The Next Billion Shoppers

Courtesy of The Economist, a report on Proctor & Gamble and Unilever’s efforts to reach emerging market consumers:

A TRIP to Paris is not usually a miserable way to celebrate your birthday, but so it was this year for Bob McDonald. On June 20th, as he turned 59, the chief executive of Procter & Gamble (P&G) for the past three years gave a faltering and apologetic speech at a conference there hosted by Deutsche Bank, in which he predicted lower-than-expected profits in the coming quarter for the world’s largest maker of household and personal-care products, and confessed to deep-seated problems at his firm both in innovation and the broader execution of its strategy.

The same day, at the Rio+20 Summit in Brazil, Paul Polman, a former colleague of Mr McDonald’s at P&G and now boss of Unilever, a big European rival, was on a high. With his firm’s share price close to record levels, he was able to enjoy hobnobbing with world leaders as he called on other companies to join Unilever in adopting a range of strategies designed to tackle climate change. How Mr McDonald must have wished he were in Rio de Janeiro, too, not least because he shares Mr Polman’s fondness for talking about his firm’s similar “purpose-driven” goal of creating a better, more sustainable world. Instead, in Paris, as P&G’s share price tumbled, doubts were being raised about the sustainability of Mr McDonald’s hold on his job.

The sense that Unilever is on the up, whereas P&G is in trouble, is the latest swing of a pendulum that only five years ago saw Unilever struggling as P&G soared. The slow economic recovery in America and the deteriorating economic situation in Europe have hit P&G harder, because it earns a greater share of its revenues in those developed markets and its brands tend to be more expensive than Unilever’s—and thus more likely to be sacrificed by consumers who are being forced to count the pennies.

Mr McDonald’s promise to make P&G’s pricing more competitive, and his plan to cut costs by $10 billion, could, if delivered, help to restore P&G’s fortunes in these markets at the expense of Unilever and other consumer-goods firms. But the biggest questions concern how P&G can improve its performance in the developing economies on which both it and Unilever depend for long-term growth.

Hoping to clean up

Both firms started this decade by setting themselves ambitious goals. P&G’s was to add 1 billion new customers by 2015, a 25% increase. Unilever’s was to double its revenues by 2020, at the same time as halving its negative impact on the environment, under its “sustainable living plan”. Both firms made clear that growth in emerging markets would be crucial to achieving those goals. They promised to invest heavily in distributing and marketing their established products in developing countries and in creating new ones tailored to the tastes and pockets of poorer consumers at the “bottom of the pyramid”—where, according to the late C.K. Prahalad, a management guru, a fortune lies.


P&G expects developing markets to contribute 37% of its total revenues this year, up from 34% in 2010 (and 23% in 2005). For Unilever, the share from developing markets is already up to 56% of sales, from 53% in 2010. However, in absolute terms Unilever’s sales in these markets, at $22.9 billion, are just behind P&G’s, at $23.6 billion, since P&G is far bigger in developed markets (see chart).

By 2020 Unilever expects developing markets to account for 70% of total sales, with about two-thirds of that coming from growth in the overall size of those markets and the other third from an increase in Unilever’s share of those expanding markets.

Exactly what share P&G is aiming for in the coming years is now unclear. A year ago it talked of detailed plans to enter, by 2016, up to 950 product markets (counting each product in each distribution channel in each country as a separate market). As Ali Dibadj of Sanford C. Bernstein, an investment bank, puts it, this meant “taking on every competitor in every category in every region of the world at once.” In Paris, however, Mr McDonald described a much narrower strategy of focusing on P&G’s ten biggest development markets as well as, worldwide, its 40 most profitable products and 20 biggest innovations.

Mr Dibadj says the “arrogance” of P&G had caused it to underestimate the competition in emerging markets, not just from traditional rivals like Unilever but from local firms, some of which are fast becoming as professional as any multinational company from a rich country. As a result P&G underestimated the cost of building its presence in these countries, he says. In its efforts to find cash to finance its emerging-market expansion, P&G pushed up its prices in rich countries to levels that consumers were not ready to accept, speculates Mr Dibadj, who prefers P&G’s new strategy of freeing up funds by taking an axe to its bloated cost structure. Overheads are higher as a proportion of revenues than at most of its rivals, and have not fallen as sales have grown, suggesting that management has done a lousy job of achieving economies of scale. Big acquisitions, such as that of Gillette in 2005, have added products and complexity but not, it seems, efficiency.

Cracking China

In the developing world, P&G is strongest in China, now its second-biggest national market with around 6% of the firm’s worldwide sales. Yet this is a country where price competition is especially fierce. (It also has a severe shortage of talent: Unilever had over 30,000 local applicants for 100 places on its management-trainee scheme in mainland China, but thought only 80 of them good enough.) A sophisticated population of internet users makes it easier to promote new brands cheaply through digital marketing. Unilever designed a Lipton Tea-branded new year’s message to send to friends that was used by 130m Chinese, for example.

Unilever is a challenger in China, but is far stronger than P&G in India, where it has long been considered a local company (likewise in Bangladesh, Pakistan and Sri Lanka). It is still known there as Hindustan Unilever, a reference to the decades its local subsidiary spent as an essentially independent company before its fuller integration into the global firm in recent years.

