings call helped illustrate.

Two of the new products he mentioned (an Olay facial-hair removal line and a Febreze auto air-freshener that delivers scent continuously) are in existing categories. Another is Downy Unstopables, a crystal laundry additive that hit shelves in September; Henkel executives see it as a knockoff of Purex Complete Crystals, which came out six months earlier.

Mr. McDonald also noted Fusion ProGlide Styler, which is a higher-end version of a combination wet razor and facial-hair trimmer that Schick tried out five years ago. And he brought up Tide Pods, which, because of delays, are coming to market now, along with similar laundry products by six other brands from Henkel, Sun Products, Church & Dwight and Phoenix Brands.

While P&G expects the Pods segment to reach 30% of the U.S. laundry market -- making it worth $2 billion -- right now it's aiming for a more conservative $300 million in sales, said Alex Keith, VP-North American laundry. Even that , however, would put Pods in the stratosphere of product introductions.

P&G has pumped up spending on R&D in the past two years, to more than $2 billion -- 60% more than its closest competitor, Mr. McDonald said. It began stepping up investment and management structure to develop brands and categories three years ago, and it has more in the pipeline, though he wouldn't disclose what. Innovation of this kind "takes time," he said.

Realistically, P&G's trademark filings are heavy on what appear to be closer-in line extensions. That's a change from the turn of the millennium, when several new brand names were in the mix.

Some of those remain active, but with different applications. Others for which P&G had high hopes last decade -- such as Bella & Birch, an interior paint that was applied like wallpaper -- never caught on with consumers.

Perhaps the most intriguing recent P&G trademark filings are for T@U, for removable or temporary tattoos. It appears to relate to a P&G patent for delivering drugs to the skin through tiny needles in a patch. The technology was originally part of P&G's now-abandoned effort of several years ago to introduce Intrinsa, a female version of Viagra.

If T@2 works, it just might leave the lasting mark P&G is seeking.

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