Branding: Five New Lessons

The P&G purchase of Gillette shows that innovation is key, and marketing is more diffuse and personal

The last time detergent and toothpaste giant Procter & Gamble Co. (PG ) made a bid for razormaker Gillette Co. (G ), it was out of desperation. Back in 2000, when the Cincinnati giant made an unsolicited bid, Gillette was a bargain: Despite its hit Mach3 razor, a series of earnings disappointments had hammered the stock. P&G was struggling, too, and so were a lot of other once-invincible brands. With fracturing TV audiences moving to the Web and cable, the classic 30-second spot that had made household names of the likes of Mr. Clean and Tide was losing traction. Consumers were starting to identify more with niche markets than with the one-size-fits-all brands that had long been the backbone of the consumer-products industry. Retail shelves were stocked with private-label rivals. Most frightening of all: The information-packed Internet threatened to expose those brands as nothing special. The age of the giant, mass-market brand seemed to be dead -- and so was a P&G-Gillette deal.

Oh, what a different story it was on Jan. 28 when it was announced that the wedding was on. Sales growth at both companies is on a tear, earnings and margins are up, and hit products are rolling out of their labs. P&G's sales growth is running at 8% a year, excluding acquisitions -- double the rate of the late 1990s. And the once-struggling razormaker fetched a price of $57 billion, 19 times earnings before interest, taxes, and depreciation. Why did Gillette do the deal? "I have a simple formula," says CEO James Kilts. "Strength plus strength equals success."

Are brands back? Well, yes and no. Well, yes and no. It's not that the doomsayers were all wrong. Media are becoming infinitely more complex. Big retailers -- especially Wal-Mart Stores Inc. (WMT ) -- are more powerful than ever, pressuring the profits that big brands need to fuel marketing and innovation. And every year surveys show consumers becoming more cynical about advertising. No wonder so many brands have faltered: Coca-Cola (KO ), Levi Strauss, Kodak (EK ), Ford (F ) -- the list goes on.

But the savviest brand managers have adapted, creating a new paradigm in which innovation is king, marketing is diffuse and personal, and size can be an advantage. Nothing shows this more than perennial No. 1 detergent Tide, where P&G's stepped-up consumer research, brand extensions, and ads have reawakened it within a moribund category.

Here are five lessons from classic companies and upstarts alike. All are thriving by managing brands differently than companies did in the heyday of the mass market.

1 Innovate. Innovate. Innovate.

Why would P&G tinker with Tide? Long the detergent leader, Tide would seem best left alone, a profitable annuity on years of mass-market flogging in the '60s, '70s, and '80s. But P&G has tinkered nonetheless, combining strong technology and consumer research to push sales up 2.6% over the last year in a category that is growing less than 1%. The secret: a widening family of detergents and cleaners that now includes everything from Tide Coldwater, for cold-water washing, to Tide Kick, a combination measuring cup and stain penetrator.

Innovation isn't always built from scratch. P&G is a master at transferring technologies from one brand to another. Tide StainBrush, a new electric brush for removing stains, uses the same basic mechanism as the Crest Spinbrush Pro toothbrush -- also a P&G brand. Gillette, too, is adept at cross-pollination. Its latest winner is the battery-operated M3Power, the result of a collaboration between the company's razor, Duracell battery, and Braun small-appliance units. Despite a 50% price premium over what Gillette charged for its previous top-of-the-line razor, the M3Power has captured a 35% share of the U.S. razor market in seven months.

2 Move Fast -- Or Lose Out

Not only are customers hooked on innovation, they're demanding it faster. Handbag designer Coach Inc. once introduced new products quarterly; now they come out monthly. On Coach's Web site, the new line currently features a bevy of options, from a $498 suede tote bag covered in an oversized pink and purple logo pattern to the "Coach Soho Nappa Small Tortilla," a white leather number with a tassel and a $328 price tag. "For brands to stay relevant, they have to stay on their toes. Complacency has no place in this market," says CEO Lew Frankfort. In any given month, Frankfort says, new products account for 30% of U.S. retail store sales.

