By Cliff Peale
The Cincinnati Enquirer
MOSCOW - Sitting in her tiny two-room apartment in a middle-class neighborhood, Olga Kashenkova holds a bottle of LaCoste perfume. The 43-year-old mother and children's clinic nurse thought she knew which company made the perfume - Cincinnati's Procter & Gamble - but wasn't sure. What she did know was that the perfume cost more than 1,100 rubles (about $40), and she loved the scent.
"I like these products," she said through an interpreter, gesturing at the Fairy dishwashing liquid, Tide detergent and Always feminine pads. "I feel at home with them."
In a Russian store in Tula, 30 miles south of Moscow, a Russian shopper picks two of Procter's Ariel products. Tide is also on shelves, but so are competing products, some with Russian-language labels.
(Associated Press photo)
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Nearly 5,000 miles from its downtown Cincinnati headquarters, P&G is making a determined thrust into Russia, whose 145 million people support an economy only 15 percent as large as the United States, but with the potential for astounding growth. P&G expects to report Russian market sales of about $500 million in 2003, tiny when compared to North American sales of about $20 billion. But Russian sales are growing 50 percent a year, a breakneck pace unmatched in the mature markets of the West.
P&G has invested at least $200 million in Russia since entering the market in the early 1990s, betting that demand for its products would blossom as Russia continues to transform itself from Communist society to freewheeling consumer marketplace.
Russia and countries such as China, Brazil and Mexico are the new battlegrounds in P&G's strategy to satisfy Wall Street expectations, keep and grow jobs in Cincinnati and earn its place as a powerhouse in the global consumer market of the 21st century.
Still, nobody is saying it will be easy, and Wall Street is watching.
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"From an investor's perspective, it's really all about growth, and ... this is where you'd expect the growth to come from," said Ann Gillin Lefever, a Lehman Brothers analyst who follows P&G. "As you develop a base level of wealth in these countries, you can get consumers there into higher-margin products." Right now, she said, it's more important for P&G to simply sell as much of its products as it can.
P&G competitor Unilever is likewise betting on the potential of emerging markets. Unilever plans to spend millions on a new ad campaign to push its products in Eastern Europe.
The market varies from country to country, and Russia has its own unique potential. For example, the average Russian is hardly flush with cash, mustering only about $1,200 a year in disposable income. Less than one-third of households use washing machines, and only about 12 percent regularly use the Internet.
But literacy rates are on a par with the United States and personal income is rising more than 20 percent a year, dwarfing U.S. income growth rates. So, P&G is gambling that an educated, increasingly affluent Russian society over time will turn to its products.
For now, Moscow and other big cities are the centers for market growth. Russia remains a poor nation by Western standards and there is a sharp divide between those who benefit from the opening of this market and those who struggle just to make ends meet.
Even better-off, middle-class Muscovites such as Kashenkova and her husband, who works at a computer company, live in apartments that easily could fit into one floor of an average suburban Cincinnati home.
However, as their American counterparts would attest, upward mobility comes with a price. Kashenkova says she "works all the time," including weekends, but is satisfied with most of her daily life. One exception: Her apartment. "Yes, I would like to have a bigger apartment," she tells a consumer research firm hired by P&G.
The pool of potential customers such as Kashenkova is growing fast, said Natasha Zagvozdina, an analyst in Moscow for Renaissance Capital, an international research and financial services firm. "The more wealthy consumers become, of course they will move to higher-priced products. The brands that P&G is pushing in Russia are so well known, and the consumer acceptance is already there."
Still, P&G must adapt to the realities of a market where cash is scarce and the customer is skeptical. The keys: control production and distribution costs and keep prices at rock bottom. Consider:
A box of Tide detergent that might cost $5 or $6 in the States costs 35 rubles in Moscow, slightly more than $1.
Shamtu shampoo, a lower-price brand created especially for the Russian market, costs 52 rubles, or about $1.50.
A pack of 70 Pampers, imported from a P&G plant in Poland, costs 400 rubles, or about $13. In the United States, a similar package can sell for nearly $40.
P&G also has found Russia to be a laboratory for mid-priced brands with features tailored to the needs and pocketbook of the local market. For example, Shamtu shampoo costs less than Head & Shoulders. But its fewer-frills formula is designed to add volume to hair, which many Russians want after cold, dry winters when they wear hats much of the time. Blendax is a less expensive version of Blend-a-Med, the toothpaste P&G sells in most overseas markets. Galina Klyopova, a Moscow homemaker and mother of two, buys Blendax instead of local brands. "A good toothpaste cannot be too cheap," she told a P&G research firm.
In response to these realities, P&G Russian market chief Daniela Riccardi has pushed a basket of lower-priced consumer products to market during the last 18 months. They're quickly becoming global market models as P&G seeks to appeal to consumers in fast-growing countries where income has not yet reached Western standards.
"Sometimes we tend to think of the low-income consumer as one that simply doesn't have money," Riccardi said. "These are consumers who have different needs. Often, they're just more careful about the price."
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Under the Soviet system, everyday Russians had only limited ability to make decisions Americans take for granted, such as changing jobs and traveling as they please. Comparison-shopping was a dream even for the privileged. A shopper's emphasis often was far more on simply locating a basic product of sustenance, and much less on quality. However, from the ashes of the "workers' paradise," newfound consumer freedoms are giving Russians the tantalizing sensation of choice.
