Think Small

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It looked like Procter & Gamble Co. would brush off yet another opportunity.

In fall 2000, rival Colgate-Palmolive Co. launched a battery toothbrush for under $20-less than half the price of rechargeable models. Just as in the 1980s, when P&G sat back while others created a market for premium-priced manual toothbrushes, and in the `90s, when it was slow to enter whitening toothpaste, P&G seemingly had no response.

But things would be different this time, reflecting P&G's new resolve to think small and move fast.

P&G reacted to Colgate's Actibrush in December 2000 by acquiring Dr. Johns SpinBrush, a disposable battery-powered model priced at $5 to $6. Within three months, P&G restaged it as Crest SpinBrush. For the 52 weeks ended Dec. 2, 2001, its sales of $60 million outpaced Actibrush's two to one.

For the first time in more than a decade, P&G is playing offense in oral care, one of its key markets. The quick action on SpinBrush illustrates a new P&G approach that also has it increasing promotion spending and making a once-taboo move into private-label manufacturing

NEW APPROACH

P&G, the nation's No. 1 household products marketer and No. 3 advertiser, has long made small technology deals, but buying and restaging tiny brands in small segments to combat rival launches once seemed beneath it. For years, P&G outspent rivals on research and development, boasted more Ph.D's on its payroll than Harvard, MIT and Stanford combined and disdained new brand projects with sales projections under $1 billion.

But within the past year, P&G President-CEO A.G. Lafley has begun defying the old orthodoxy-in more ways than one. His primary strategies for turning P&G around remain focusing on consumers, big brands, big retail customers and big countries where P&G operates. Yet Mr. Lafley is also not above closely watching competitors and finding little ways to thwart them.

P&G will put its big brand names on acquired products in small categories rather than risk missing an opportunity. P&G also is doing the once unthinkable, talking to retailers about making private-label products. And in a step away from-if not abandonment of-P&G's decade-old dogma of everyday low prices, Mr. Lafley has vowed repeatedly to counter rivals' price promotions.

"I think the basic line from the old days-where they only introduce the best brands with the best technology and go after the big segments-is done," said Andrew Shore, analyst with Deutsche Banc Alex. Brown, who has followed the company for more than a decade. "They're filling out flankers, controlling the periphery, redefining categories and going after competitive profit zones-things that have always been anathema in the past. ... [Lafley's] willing to change. They're willing to go after the scraps. He's willing to go to the mid-tier or low-tier."

"We're definitely taking a more flexible approach in finding more cost-efficient ways to innovate," said a P&G spokeswoman. "One way we're doing that is to acquire first-generation products so we can get them to market quickly like we did with [Charmin] Fresh Mates and SpinBrush. Then we have a way that we can leverage our strength and bring our innovation to them through their design or performance. That's definitely a new direction for us."

In its recent history, P&G was more likely to take the opposite tack. The company developed Dryel home dry cleaning kits from scratch rather than buy Custom Cleaner, a similar existing product that later was purchased, restaged and ultimately discontinued by a joint venture of Dial Corp. and Germany's Henkel. And while the strategy in some ways hearkens back to P&G's past-in the 1950s and 1960s it acquired smaller brands such as Duncan Hines, Charmin and Folger's-earlier acquisitions were made strategically as a means to enter new businesses, rather than as a competitive response to rivals.

Neither the big strategies nor small tactics have proven they can turn things around broadly for P&G, which has been losing market share in crucial cases to such rivals as Kimberly-Clark Corp., Colgate-Palmolive, L'Oreal and, in some categories, Unilever, for more than five years.

P&G last month projected that cost savings would help it beat analyst earnings forecasts for its recently concluded fiscal second quarter, but sales were up only 2%-3%, roughly two percentage points of that coming from the Clairol hair-care business acquired in mid-November.

Banc of America Securities analyst William Steele said in a recent report that P&G's U.S. sales declined in 20 of 26 categories and seven of its top 10 categories in November, the worst performance of any company he covers. It's the second consecutive month of poor performance. Mr. Steele's Information Resources Inc. data don't include Wal-Mart Stores or membership-club stores.

While P&G's new posture hasn't significantly boosted sales, it has clearly made life harder and less predictable for competitors.

Take the wet roll toilet paper category. Rival Kimberly-Clark announced a year ago it would launch Cottonelle Rollwipes, which it said could become a $500 million business.

