For a glimpse of the daunting challenge facing Procter & Gamble Co.'s (PG ) chief executive, Alan G. Lafley, look no farther than the paper towel aisle at McCaffrey's supermarkets. P&G's Bounty brand has long been king at the small Yardley (Pa.)-based chain, posting year after year of solid sales gains. So McCaffrey's marketing director, Rick Bozzelli, was more than a little surprised by what happened last year: Bounty's sales dipped. At the same time, Scott--a brand that just five years ago had been left for dead--was a quicker picker-upper in sales. "I never expected that the competition would knock Bounty off its upward track," Bozzelli says.
McCaffrey's experience wasn't isolated. Bounty's share of the nation's paper towel market in supermarkets, drugstores, and major discounters fell 1.8 percentage points last year--equivalent to a loss of $49 million in sales in the $2.7 billion U.S. paper towel market, according to Information Resources Inc. And that's only one small piece of a much larger problem for Lafley. Procter & Gamble's market share was down in 16 of its 27 major product categories last year, says IRI. In fact, seven of its nine biggest U.S. brands lost market share (table).
What is happening is that an array of smaller, more nimble players are chipping away at P&G across its vast range of brands. Despite slipping last year, Bounty still dominates paper towel sales, with 39% of the market, but Scott and Kimberly-Clark Corp.'s (KMB ) other two brands captured 15.5% of the market, up from 13.8% just one year earlier. P&G's Tampax brand lost 1.9 points in market share, falling to 40.9%, while Playtex tampons picked up 1.1 points last year, and now has 31% of the market. Three years ago, Colgate-Palmolive Co.'s (CL ) Colgate brand captured the toothpaste crown from P&G's Crest. "The extent of P&G's vulnerability right now is astounding," says Nick Chilton, who worked at P&G and is now CEO of snack-food maker Wyandot Inc.
OVERSPENDING. Indeed, P&G's sales may not grow at all for the fiscal year ending June 30. In January, the $40 billion company lowered its target for revenue growth in fiscal 2001 to 2% to 4%, excluding currency changes, from the 4% to 6% range it set in September. But after the company issued an earnings warning on Feb. 26, blaming the currency depreciation in Turkey, P&G's 12th-biggest market, analysts said even that is too high. "It's going to be flat," says William H. Steele, an analyst at Banc of America Securities.
Of course, Lafley inherited much of this problem. P&G tapped him for the top job last June, after Durk I. Jager abruptly resigned. Jager, in his 18-month tenure, had sought to shake up the company's culture in order to spur innovation, speed new products to market, and boost sales. While he succeeded in boosting revenues by launching new brands, such as the electrostatic dust mop Swiffer, he overspent on new products, and that hurt earnings. The company's core earnings rose only 2% in fiscal 2000; they're expected to rise a still-measly 4.1% in fiscal 2001. Now Lafley, a 23-year P&G veteran, is taking a new tack. Instead of emphasizing new products, he decided P&G must focus its brainpower and cash on the big, established brands that drive earnings such as Tide detergent, Charmin toilet tissue, and Bounty.
OUTGUNNED. The formation last month by P&G and Coca-Cola Co. (table) of a jointly owned company to develop and market juices and snacks is Lafley's most visible step yet in reorienting P&G. The plan aims to rejuvenate P&G's Pringles snack and Sunny Delight juice-drink brands by pushing them through Coke's global distribution system, which is more vaunted even than P&G's. The move, Lafley said in a conference call with investors, "allows P&G to focus on core categories." He declined to comment for this story.
Many of P&G's headaches in defending its powerhouse brands can be seen in Kimberly's assault on one such brand, Bounty. The 35-year-old household name lost more U.S. market share last year than any of the company's top nine U.S. brands. Kimberly out-executed P&G on nearly every front: in product innovation, cost control, pricing, promotion, advertising, even in how it worked with the managers of individual stores. Those are all areas that P&G once dominated. "Kimberly-Clark simply out-Proctered Procter," says John Watkins, a former paper towel salesman at P&G who now heads the sales operations at Acosta Sales & Marketing Inc., one of the nation's largest consumer-products brokers.
