One year on, how has AG Lafley changed P&G?

It is a year since Procter & Gamble brought back A.G. Lafley to jump-start faltering sales and profits that were causing the FMCG giant to fall behind rivals.

AG Lafley P&G CEO
Progress has been made in restoring brand equity but one year after returning as CEO, Lafley’s challenge has not diminished.

Under his predecessor Robert McDonald, P&G expanded rapidly into new categories and countries. However, that was increasingly at the expense of its core brands and markets – products such as Pantene and countries including the US.

Lafley was brought back to restore momentum at P&G but still faces many of the same challenges that dogged his predecessor – flagging sales, pressure to match the rate of innovation of rivals such as L’Oreal and a share price that has not kept pace with the wider market.

Talking down discounting

Under McDonald P&G was leaning on price promotions to boost sales particularly in recession hit developed markets. While good for volume sales, it damaged brand equity and left shoppers expecting to get its products for cheaper.

It was also seen to have fallen behind rivals in terms of marketing innovation and was struggling to communicate its products’ points of difference.

Oru Mohiuddin, senior analyst in beauty and personal care research at Euromonitor, says: “P&G comes under strong competitive pressure from the likes of L’Oreal, who rapidly innovate and put an interesting marketing spin on their product launches to give the impression they are unique or offer something consumers wouldn’t get from regular products in the market,”

That is changing under Lafley. He has restructured the marketing department to focus on “brand management”, reorganising the business into areas such as design, consumer and market understanding, communications and marketing.

That will help to unify P&G’s marketing, which had been divided among two separate divisions – its regional market development team and market development organisations. That meant that advertising and brand marketing decisions took place in one area of the business, while shopper marketing and other regional efforts happened in another.

The restructure will have the two working together to create campaigns that work both creatively and in-store, as well as ensuring experts in particular categories stay within the best business unit for their skills, helping to drive expertise and therefore marketing innovation and understanding which aspects of a product to communicate. Take beauty for example. P&G tripled its sales and revenues between 2000 and 2007 but then, as Lafley put it on a call last year, “got stuck” because it moved management around too much.

It is also expected that P&G will make a move back to more creative advertising. P&G has begun to communicate that it wants big ideas that work harder at a brand level, rather than focusing on benefits claims and promotions that might remove barriers to purchase but don’t boost brand equity.

Last year P&G ran a pitch for Gillette in North America, making the decision to end its 80-year association with BBDO and Forebears in favour of Grey, which became its brand agency leader. That was the first time any agency has lost Gillette and signals an intent to try something new, particularly as the category faces increased pressure from customers trading down and a cultural move to men embracing stubble and moustaches, as evidenced by the success of Movember, which enourages men to grow facial hair and raise money for and awareness of prostate cancer.

The risks of underinvesting in marketing

Lafley has also introduced a cut in overall marketing spend as the company shifts focus to digital, social and mobile marketing. Speaking on a recent call, chief financial officer Jon Moeller said P&G has “improved marketing effectiveness and productivity” despite the spend reduction, with digital accounting for 30 per cent of its total media spend.

“We are at a point where looking at dollars is not representative of the strength of a marketing programme in a rapidly changing marketing landscape,” he added.

That hasn’t stopped analysts questioning the move. Wendy Nicholson an analyst at Citi Research, has raised concerns that P&G could end up “underinvesting in its brands”, particularly as competitors such as Unilever, L’Oreal and Avon increase their ad spend, a worry mirrored by other analysts.

“P&G need to make its presence felt. Reducing the marketing budget won’t work well for the company. They do have to increase their profit margin and one way to do that is by cutting advertising. But that is a short-term view that will have a long-term impact,” adds Mohiuddin.

However, will P&G actually be cutting spend in real terms? There is likely to be a decline in how much money it pays out in non-working media – agency fees – and above the line advertising but that simply reflects a general trend in the marketing industry that P&G, as one of the biggest advertisers, is leading.

Lafley is under pressure to boost profit margins and cutting marketing spend is one obvious way of doing this and a means to appease investors. However, it is understood that spend in formats such as store activations could be shifted to other areas of the business, put down as a trade investment for example rather than a marketing one, meaning any increases would be absorbed by the in-store teams, rather than marketing.  It seems unlikely P&G will cut in-store, particularly because retail is such a key area for promoting products and converting shoppers and because P&G is often lauded for its in-store marketing.

The challenges

Lafley’s return has provided P&G with a spring in its step but the financial impact has yet to be felt. Its third quarter sales were flat at $20.6bn and while its profit was up, increasing 1.7 per cent to $2.61bn, this was due to “efficiencies and productivity savings”. The company’s share price is up little more than 5 per cent over the past year, behind the average rise across consumer stocks in the S&P 500, which is up nearly 12 per cent.

Lafley has made steps towards returning P&G to its glory days. There are innovations coming through, notably its first interactive toothbrush and the Flexball Gillette razor.

The company is also putting its discounting days behind it, using creative and innovative marketing to explain to customers why they should be buying its more expensive products rather than those of its rivals.

It is the progress of this strategy that will determine whether Lafley’s second stint at the top is to be judged a success.