P&G to place focus on ‘value creation’ to ‘win’ with consumers

Procter & Gamble’s recently returned CEO AG Lafley has vowed to improve the company’s marketing ROI by choosing a more “optimised” mix of media as part of the “value creation” strategy designed to turnaround its recent lacklustre sales performance.

AG Lafley P and G CEO
A.G. Lafley set out his value creation vision for Procter and Gamble’s turnaround

Analysts criticised P&G under previous CEO Bob McDonald’s tenure for failing to make sales and profit increase simultaneously, focusing too heavily on premium products in western markets and expanding into too many emerging markets without a clear strategy.

In his first analyst call since he returned to lead the company on 23 May, Lafley underlined P&G’s “overriding focus” on ”value creation”. He said the company would make “choiceful” investments in core brands – which could mean exiting some product categories – in its biggest innovation opportunities and in core developed and the most promising developing markets to “win” with the consumer and its customers and shareholders.

Lafley said: “We know we are not winning like we know we can and we are committed to making changes we know we need to make to improve our performance significantly.

“We are trying to thread a needle here; trying to look at what we can really do and what we really need to get ready to do. I think it’s going to take a couple of years before we’ve got everything in place so that we are hitting on enough cylinders to perform to our full potential. We view this as a transition year, last year was a stepping stone year and we will see how it goes.

“We have the methodology, the tools and techniques to understand who our best consumer is business by business, brand by brand, but you have to use it and act on it…our business model is very simple: if we can get higher trial and purchase rate and get better usage and more loyalty – that drives value creation. We need to be incredibly disciplined to stay on that business model.”

As part of the “value creation” strategy, P&G will choose a “more optimised” mix of advertising spend and look to increase the efficiency of non-advertising marketing spend as part of its mission to “aggressively” drive productivity and cost savings.

Productivity is set to become a “systemic” culture rather than episodic and the company will look at ways to better measure, recognise and reward productivity. It will become one of P&G’s “core strengths” alongside innovation and execution, Lafley said.

Marketing spend is set to increase in terms of dollars in the coming fiscal year, but it will actually decrease as a percentage of sales growth by 20 basis points as P&G increases its return on investment, the company claims. The company does not forecast all efforts to improve ROI will result in restructuring, because value creation, rather than just cost savings, is the main objective.

Lafley said: “We are interested in effectiveness. We know brand by brand in the US – and in a lot of other markets – the range of effectiveness we can deliver, and it’s wide. We are holding all the businesses to a minimum ROI and pounding away on communication effectiveness and best media. Digital is now up to 35 per cent roughly [of total spend] in the US.

”There are some businesses and brands where digital is incredibly effective and we’re doing more and other brands that have to get up the learning curve faster…the problem is not the total amount we are spending, the problem is the mix. The opportunity is the mix and we’re going to get better and better at it.”

He alluded that marketing activity going forward will particularly focus on the moments when consumers are making their “preliminary” purchase decisions, as they compare pricing and gather information about products on desktop and mobile.

When it comes to the actual purchase, Lafley said P&G will “never compete fully on price” but across a a broader brand and product architecture – across verticals such as hair care and personal care – that will give consumers more of a chance to trial products, both offline and in commerce.

Lafley’s comments came shortly after P&G reported net sales for the past quarter rose 2 per cent to $20.7bn. Net income dropped 48 per cent to $1.88bn – although steep, this figure was slightly better than expected, as analysts had predicted higher marketing spend, a stronger dollar and restructuring charges would drive down margins even further.

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