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2 amp; LO. 3 ( Alternative cost management strategies ; writing ) In 1993, Procter amp; Gamble ( P amp; G ) management tried to control costs by...
These are heartbreaking times for brand marketers. Consumers seem to have fallen out of love with the soaps and the cigarettes they once were so enamored of. More and more, they're spurning products they grew up with for the siren call of cheaper rivals--and finding the savings sweet. So is this the end of our long affair with premium brands? Some marketers seem to be acting that way. Philip Morris Cos. recently slashed the price of Marlboros by 50 a pack to compete with cut-price smokes. But Procter & Gamble Co., the king of consumer brands, would dearly like to avoid that marketing equivalent of stepping off lover's leap. Instead, P&G Chairman Edwin L. Artzt has been revamping many of the company's time-honored selling techniques in response to the pennypinching 1990s. In a series of moves that have jolted retailers and are being closely watched by rival marketers, P&G is slashing its promotional spending, culling weaker brands, and pushing to cut manufacturing and administrative costs. By slashing what it increasingly sees as unproductive marketing expenses, Artzt figures, P&G can apply the savings to price reductions. Those cuts could help P&G stem the erosion in its U.S. sales growth (charts)--without committing Marlboro's profit suicide. That's vital, in turn, to Artzt's global strategy, which is based on continued expansion abroad, funded largely by strong U.S. profits. BRAND APOSTASY. Artzt is expected to outline key new elements of his plan at a rare presentation to analysts on July 15. He is likely to announce a major reengineering of P&G that will reduce management layers, streamline work processes, and cut staff by the thousands. He is also likely to trumpet signs that the new marketing approach that P&G began accelerating last year is starting to pay off in revitalized market shares. And while he probably won't say so explicitly, it's becoming clear that P&G has been taking its marketing overhaul even further than anyone reckoned. Having hacked away at the discounts and promotions it offers its retailers, P&G has also begun cutting the welter of coupons and refunds it aims at consumers. And in what amounts to virtual apostasy at a company that never gave up on struggling brands, P&G is consolidating some weak products with stronger siblings, while dumping others. Artzt's new mantra: "Consumers won't pay for a company's inefficiency." A cynic might say that's partly what brand marketing has always been about. Shoppers were willing to pay a premium for national brands because of their promise of quality and consistency. That price premium gave manufacturers fat margins to apply to advertising, trade and consumer promotions, and profits. But consumers have grown to see products in many categories as pretty much the same and increasingly shop for the cheapest offering--whether it's a national brand on special or a store brand. The toll is clear. In P&G's biggest business, disposable diapers, private-label products have increased their market share from 21% to 31% since 1991, taking half of that increase out of P&G's hide. Sales of other private-label products, from cold medicine to cooking oil, have also risen, according to market researcher Information Resources Inc. "Consumers are getting back to basics," Artzt said in a speech last year. SWINGS. P&G has responded with an efficiency drive. It studied pit crews at the Indianapolis Speedway, for instance, and applied their lightning-quick methods of changing parts and tires to reduce some manufacturing changeovers from two days to just two hours. Altogether, P&G is looking to cut overhead by $750 million, based on today's sales.
In particular, though, P&G is reexamining its marketing system. Initially, Artzt focused on trade promotions--the discounts, fees, allowances, and other gimmicks marketers offer retailers and wholesalers. From P&G's perspective, that system is hugely inefficient. It shifts some of the manufacturer's profits to the retailer. It often requires extra spending on special packaging and handling. Because it causes wild swings in production--creating spikes when promotions are high and troughs when discounts are eliminated--it raises manufacturing costs. And worst of all, since it has Dawn dish detergent selling for 99 one week and $1.89 the next, it makes consumers even more price sensitive. So P&G started paring back those promotions in 1991, infuriating many retailers, who have come to depend on the promotions for much of their profits. Some took P&G products off the shelf; others cut their ads and displays of P&G brands. The immediate effect was major marketshare losses. But Procter also achieved major cost reductions by cutting price promotions. And by smoothing out production schedules, the steadier pricing should trim $175 million a year from production costs. Thanks to the savings, operating profits in the quarter ended Mar. 31 rose 11%, to $760 million, on sales that dipped 2%, to $7.4 billion. The cost savings have given P&G the leeway to hit back at low-price rivals. In 1992, the company lowered diaper prices 12%, and Artzt announced further price cuts on Pampers and Luvs last April. P&G has been widening the assault: List prices for Tide and Cheer have dropped about 9% in the last few months. Artzt believes profits won't be affected in either category. As Artzt is expected to tell analysts, the price cuts are paying off. The company says volume in the more than 70% of its brands that have switched to the new pricing model is growing faster than in the rest. And Procter claims its share in 21 of 31 U.S. product categories is up from last year, led by double-digit gains in detergent and shampoo. "The worst is over," says PaineWebber Inc. analyst Andrew Shore. "SUPERB PROCTOID." More recently, Procter has been turning its gimlet eye on consumer promotions. From here on, it may use free samples to get buyers to try new products, but it won't be burying shoppers under a blizzard of coupons any longer. Again, it's using the savings to pare prices even further. "Coupons don't contribute to consumer value day-in and day-out, and those dollars are better used to drive lower shelf prices," a spokesman says. Altogether, P&G has cut spending on trade and consumer price promotions by 40%--in excess of $1 billion a year. Procter is also aiming to streamline its brand portfolio, repositioning or even scrapping weaker brands while broadening the franchise of stronger ones. It's cutting the colors, flavors, and sizes of its 100 U.S. brands by 15% to 25%. It has combined Puritan oil with Crisco. It's killing its White Cloud toilet-tissue brand altogether, replacing it with a new Charmin Ultra. And P&G-watchers expect other lackluster brands are heading for the chopping block. P&G isn't just wielding the ax. Artzt "is a superb Proctoid," as one former manager puts it, raised on the verity that Procter invests heavily in new products, then advertises them to the hilt. The company has boosted its new-product introductions 30% in the past three years. Artzt has also maintained or slightly increased U.S. ad spending. To be sure, P&G's rewriting of the marketer's handbook has its risks. By cutting trade and consumer promotions, P&G removes some powerful arrows from its quiver. That will make it "very readable, very predictable," and thus easier to compete against, says a rival. Others suggest that promotions are needed to drive sales and that Procter's moves to simplify product lines may leave too few choices for consumers--an inflexible "one-size-fits-all" approach, worries one P&G manager. Meanwhile, price pressure is growing in Europe, where P&G hasn't yet taken the dramatic cost-paring steps it's taking at home. P&G knows, however, that consumers worldwide are no longer willing to pay the premium for a brand name they once would have. Now, value is the way to woo. It may not be a torrid romance, but at least it's an ongoing relationship.
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