3 Minimize Exposure to Wal-Mart

Wal-Mart is the key customer for any consumer product brand today. But balancing those sales with plenty of others is vital to a brand's health: For most suppliers, the more you sell to the world's biggest retailer, the less you make. In a recent study by consultant Bain & Co. of 38 companies doing 10% or more of their volume through Wal-Mart, only 24% sustained above-average profitability and shareholder returns. P&G, which sells 18% of its goods through Wal-Mart, was one. It has done so by shifting business away from basic products such as paper towels, which can easily be knocked off by a private label, to higher-margin products such as health and beauty care, including its line of Olay skin products.

It's not as if Wal-Mart is the only game in town -- though sometimes it might seem that way. Besides low prices, Americans crave convenience. Increasingly, consumers are shunning supermarkets and buying food at convenience stores, fast-food outlets, club stores, and elsewhere. Recognizing that, Kellogg Co. (K ) began thinking outside the supermarket aisle in 2001 when it bought Keebler Co. and its links to vending machines. Now, Nutri-Grain bars, Pop-Tarts, and even single-serving cereal bowls are available at many more places, and the Battle Creek (Mich.) company has gone from providing breakfast cereals to round-the-clock snacks.

4 The New Media Message

The splintering media, it turns out, hasn't been all bad. P&G is a longtime master of what a former exec calls "surround-sound marketing" -- everything from in-store demos to pitches on Wal-Mart TV, engulfing shoppers in the brand message. But it has also become a pioneer of new techniques, such as integrating its Crest Whitening Expressions Refreshing Vanilla Mint into a recent episode of the TV show The Apprentice. The goal is to both target specific customers and to fit the medium to the message. When research showed that girls wanted to know more about Tampax, P&G shifted a chunk of advertising from TV to print and created a Web site called "It's hard to convey a lot of information and stuff that's kind of personal in a 30-second TV ad," says Ted Woehrle, vice-president for North American marketing. "Print and online were terrific."

5 Think Broadly

Rather than define itself by its products, P&G has expanded its mandate to become a solver of every problem in the home. While toothpaste rival Colgate-Palmolive Co. (CL ) was focusing on the tube, P&G grabbed greater "share of the mouth" with innovations such as the inexpensive spin toothbrush and premium-priced Whitestrips teeth-whitening kits.

Apple Computer Inc. (AAPL ), which was late to market with its digital music player, the iPod, took the lead nevertheless with a combination of great product design and marketing brains. But why were consumers willing to accept a computer maker as a consumer-electronics company? Because Apple made its brand stand not for desktop computing but for imagination and fun. "The iPod is about creative people doing creative things," says David Placek, president of Lexicon Branding in Sausalito, Calif.

Such thinking can fuel a rise to megabrand status in a fraction of the time it once took. The proof: Starbucks Corp. (SBUX ) The Seattle-based coffee chain does plenty of core innovation. Credit for part of its holiday profit surge of 31.2% belongs to its new pumpkin spice latte. But that's just the start. Anne Saunders, senior vice-president for marketing, sees the cafés not just as a place to slurp java but as somewhere "to connect with other people or as a getaway." That broader vision has led to offerings such as music and wireless Web connections.

Today, 30 million people visit a Starbucks each week. The average customer stops in 18 times a month. With no tagline and sparse traditional advertising, Starbucks has gone from an idea to being one of the most popular and valuable brands on the planet in under 20 years. "Starbucks, based on the old model, shouldn't be able to happen," says Kelly O'Keefe, CEO at brand strategy firm Emergence. But it has -- and it's a whole new world.

By Nanette Byrnes in New York and Robert Berner in Chicago, with Wendy Zellner in Dallas, William C. Symonds in Boston, and bureau reports

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