Procter & Gamble and Colgate-Palmolive are providing fresh evidence of the price and marketing pressures on global CPG/FMCG companies and brands from the explosion in e-commerce for categories of products that, until relatively recently, were seen as highly resistant to the lure of online ordering and home delivery.
The two titans are responding with new products and services—and, yes, price hikes—but they’re both in marketplace donnybrooks that are unprecedented in the long history of either company.
P&G on Tuesday reported quarterly and fiscal full-year earnings that topped analysts’ expectations even as its sales results disappointed analysts. Organic sales growth of just 1% fell below the 2.3% gain that had been expected, which indicates that the world’s second-biggest CPG player (only Nestlé is bigger by market cap) is struggling to revitalize the major traditional brands on which CEO David Taylor has based his strategy.
Gillette nicked P&G, with net sales dropping by 3% for the company’s grooming business, as the shaving product icon competes with private labels (with Kroger now joining the fray) and subscription services such as Dollar Shave Club. Meanwhile, Pampers brand baby product sales dropped by 2%, in part because of deep discounts by retailers and what P&G called “aggressive” private label pricing.
“We expect the competitive environment to stay very heavy for a while,” Taylor told financial analysts on a conference call about the earnings report. “We’re going to address in each market online or offline what it takes to grow, because we clearly have the superior products.”
Colgate-Palmolive, which released its latest earnings report on July 27, also bucked headwinds in a challenging second quarter that saw less-than-expected sales growth, and higher costs for raw materials and packaging. In response, the maker of Speed Stick deodorant, Softsoap hand wash and other flagship brands has begun to increase prices around the world.
“Rising commodity costs and volatile exchange rates put pressure on our P&L, and we have sometimes questioned if we’re responding with an appropriate sense of urgency,” CEO Ian Cook said on its earnings call about what he called a “challenging” quarter with analysts.
Taylor and Cook understand that, ultimately, it will be the strength of their brands, marketing, innovation and products that will help pull them out of their companies’ respective slumps—which are occurring amidst a booming U.S. economy and strong growth in many other places around the world.
For a start, they need to excite consumers and come up with more innovative yet relevant products; build new capabilities; and test new ways of delivering and introducing products to people.
Colgate, for its part, is now promoting in Europe its AI-enhanced smart toothbrush that debuted earlier this year in the U.S. It gives the user real-time feedback on brushing, with Bluetooth wireless connectivity to the Colgate Connect app’s Check Up feature to show areas in the mouth that may have been missed.
And in a nod to the shave clubs of the world and other subscription services that have helped turn the personal care sector upside-down, Colgate-Palmolive has just bought a stake in Hubble, a two-year-old New York company that sells contact lenses online in brightly colored boxes.
Hubble will develop new online subscription services for some of Colgate’s products, starting with tooth-whitening products. Cook confirmed the Wall Street Journal report of the company’s investment in the online-based Hubble contact lens brand on the earnings call, commenting:
We also recently took an equity stake in the direct-to-consumer company Hubble. Our collaboration with Hubble provides expertise in the digital channel and the platform for us to launch several incremental direct-to-consumer offerings, providing us with the ability to enter new segments.
We launched our connected toothbrush in Apple stores in the U.S. earlier this year. And this month, we are launching in Apple stores across Europe. And while we’re just beginning this journey, a journey that Hubble will also be able to help us with, we think connected health is a significant long-term opportunity for us in this digital world as we look to integrate consumer behavior, the profession and other interested parties to improve health outcomes across the world, and you’ll be hearing more from us on connected health in the future.
And finally, our recent acquisitions of EltaMD and PCA also give us and entree into thousands of spas, dermatologists and aestheticians across the U.S., with the potential for further product and geographic platform and a base on which to continue to build our ambitions in skin health.
Cook added the the objective is “providing consumers with what they want to buy as we focus on their changing tastes and of course that speaks to accelerating innovation across our portfolio. And we have a broad strong array of planned innovation” through the end of this year into next. He continued:
Let me talk today about one of our key innovation initiatives, Naturals, especially, but not only, in toothpaste… On Naturals, we are making progress in our rollout across the world. We’re now in 44 markets with the Naturals offering. And we expect to launch in an additional 32 markets by the end of the year. In toothpaste, we’ve launched Naturals in every hub in Asia and broadly across Europe. We will launch in Latin America and Africa Eurasia through the balance of the year.
Importantly, these products sell at a meaningful premium in almost every market which will help deliver positive mix. Market shares are growing and repeat rates are strong, giving us the confidence to invest in generating more trial in the future.
Importantly, through our consumer innovation centers, which are based in the markets they serve, we’re able to customize these products for local tastes. While Naturals is a global trend, each market has its own interpretation whether it’s ingredient-based like Swarna Vedshakti in India or more of a specialized Naturals product like our Tom’s of Maine in the U.S. and Canada.
And Naturals is not just about oral care, in personal care, we’re seeing significant success in the free form sub-segment with Sanex Zero and Palmolive Nutritionist, a line of natural products across our personal care categories in Mexico and Brazil that is being rolled out across the rest of Latin America. And even in Pet Nutrition, we’ve just launched our new Hill’s Bioactive Recipe line, which is seeing a very strong response from some of our pet specialty partners in the U.S.
