Ed Artzt's Elbow Grease Has P&G ShiningZachary Schiller
When Edwin L. Artzt became chairman of Procter & Gamble Co. five years ago, his main objective was to turn the consumer-products giant into a global company. Yet shortly after he took the reins at P&G, it became clear that Artzt would have to do a lot more than that. Caught in the sway of the growing consumer demand for value, P&G--known more for its premium brands at premium prices--suddenly found itself out of step. Artzt's answer was simple: Change the way P&G does business. Says Artzt: "We have to become single-minded in our quest to deliver better value."
Against great odds, P&G has. Under Artzt, the company has moved aggressively to cut costs, keep prices down, and improve customer service by streamlining its once-cumbersome billing and delivery systems. The results have been impressive: In its fiscal year ended June 30, Procter reported its highest profit margins in 21 years. Even after a $102 million charge for its highly publicized derivatives disaster, it made a tidy $2.2 billion. Both in the U.S. and abroad, Procter boosted its market share in most of its businesses while increasing unit volume 5%.
REVISED PLAYBOOK. The changes have not come without pain. Last year, Artzt announced a massive restructuring, cutting 13,000 jobs--12% of the company's employees--and shuttering 30 of P&G's 147 factories. The cutbacks have deeply shaken morale at what had been one of the last U.S. bastions of lifetime employment. And that is something Artzt will have to confront as he tries to get P&G growing again. Sales were essentially flat last year at $30.3 billion, as divestitures, price cuts, and foreign exchange woes masked the volume gain.
That problem, however, is likely to fall to Artzt's successor. Artzt, 64, may retire as early as next spring. Yet the two front-runners, Executive Vice-President Durk I. Jager, Procter's U.S. chief, and President John E. Pepper, who heads P&G's international operations, are both likely to continue Artzt's value campaign.
As the king of packaged-goods marketing, Cincinnati-based Procter never had to worry much about being the low-cost producer. "Historically, we have been a high-cost operator because we could get the growth we wanted," says one former top P&Ger. The company invented products such as Tide, Crest, and Pampers that it could usually sell at a premium--and mounted massive marketing blitzes to imprint their novelty on consumers. Even now, P&G isn't offering rock-bottom prices. And the company is spending more than ever on research and advertising (charts).
Now, Artzt has added a new page to the P&G playbook. He is slashing at costs, allowing Procter to reduce the premiums at which its goods sell, pressuring both private-label rivals and national-brand purveyors such as Lever Brothers Co. and Colgate-Palmolive Co. This strategy is most important in the U.S., where Procter generates 69% of its earnings. "They've learned low-cost production and clear-cut product superiority are not mutually exclusive," says one former vice-president.
P&G's big move in the U.S., starting back in 1991, was to slash the promotions it offered to trade customers. These discounts corroded the loyalty of shoppers to P&G brands because they led to yo-yo shelf prices--Tide at $1.99 one week and $2.99 the next. They also produced enormous costs, whether it was a wholesaler pocketing much of the discount, big swings in production as specials came and went, or vast overhead in keeping track of all the deals.
Over the past three years, P&G has reduced its list prices by 12% to 24% on nearly all of its U.S. brands, most of that by cutting the level of trade promotion. At first, "value pricing," as P&G calls it, hurt its sales. Rivals tried to take advantage with their own deals, and many customers were upset because it hurt their profits. Even now, Procter's share in many categories isn't as high as it was several years ago.
Yet value pricing has worked. For example, Procter cut the list price of liquid laundry detergents two times--first by 9% in late 1992, when it introduced concentrated liquids, and then again by 15% in the summer of 1993. Along with new products, that has bolstered P&G's share from about 41% to 47%, according to Information Resources Inc.
The value credo has impelled P&G to simplify its vast array of products. Since 1991, the company has eliminated almost a quarter of the different sizes, flavors, and other varieties of its brands. Unproductive coupon promotions have been slashed. Brands, such as Clarion cosmetics and White Cloud toilet tissue, either have been given the heave-ho or have been combined with stronger monikers.
Now, P&G is moving forward with crucial changes in logistics and customer relations. After years of restructuring its U.S. sales force, early this year it reorganized so that it now relies largely on customer-based teams, which offer support to customers with data analysis, finance, and other functions. And on Oct. 1, the company is beginning "streamlined logistics," which will let customers order almost all of Procter's products using one invoice and one set of payment terms and have the entire order shipped on a single truck. Many companies are working on computer-to-computer reordering and other such systems, notes Donald D. Bennett, president of Richfood Holdings Inc., a $1.5 billion wholesaler in Richmond, Va. "P&G got there quicker than anybody."
DIAPER RIVAL. Yet some analysts, such as Lynne R. Hyman of CS First Boston, wonder if P&G hasn't sacrificed product innovation in its quest for value. Defenders say P&G has had some winners, such as such as the papermaking technology it used to create a more absorbent Bounty paper towel. But in the important U.S. diaper business, Procter is still struggling to catch up after falling behind rival Kimberly-Clark Corp.
With more than half of its sales now coming from abroad and the best growth prospects there, P&G is looking to globalize more than ever. Says one retired executive: "If they put a bust of Artzt in the west wing [of P&G headquarters], it would say: `This SOB made us a truly global company."'
That doesn't necessarily favor Pepper as the man to succeed Artzt, since Jager, too, has won kudos for his foreign successes. Pepper, a congenial executive who is highly popular with the troops, would be the one to ease staff discontent. That's important, since the exodus from its restructuring has some outsiders wondering if P&G could find itself short of talented managers down the road.
But Jager, a hard-nosed, Dutch-born executive, can make a strong claim, especially because of the success of value pricing in the U.S. And he has the stomach for tough decisions, such as dumping the company's Citrus Hill orange juice, a longtime loser.
Not everyone has ruled out the possibility that Artzt could find a way to stay on. But whoever is running P&G next spring, you can expect they'll be as value-conscious as the consumers they count on to buy their products.