On highways heading into Moscow and throughout the city, dozens of billboards that once promoted five-year industrial plans now hawk beauty products. And just off Red Square, within sight of the Kremlin, an indoor mall beckons those with rubles to spend to a store operated by Wella, the German hair-care giant acquired recently by P&G for $5.7 billion.
"When I came here, I was amazed how much attention women here pay to their beauty," said Italian-born Riccardi, who has served as general manager of P&G's Russia operations since 2001. "And they pay a lot of attention to their skin ... I think it's the perfect match (for P&G)."
To reach the Russian consumer, P&G must alter marketing habits ingrained from more than a century of doing business in the United States. For example, ad-savvy P&G is the largest advertiser on Russian television. The Russian daily newspaper Pravda reported that in May 2002 alone, P&G shelled out $38 million to reach Russian viewers.
Some approaches are colored by the generations of government-controlled information that has tempered Russians' belief in what they see and hear. It's also flavored their expectations for product pitches.
"These consumers have seen lots of propaganda they didn't trust from 50 years of communism," said Alex Nasard of P&G's Moscow marketing office. "You can't just go on television and say anything." So Muscovites are more likely to be bombarded by straightforward, to-the-point P&G pitches than by the entertaining nuances of Mr. Clean.
Still, Western brands are hot. Most P&G products are labeled in English, both to retain the global identity the company is seeking and to appeal to the consumer's desire for anything American.
Sticking with the final frontier
Russians were already familiar with the marketing of U.S.-based companies, such as Pepsi and McDonald's, by the time Mikhail Gorbachev proclaimed glasnost in the 1980s. Then, the world changed.
On November 9, 1989, more than seven decades of communist control unraveled as the Berlin Wall came crashing down. The sprawling Soviet Union wasn't far behind and in 1991 it, too, dissolved. To many, it seemed that blue jeans, rock 'n' roll and burgers had accomplished what decades of armed face-off had not. The Cold War was over; the Consumer War was beginning.
Even before the formal breakup of the Soviet state, P&G strategists set their eyes on the potential of a soon-to-be capitalist Russia.
John Pepper remembers well his first trip to Russia, a five-city tour he and other P&G executives took in February 1990. Their mission: To scout former Eastern Bloc countries and establish P&G beachheads.
The former P&G chairman and CEO, then directing international operations, recalls an encounter at the Kremlin with a trade official who asked him to consider taking over the state-run detergent industry. From these discussions, P&G ultimately acquired the giant plant it now operates in Novomoskovsk. "I had this vision that I hoped Russia could become a business like the United States," Pepper said in an interview from his Cincinnati office. "I was thinking this was the final frontier."
Concerned about risks the company would never face in the United States, P&G took baby steps into Russia. It formed a partnership with St. Petersburg University in the former Leningrad and installed some marketing executives there. The first office was in a hotel, and P&G sold brands including Wash & Go, Old Spice and Head & Shoulders.
Pepper says the partnership enabled P&G to start slow, and gave it access to the younger, university-educated Russian professionals he knew the company needed to grow.
From this foothold in Peter the Great's capital on the Baltic, P&G soon recognized that a much larger commitment was needed to establish its products in a diverse and expansive market from more sophisticated western Russia to the forests of Siberia in the east. So it slowly ramped up its operations, opening an office in Moscow and in 1994 winning a bid to invest at least $50 million in the state-run laundry plant in Novomoskovsk.
"We were metering our investment," Pepper said. "While I thought Russia would make it, we've had some real roller-coaster rides."
The big one hit Aug. 18, 1998, when the ruble crashed in what became known as the crisis. Today any Russian can tell you where he or she was when the crisis hit. In a single day, the value of the currency plummeted by half. Stores raised prices, and overnight, every Russian had half as much buying power.
P&G had to respond. While it continued to sell its products, revenue dropped by more than half to about $300 million, Pepper said. "That was the greatest single economic challenge I've ever seen a P&G organization face," he recalls.
So the company cut costs. It laid off hundreds of workers, but raised the salaries of those remaining in the Novomoskovsk plant. "That was the defining moment," says Giancarlo Iannelli, an Italian native and manager of the plant. "That's when people understood that P&G, yes, it's here to make a profit. But it's going to be here not only when things are going well, but also when they are not going so well."
Five years after the currency crash, the ruble and P&G appear to have recovered. Profits have returned to pre-crisis levels. Riccardi said she hopes to drive sales to $1 billion in the next two years and to $3 billion - six times the current level - in a decade.
P&G's on-the-ground marketers, nearly all younger Russians who have stuck with the company during the past decade, say the future is bright. "The fun of working here before the crisis was that we were all the time introducing new categories," said Alena Kudryashova, associate marketing director for brands including Pampers, Fairy dishwashing liquid and Comet cleanser. "Then we went through the crisis. And now we are introducing brands again."
Patience remains a watchword. "In the U.S., it took us 40 years for the transition from cloth to (disposable) diapers," Kudryashova says. "Here, we are in our 10th year."
P&G executives remain optimistic for the ultimate rewards of their Russian gambit. They say the company has learned and adapted from its early lessons.
"Russia has crossed the threshold for us, and we're expanding our business there," says P&G vice chairman Kerry Clark, Cincinnati-based president of global market operations.
That's music to the ears of P&G's thousands of local employees who hope the quest for rubles will put dollars into their paychecks and add fuel to the economy of Greater Cincinnati.
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