Unilever benefits from India’s continued reliance on small family shops (compared with the supermarkets prevalent in China), with which it has long-established relationships, and from India’s far larger bottom-of-the-pyramid population. Both these factors push up the cost to a new entrant of building a distribution network. Africa, the next frontier for branded consumer goods, poses similar challenges, with both firms starting mostly in similarly weak positions.

With internet penetration relatively low in India, consumers often have to be engaged in person. P&G is going into Indian schools (with government approval) to preach to girls the benefits of sanitary towels. It and Unilever have programmes to explain the health benefits of washing hands with soap several times a day and of brushing teeth regularly. But P&G has nothing to equal Unilever’s army of around 50,000 “shakti women” who sell its products in remote villages (and which has recently been expanded to include “shakti men” hired by their wives). P&G’s big push in India over the past couple of years was hugely expensive, including launching a price war between Tide, its venerable detergent brand, and rivals such as Unilever’s Surf and Rin. Some say it temporarily pushed the company’s business there into the red.

Both firms are trying to “straddle the pyramid” by offering products in each category aimed at three different sorts of consumer: high-end ones, who have essentially the same tastes as their counterparts in America or Europe; the rapidly emerging middle class, where the challenge is primarily to get shoppers to devote more of their spending to branded goods; and those at the bottom, who may never have brought any branded product before.

P&G is reckoned to have been slower at “reverse engineering” its products to be affordable to poorer customers: ie, starting with the price the customer can pay, then working out how to deliver a product profitably. Unilever started doing this years ago, by selling shampoo in small sachets as well as in pricier bottles. In Indonesia, one-third of Unilever’s revenue comes from purchases costing 20 US cents or less.

However, P&G is beginning to work out what these extremely demanding customers want. Its Olay shampoo is now sold in sachets. In India, P&G has launched Guard, a cheap new razor which, because customer research suggested it is likely to be used just once a week, comes with a comb in front of the blade to make the shave smoother.

Cincinnati central

P&G is one of the world’s most thoroughly integrated multinationals, whereas Unilever has only recently been reintegrated from a clutch of regional fiefs and continues to have two headquarters, in London and Rotterdam. This may have helped the Anglo-Dutch firm strike a better balance of global and local in developing markets compared with Cincinnati-centralised P&G. Even so, both face threats from agile local firms. “Decisions on how to innovate, say, [Unilever’s] Lux brand will be made by the global head of Lux, who will try to satisfy many different markets at once, which can marginalise some markets as well as being slow and bureaucratic,” says Vivek Gambhir of Godrej, an Indian consumer-goods firm. “We can get innovation done much faster, in three or four months.” The lower profit margins available in developing markets may have discouraged P&G’s brand managers from expanding in them, until they were ordered to do so, by which time they were playing catch-up, says Bernstein’s Mr Dibadj.

Soups, soaps and science

Whereas both firms have innovation centres around the world, P&G’s Cincinnati focus may have made it less effective than Unilever at “distributed innovation”. Consumers in Britain, continental Europe and Turkey have embraced Knorr Stock Pot, a bouillon jelly developed for Chinese consumers, who disliked existing packaged soup. Likewise, Clear, an anti-dandruff shampoo designed for China, where hair is thick, black and infrequently washed, is now being rolled out in America.

Starting in 2010, Unilever has launched Dove For Men soaps simultaneously in more than 20 countries, including Brazil, “far more efficiently than it would have done in the past”, says Martin Deboo, an analyst at Investec. He attributes this to Mr Polman’s focus on “better execution” since taking charge in 2009, a goal Mr McDonald embraced in Paris. In consumer goods, “strategy is only 10%; 90% of success is down to execution,” Mr Polman has said.

These are still early days for both firms in the developing markets, which unlike rich countries may have many decades of high growth ahead of them. For now, Unilever may be doing better, but elements of its developing-market growth strategy remain as unproven as whatever P&G’s updated strategy turns out to be.

For instance, Mr Polman sets great store by Unilever’s “sustainable living plan”, not as corporate social responsibility but as a way to generate better innovation, not least by forcing its product developers to focus on using energy and water efficiently. In Asia it has launched Comfort One Rinse, designed to reduce the amount of water used when washing clothes. Purpose-driven P&G has introduced a similar product, Downy Single Rinse.

Yet Mr Polman readily concedes that, so far, Unilever has been “picking low-hanging fruit”, and that “a lot of what we need to do we can’t do alone.” Much will depend on re-educating consumers in the rich world to use its products more sustainably, such as by taking shorter showers; or on establishing greener habits among new consumers in developing countries than those already deeply ingrained in rich countries. Behavioural economists have been consulted on how to do this. Unilever’s plan to incorporate 500,000 small farmers in developing countries into its global supply chain may ultimately give it a more secure source of high-quality produce, but making this shift is hardly without risk.

P&G has also begun to demonstrate that where it is willing to invest heavily in developing markets it can make inroads. This should give hope to the embattled Mr McDonald. If he can sort out his cost problem, and free up more money for marketing and innovation, especially in the developing world, P&G can rediscover its mojo. The potential of those markets is so huge that there is room for both these old rivals to win.

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