P&G to keep spending

16 May 2011

CINCINNATI: Procter & Gamble, the FMCG giant, believes that investing in innovation and marketing is the "best response" to meeting challenges in North America and Western Europe.

The owner of the Tide and Pampers brands derives two-thirds of sales from mature markets, and the protracted recovery in these geographies knocked almost a full percentage point off its growth figures during the firm's current fiscal year.

However, speaking at the Goldman Sachs Consumer Products Symposium 2011, Jon Moeller, Procter's cfo, identified "spots of light" providing room for encouragement in spite of this trend.

"We've got a very different consumer dynamic," he said.

"While consumers at lower incomes levels certainly aren't in a healthy spot in the developed world, they're not looking over the cliff into oblivion as they were in 2007/08."

"The level of fear that exists is very different now than it was then."

More broadly, the tendency among customers to trade down is beginning to abate.

As such, P&G has witnessed 16 straight months of share growth in Western Europe, whereas store brands expanded during just one of the last 12 months.

In the US, the company has maintained or improved its position for 13 months in a row, as own-label posted declines for eight successive months.

"We're seeing consumers across all price tiers continuing to have a strong preference for branded products, which wasn't necessarily the case in the depths of the recession," said Moeller.

"Having said that, we continue to see markets essentially move sideways in both Western Europe and North America, and that view hasn't changed."

In reacting to such obstacles, P&G is focusing on research and development in five price tiers as a means through which to boost demand.

"The best response to slow market growth is innovation," said Moeller. "Innovation is enabling us grow faster than underlying market rates."

Crest 3D White, Fusion Pro-Glide, Tide Pods and Pampers Three-Way Fit are a few high-end lines recently emerging from the R&D pipeline.

"Some of the faster-moving items in our portfolio are these premium-priced items that we're launching with strong innovation behind them. I think that speaks to a healthy consumer among the wealthier set," Moeller said.

"Each of these … are examples of premium innovations that build market value in their categories and build market share for Procter & Gamble."

Equally, introductions at the lower end of the spectrum – such as Always Simply Fit, Charmin Basic, Tide Naturals and Gain Hand Dishwashing Liquid – also possess distinct advantages.

"These innovations help us build scale in large categories and serve more consumers with Procter & Gamble brands," said Moeller.

"They insulate our premium offerings from low-priced competition, enabling us to more effectively price up with innovation on higher price tiers."

Delivering products carrying unique features also yields a tangible reason to increase prices, an important approach in the face of rising commodity costs.

"Coupling pricing with innovation is a very different dialogue, and you can do that with consumers and with retailers, and we've got the strongest innovation programme that we've ever had behind this," said Moeller.

"If we innovate better than our competition and communicate innovation more effectively to consumers, we will create leadership levels of value creation for our shareholders."

While the on-going pressures on manufacturers may stimulate short-term strategies, Moeller argued quick fix solutions ultimately prove sub-optimal.

"In general, we would rather invest a dollar in innovation and on equity building of our brands than we would on price promotion of any form, whether its couponing, or trade support or anything else," he said.

"Promotion wins quarters; innovation wins decades."

Data sourced from Procter & Gamble; additional content by Warc staff