Can P&G’s Lafley balance its books?

Durk Jager ploughed massive resources into P&G new products. While some – like Sunny Delight – were hugely successful, research reveals this may have been at the expense of established brands.

Procter & Gamble last week delivered the latest in a long line of shocks to its staff.

Durk Jager, chairman, president and chief executive for the past 18 months, resigned in favour of Alan Lafley, president of global beauty care.

Jager’s tenure at the top had already put P&G staff through their paces, with the swingeing changes he introduced through the Organisation 2005 initiative. This aimed to double sales to $70bn (£46bn) by the year 2005, and involved a massive reorganisation of roles and 15,000 job cuts.

While established P&G brands in Western markets have delivered stable sales over the years, only new products and new markets could provide Jager with the sales increases he craved. These did not materialise, and in implementing the changes, costs spiralled out of control. Jager had already delivered two profit warnings in a year. When he gave his third warning last week, it was accompanied by his resignation.

But most observers doubt that his replacement Lafley will axe Organisation 2005 wholesale, though he is likely to make changes to it (See also “MW200006140025”).

Whatever changes are made, the picture for P&G is the bleakest it has ever been.

A Marketing Week survey of the UK performance of some of the company’s leading products show that many established brands have suffered over the past year.

According to data from Information Resources, which records sales through tills in major multiple retailers, Ariel detergent has been forced into retreat by its rival Persil. It languishes at its lowest market share level since 1986, observers claim. Lever appears to be winning the battle for detergent tablets. TNS Superpanel figures, compiled from a survey of 10,000 households, are less damning and show Ariel sales increasing 2.9 per cent year on year.

P&G’s major snack brand Pringles is also facing declining market share.

According to IR figures, like-for-like value sales in the UK fell by 26.3 per cent, to £23.6m from £32m, in the 12 weeks ending 23 April, compared with the same period last year.

In the same period, KP Hula Hoops value sales increased by 22.3 per cent and sales of PepsiCo-owned Walkers’ Quavers rose by 17.7 per cent.

One supermarket crisp buyer says: “New entrants and variants such as poppadums are creating competition for the biggest brands, especially through promotions.

“Pringles is definitely suffering. Sales aren’t increasing as they used to and the brand is losing out to others like KP.

“Multi-pack sales are also taking off, which causes a problem for Pringles as it is a one-flavour-per-pack brand.”

Superpanel, however, estimates Pringles sales are down only 2.6 per cent year on year.

However, orange drink Sunny Delight, once hailed as the most successful UK product launch, has seen its market share decrease by eight per cent according to Nielsen, and is down 17.8 per cent on Superpanel data. One analyst claims that revelations about its low fruit content inspired consumers to look for alternatives.

And according to Superpanel, Fairy Washing-up Liquid sales have fallen 4.4 per cent year on year.

But when it comes to new products, P&G has had more success. The controversial Charmin loo roll has achieved a 4.5 per cent share of the £700m market within only a few months of its UK launch. This has been achieved through heavy promotion and advertising.

P&G is at its most powerful when it is using its marketing muscle to launch products, though the gains can soon diminish once marketing support is scaled back to more realistic levels.

This goes to the heart of the problems during Jager’s reign. Driving sales growth through launching new products has meant fewer resources behind established brands.

Many predict that Lafley will rebalance the mix to give a more equitable distribution of support across established and new brands.

In delivering his resignation, Jager said he had tried to achieve “too much, too fast.”

As one source says: “It caused a great deal of upheaval, with people being moved to new jobs and new locations. The structure and policy were sound, but it didn’t suit people who were used to slow, steady, minor moves. Everything has changed.”

Another senior agency source, who works on P&G business, says: “Jager was a crazed maverick who simply went too far. It is a pretty unforgiving company – if people don’t deliver they’re out.

“Everyone expected him to shake up the operation yet in doing so he damaged the reliable processes to such an extent that the company could no longer even predict future revenue. But the Organisation 2005 initiative will be maintained because it is too far down the road to turn back,” adds the source.

Lafley became P&G’s first president of global beauty care in summer 1999. With sales of $7.5bn (£5bn) – ranking it behind rivals L’Oréal and Unilever – the business includes Max Factor, Cover Girl, Oil of Olay, Pantene, Vidal Sassoon, Head & Shoulders, Secret Deodorant and Hugo Boss fragrances.

A source close to P&G says the quality and value for money of P&G’s beauty brands is high but the packaging, merchandising and imagery used to sell the brands is “tacky” and old-fashioned: “They keep trying to adapt but do not go far enough.”

The source also says P&G’s short-term profit has suffered from long-term investment in developing markets such as Eastern Europe and Latin America and from declining profit margins when raw material costs have increased.

Product innovation such as resistant lipstick technology called PermaTone is being introduced this autumn in a Max Factor lipstick called Lipfinity.

Lafley will be wrestling with the dichotomy between supporting established brands and promoting new products over the next six weeks, as he prepares to make his first analysis of how to repair the worst effects of Organisation 2005. “It’s all a question of balance,” says one analyst.

Jager lost his balance. Lafley will have to regain it.

Performance of major P&G brands

  • Sunny Delight – volume share 165m litres, down 7.9 per cent on previous year, according to Nielsen (moving annual total to April 2000). Fruit drinks market has grown 4.3 per cent, but SD’s share is down from 40.9 per cent last year to 36.1 per cent.
  • Charmin – has achieved a healthy 4.5 per cent of the £700m toilet tissue market according to IR figures, on the back of hefty promotion and marketing.
  • Pringles – IR data shows Pringles Snacks sales fell 26.3 per cent in the 12 weeks to 23 April, compared with the same period last year. Sales for the period fell to £23.6m from £32m in last year’s period.
  • Ariel – In the 12 months to end 1999, its share of the £900m laundry detergent market was 20.4 per cent, compared with Persil’s 25.9 per cent, according to IR. In the four weeks to end of May it fell to 19.2 per cent to Persil’s 26 per cent.
  • Fairy Washing-up Liquid – has fallen 4.4 per cent over the year, according to TNS Superpanel.
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