In Oral Care, we’re also very focused on competing more effectively in the Premium Therapeutic segment of the category and have recently launched the elmex brand in two entirely new markets with the full line of products. This marks the first geographic expansion of this brand outside Europe.
How Procter is Taking a Gamble
P&G, which has its own smart toothbrush and natural brands, is taking a different tack at re-engaging consumers, challenging competitors and sharpening its tactics.
As Taylor commented on the call,
We’re investing to improve superiority, our margin of advantage. We’re making P&G ever more productive. We are structuring an organization and building a culture that continues to put us in front of change, riding the wave of this dynamic environment versus being hit by it. We’re leading disruption across the value chain, innovation, supply systems, consumer communication, retail execution, customer and consumer value, to consistently and sustainably grow sales, margins, and cash.
“Superiority is really our basis to win,” he added. “We’ve made a deliberate choice to invest in the superiority of our products and packages, retail execution, marketing, and value, and not just in the premium tier, but in each price tier where we compete. We need to strengthen the long-term health and competitiveness of our brands. To do this, we’ve raised our standards for each of these superiority drivers.”
“In brand-country combinations where we judge ourself to be noticeably superior in at least four of the five elements, we deliver meaningful improvement in key business success measures, including household penetration, which is the number of people that buy our brands each year; market growth, critical to us and our retailers; value share growth; sales growth; and profit – all 80% of the time. When we are superior in just three or fewer of the superiority elements, we grow all of the business success measures 0% of the time.”
Taylor spoke about how P&G is responding to “a changing world and changing consumer needs, including increased demand for natural and sustainable products. We’ve now introduced products in nearly every category that address these emerging consumer needs. Tide purclean, Gain Botanicals, Dreft purtouch, ZzzQuil PURE Zzzs, Febreze ONE, Whisper Pure Cotton, and more recently we just launched Pampers Pure Protection diapers and Aqua Pure Wipes. Our naturals segment offerings quadrupled sales in fiscal 2018. We expect to more than double sales again in 2019. We’re in this game and in this important segment to win.”
Acquisitions are also a key part of finding fresh new ideas and making the world know P&G is “cooler than you think,” as a recent banner stated: “We’re augmenting organic innovations with acquisitions: Native, a natural deodorant, and Snowberry skin care, a naturals brand based in New Zealand. We recently announced our agreement to acquire First Aid Beauty, a full line of prestige-quality skin care products that deliver superior skin health solutions specifically designed for sensitive skin and skin conditions like redness, irritation, and eczema.”
P&G’s innovation pipeline is benefiting by streamlining processes to get to market faster, he added: “We are leveraging lean innovation practices to create and extend product and packaging superiority faster and more cost-effectively than ever before. And Pampers Pure is a good example. It reached the market in half the time of a typical product innovation in a very capital-intensive diaper category. We’re using the lean approach to explore how we can solve new problems for consumers, addressing new jobs to be done. We have several new products in various stages of market testing right now and we’ve brought them to that point at a fraction of the time and investment it would have taken us without this lean approach.”
“In addition to products and packages, we’re improving the superiority of consumer communication and retail execution, as well as consumer and customer value. At this year’s Cannes Lions International Festival of Creativity, P&G and our agencies won 26 Lions for the outstanding work on P&G brand campaigns, including two of the Grand Prix honors for the “It’s a Tide Ad” campaign, which launched during the Super Bowl, and “The Talk,” which started an important conversation about racial bias. We used the forum to announce further commitments to advancing diversity and gender equality in our advertising.”
As for how to measure these investments, Taylor pointed to one external measure of P&G’s improved retail execution— “The global Advantage Monitor Report, an independent retailer assessment of manufacturers across seven key focus areas. Our objective is to be ranked number one overall and the top third versus competition in all areas. For the third straight year, we were number one ranked globally, with the highest number of countries ranking P&G as the number one manufacturer. We also ranked number one in all seven practice areas for the second year in a row, with noticeable improvements in the categories of Business Relationship and Support, importantly Category Development, Supply Chain, and Customer Service.”
P&G is also focusing its marketing dollars by “moving from wasteful mass marketing to mass one-to-one brand-building enabled by data and technology. In China, where 70% of our media is digital and 30% of our sales are in e-commerce, we have one of the largest data management platforms in the country, which we use for consumer analytics. We can effectively manage frequency and engage people when and where it matters. We saved 30% on digital spending in China while increasing digital reach by 60%.
We’re reinventing advertising from mass clutter to less doing more. For example, Olay China was running up to six different ads at a time and changing ads every two months. We now focus on one highly effective ad and stick with it over time. With fewer ads and lower frequency, we focus on creating deeper one-to-one engagement by improving in-store presence. With these interventions, Olay China has delivered its fifth consecutive quarter of double-digit growth, with media spending down 50% over the past two years.”
“Each of these organization and culture changes are aimed at creating a company designed to win in today’s market, with today’s consumer, at the speed of the market: more agile, more accountable, more efficient, more productive,” Taylor concluded. “Our focus on superiority, enabled by a strong productivity cost savings program and supported by an improved organization and culture, will yield faster growth, higher margins, and strong cash generation.”