Entrenched P&G faces foes' inroads

Tiered-marketing efforts give U.S. giant a leg up, but body wash, toothpaste are in a tussle

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By getting in early and sticking even when the going got tough, Procter & Gamble Co. is reaping big rewards in Eastern Europe while rivals play catch-up.

The problem for P&G: Competitors are starting to pick up ground. With all its major global foes now fully on the Eastern Europe bandwagon, P&G faces a much tougher fight.

Last year's acquisition of Gillette Co. promises to give P&G a new edge in the region. Unlike competitors, including Gillette, P&G has exclusive distributors in the key markets of Russia and Poland. That allows it to control retail display and pricing much better, says Deutsche Bank analyst William Schmitz, giving P&G easily the best scale and distribution clout among its competitive set.

The distribution edge could let P&G dramatically expand sales of Gillette products, making Eastern Europe one of the linchpins in delivering the "revenue synergies" P&G has promised from the $57 billion acquisition. Already Russia ranks among P&G's top 10 markets worldwide. Eastern Europe as a whole surpasses China as P&G's most important developing market.

Long the heavyweight in the U.S., P&G didn't focus as much on global expansion until the late 1980s.

When Chairman-CEO Durk Jager stepped down and A.G. Lafley succeeded him, it was a turning point for P&G in the region. Mr. Jager focused more on building, or reinvigorating, P&G's business in the developed markets of the U.S., Western Europe and Japan. Mr. Lafley has focused more on developing markets, including building low- and midprice value brands that let P&G compete for a broader range of consumers.

One of the best examples of the tiered-marketing approach is in Russian laundry detergent. There, Ariel is the premium brand, selling for the equivalent of about $1.50. Tide, in the next tier, touts whitening and sells for about 20% less. Myth, similar to Gain in the U.S., touts fragrance and sells for about half the price of Ariel. P&G's Russian ultra-value-brand Tix sells for a third the price of Ariel.

The broad range led P&G to control roughly half the Russian market, according to Deutsche Bank, making it one of P&G's strongest global detergent markets outside the U.S. and keeping archrival Unilever entirely at bay.

Such initiatives pushed P&G's Russia business past the long-sought $1 billion threshold in 2004, and it's expected to top $1.5 billion this year. Throughout the broader Central and Eastern Europe, Middle East, and Africa regional organization, consisting mostly of Eastern Europe sales, P&G sales are nearing $8 billion.

The downside for P&G is that leadership positions can disappear fast in Eastern Europe.

Just ask Beiersdorf. Even before communism collapsed, the company had established Nivea in Russia. But a multicategory assault by Unilever's Dove has cut Nivea sales nearly in half since 2001, according to Deutsche Bank.

All of P&G's key global competitors are now highly focused on Eastern Europe, particularly Russia. Kimberly-Clark Corp. includes Russia among its six key focus markets in the developing world. And its Huggies brand already has a substantial lead over P&G's Pampers in Russia.

The Colgate brand overtook P&G's Blend-A-Med for leadership in toothpaste in 2004. One indicator of how quickly the market can turn: Colgate-Palmolive Co. had a 25% share of the Russian body wash market only two years after entry in 2002.

Though P&G's largest global beauty and personal-care competitor, L'Oreal, got a relatively late start in Russia, it's catching up. It has a business estimated by Deutsche Bank of more than $350 million and has easily surpassed P&G's Russian growth rate each of the past five years.

P&G sent shivers through Wall Street in March when it blamed a cold winter in Russia in part for lowering its revenue stream. At least one rival also seemed to be feeling a chill. L'Oreal, which grew 34.3% to more than $800 million in Eastern Europe last year, lagged behind that figure for the first half of this year, with 26.7% growth.

Mr. Lafley in March characterized Eastern European sales as remaining "incredibly strong."

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