In a similar vein a decade earlier, Kimberly-Clark had launched Huggies Pull-Ups training pants, creating a $400 million segment P&G dismissed as too small to merit the investment. Pull-Ups helped Huggies overtake P&G's Pampers for leadership in the $4.5 billion U.S. diaper category.

Would Rollwipes let Kimberly-Clark do the same thing to P&G's Charmin?

Seemingly P&G was following the old script. When an analyst asked Mr. Lafley about Rollwipes during a January 2001 conference call, he said P&G had tested such products for years and found little consumer appeal, though he said the company would respond if necessary.

Within days of that call, P&G was approached by the owner of Moist Mates, a product similar to Rollwipes. P&G closed a deal to buy the brand three months later, allowing P&G to hit the mid-Atlantic and Southeast markets in August with its own version, restaged as Charmin Fresh Mates, at the same time that K-C rolled out Rollwipes.

Wipeout

Retailers say both Rollwipes and Fresh Mates have disappointed, with retail sales of less than $2 million combined through Dec. 2. Kimberly-Clark is re-evaluating plans to roll RollWipes nationally. But P&G, which still uses the same contract manufacturer as Moist Mates, needed only a tiny fraction of the $100 million Kimberly-Clark spent on Rollwipes R&D to learn its lesson, said Mr. Shore.

SpinBrush has shown more promise, according to Jim Gingrich, analyst with Alliance Capital Management's Sanford C. Bernstein unit. Thanks to its strong showing, he thinks Colgate will having trouble securing retail shelf space for Motion, a $5 brush launched last month. He also predicts the $15-$20 battery brush segment-including Actibrush and a host of me-too models launched last summer-will disappear.

"Why would you buy one of those things when you can buy a $5 one?" Mr. Gingrich said. Moreover, P&G is responding to Motion with a new SpinBrush featuring replaceable heads. The heads cost $3.

By itself, beating Colgate in the estimated $150 million battery brush business may not mean much to a $40 billion company like P&G. But battles in small segments sometimes shape the larger war.

Mr. Shore contended in a recent report that Kimberly-Clark's uncontested dominance in Pull-Ups helped fund the aggressive marketing that helped Huggies win the broader diaper category. Ceding leadership to Colgate and others in toothbrushes and whitening toothpaste ultimately eroded share for Crest toothpaste so much that it lost leadership in the overall $2 billion U.S. category in 1999.

As with niche acquisitions, however, P&G's moves into private-label manufacturing and more aggressive promotion aren't without risks.

In years past, P&G re-evaluated its stance on private-label manufacturing about once every 10 years, always reaching the same conclusion, according to former P&G managers: It isn't worth hurting your own brands to help retail customers.

private-label help

But Mr. Lafley has said in conference calls that private-label products can help leading brands by taking share from weaker competitors. The P&G spokeswoman said the company is limiting private-label manufacturing to "non-strategic, commodity-driven" products, or, as with Millstone Coffee, acquired businesses with existing private-label contracts. P&G is making privat-label goods primarily to fill excess capacity, she said, not as a strategic direction. Among private-label items P&G is looking to manufacture are paper products for leading retail chains, though P&G is targeting low-price, low-quality items rather than direct premium threats to its own brands.

SpinBrushes and private labels aren't the only ways P&G is going after competitors on price. Mr. Lafley's repeated pledge to "no longer allow competitors to buy market share" could mean protracted promotion battles, Mr. Shore said. Mr. Gingrich has noted a general upward creep in promotion activity in household products and beauty care categories, with all players participating.

The increase in promotion is an industrywide phenomenon that stems in part from uncertainty about the economy, said Wayne Sanders, chairman-CEO of Kimberly-Clark. "Nobody knows exactly when we're going to get a recovery or where raw material prices are going, so there's a reluctance to take list price changes that are more permanent."

One former senior P&G executive, however, sees danger in eroding brand strength through price battles and isn't convinced P&G needs them. "The cry that we won't let competitors buy our market share is often a poor excuse for failing in the basic offering of a product," he said. "It also is a great excuse for brand managers, since anybody can find data that suggests the competition spends more on price [promotion]."

P&G appears intent on protecting its market share. "We prefer to compete on our everyday price basis," the P&G spokeswoman said. "We want consumers to choose our products because they see them as the best value. ... But if anyone drops their prices low enough, they can buy share, and we will not let that happen."

Ken Harris, a partner at Cannondale Associates, sees a more aggressive stance on promotion as part of a broader effort in turning P&G around. "It's kind of like fighting words, saying, `We're not going to get kicked around. We're not going to stand for it.' "

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