P&G officials say Bounty's troubles in 2000 are just a bump in the road. Tarang Amin, Bounty's North American marketing director, points out that Bounty gained $800 million in total North American sales during the 1990s. "Short-term blips aren't really the story here," he says. Still, Bounty sales in U.S. supermarkets, drugstores, and discounters (data from club stores such as Costco aren't available) rose last year by just $18 million, or 1.7%, to $1.06 billion, according to IRI, while Scott's sales jumped from $150 million to $197 million. That pushed Scott's market share to 7.2% from 5.9%
Kimberly set the stage for its assault on Bounty when it acquired Scott Paper in 1995, taking on a paper towel brand that was cheaper than Bounty but far inferior in quality. In 1999, Kimberly made its first move, upgrading Scott to make it softer and more absorbent. The new version--called Scott "with Ridges"--also used 20% less paper pulp, lowering production costs, Kimberly officials say. Meanwhile, P&G hasn't made a similar brand-wide improvement to Bounty since 1994, when it launched "quilted embossed technology" to make the towels more durable. No one in the industry disputes that Bounty's quality is still higher than Scott's, but Kimberly entered 2000 with a towel closer in quality to Bounty that still cost less and that Kimberly could pitch as improved. P&G couldn't counter with a similar message.
Kimberly made the most of this. The company stepped up advertising spending on Scott by 15.6%, to $3.5 million, during the first 10 months of 2000, according to CMR, a firm that tracks ad spending. That's puny compared with P&G, which spent $29.9 million on Bounty during the same period, much of it on network television, CMR says. But Kimberly spent efficiently, using local TV ads to target specific markets as it rolled out its new towels in different parts of the country. And it didn't help that P&G's ad spending on Bounty, while huge, was cut by 30.5% from a year earlier. A P&G spokesman declined to specify why it cut Bounty advertising, but noted that the company often shifts spending levels on brands.
As Kimberly-Clark stepped up the attack, Bounty's management was in flux. In the past year and a half, Bounty has had four brand managers. One went on maternity leave and two left for new jobs outside P&G. "There was no institutional memory," says a person close to P&G's Bounty operations.
That might explain the company's next misstep. Hit by soaring pulp prices, P&G increased Bounty's wholesale price by 9% last April. Kimberly seized the opportunity to boost its profits and sales. It raised Scott's price the same month, but by only 6%, letting the price gap grow. It could afford this because it produces two-thirds of its pulp for the U.S. market itself, which buffers it from rising prices.
PRICE POINTS. Kimberly drove the price wedge further by discounting Scott to stores more frequently than P&G was doing with Bounty, grocers say. At McCaffrey's, for example, Scott was on sale two to three times as often as Bounty last year, selling at 69 cents to 79 cents for a regular-size roll, down from a list price of $1.19. Meanwhile, Bounty sat on the shelf at its full $1.29 price much of the time. "I don't care how loyal you are, most people aren't going to pass up a 50 cents price difference," says Bozzelli, the chain's marketing director.
Kimberly has another advantage. Its salespeople visit the supermarkets more frequently than P&G's, some chains say. They pay attention to whether products are getting enough shelf space and a prominent shelf position, and are being sold at the right price--details that can make a big difference in such a slow-growth business. In contrast, a former P&G field manager says P&G sharply cut back its in-store presence at supermarkets during the 1990s. It went from a full-time staff for that purpose, to a part-time staff, then finally contracted out most of the work. Larry Murphy, the grocery manager at a Treasure Island store in Chicago, says his Kimberly saleswoman stops in twice a month: "We don't see anyone from P&G. I'm more inclined to give her the shelf locations she wants."
By November, P&G decided it had lost enough market share with Bounty. It rolled back its April price increase by half and aggressively stepped up its promotion; sales responded with a 22.4% year-on-year gain in January. The company is also rolling back price increases in feminine-care products in the U.S., diapers in Germany, and detergent in Britain. "We have been taking a hard look at pricing to make sure we are offering customers a better value," Lafley said in a conference call in January. He added that P&G will step up efforts to cut costs so that it has more pricing flexibility. P&G also appears to be hiring part-time merchandisers to boost its relationship with individual supermarkets, according to consumer-product brokers. It's running newspaper ads in help-wanted sections for the positions.
Still, P&G's competitors aren't letting up. On the paper towel front, Kimberly says it will continue rolling out Scott "with Ridges"--it's now available in about half of the country--and plans to launch a softer Scott with wider ridges in May. Don't expect Lafley's job to get easy anytime soon.
By Robert Berner in Chicago