By Cliff Peale
The Cincinnati Enquirer
GENEVA - As Procter & Gamble Co. gears up its operations in Russia, the company is blending the experience of market growth in a post-communist state with the tough lessons learned from decades of battle against fierce competition in the upscale nations of Western Europe.
The two theaters of corporate war are very different. Russians, though increasingly brand-conscious, are accustomed to products with a more generic quality and a rock-bottom price. In Western Europe, where the parade of tony brands seems endless - Ferrari, Mercedes, Yves St. Laurent, to name but a few - the consumer thirsts for panache, has more money to spend on luxury items and is willing to part with big bucks to achieve a sense of haute couture.
Advertising, still relatively primitive in its approach in the former Soviet state, is almost an art form in the West, and well-established and reliable distribution networks in Western Europe mean the latest styles can get to the many shopping capitals with ease.
Toothpaste and detergent are now the staples of the company's Russian offerings. But the products of tomorrow may come with a higher price tag.
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P&G hopes that by entering the developing Russian market now, led by Italian-born Daniela Riccardi, the company will have the competitive edge when Russian consumers can pay for high-priced, status-symbol products. So Riccardi keeps an eye on what's going on far to the west in Geneva.
And from P&G's Western European headquarters atop a hill overlooking Lake Geneva, the focus is firmly on Europe's corporate and fashion capitals. London, Paris and Milan grab the daily spotlight as a well-oiled marketing machine analyzes every hint of a consumer trend, and every move by giant Europe-based competitors such as L'Oreal and Unilever.
Western Europe is the jewel in the global marketing plan hatched at the company's headquarters in Cincinnati. The company entered the European market in 1930 with the purchase of a British soap company. It reached the Continent in 1954 by leasing a detergent plant in France.
L'Oreal, P&G's archrival and role model in the fast-moving business of cosmetics, shampoo and hair color, is based in Paris. Just as importantly, Milan and Paris are home to what the industry calls catwalks, the fashion runways where the newest hairstyles and expensive apparel and fragrances debut. Staying on top of it all may sound glamorous, but the stakes are high and the price of procrastination can be devastating.
"If you're completely off trend or two years late, obviously you're not going to win," says Hanneke Faber, marketing director for Pantene shampoo and Clairol hair color in Geneva. "It's not science. You look at the catwalks and see what the hair looks like, that's what it's going to be a year from now." And that means P&G must adapt its products before the trend hits.
Those are sentiments echoed throughout P&G's Geneva offices, the war room of the company's ceaseless battle against major European competitors.
P&G's 1,600 Geneva workers - averaging 29 years old - come from 40 countries. They lead the research and marketing of the company's brands as it continues a successful turnaround of its fortunes in Western Europe. Still, European companies such as Unilever and L'Oreal have the home-field advantage in a market where the consumer's taste is highly demanding and subject to change without warning.
"It's pretty tough," says Paul Polman, president of P&G's Western Europe operations, who has led the company's turnaround. "In most of these countries, we've had a come-from-behind mentality. We tend to have more competitors that have market shares closer to ours."
A photo of a L'Oreal display at a store in Geneva, Switzerland.
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In Russia, the main competitors might be local companies that make cheaper products. To respond, P&G has introduced less-expensive shampoos, toothpastes and feminine pads.
But in Western Europe, the biggest of those competitors is L'Oreal, which sets the standard in beauty care and treats price as no object.
"They (L'Oreal) are an incredible company that churns out ideas like nobody else," Faber says. "We benchmark them for nearly everything we do. ... We say, 'Is that more distinctive than L'Oreal?' "
That's serious business to the Geneva brain trust because P&G chairman and chief executive A.G. Lafley has made no secret that he wants to transform the company into a global beauty-care powerhouse.
Because image-savvy Western Europeans are willing to pay more for beauty care products, the profit margins can be higher than in traditional P&G strengths such as diapers and detergent. And while such powerhouse brands as Pampers, Bounty and Tide still provide the bulk of P&G's profits, they don't match profit margins or sales growth of beauty-care brands.
Procter has increased its success in the last three years. For example, in Germany, Head & Shoulders has leapt from a 0.5 percent market share in 1999 to a 7.5 percent share now, Faber said.
Much as Crest toothpaste took off in the United States decades ago with an official recommendation from the American Dental Association, P&G started a dermatologist program in Germany to spark sales.
In France, Head & Shoulders now is the No. 3 hair-care product, though still behind two L'Oreal brands.
"If we can win there, we can win anywhere," Faber says.
Western Europe is P&G's biggest turnaround story in Lafley's three-year tenure. It has returned to profitability, and sales have jumped past $10 billion, now accounting for close to one-quarter of the company's total sales.
Two years ago, sales were about $8 billion and falling.
Some of the reported rebound can be attributed to the rising value of the euro. As the euro rises against the dollar, European companies find it harder to export to the U.S. market. But P&G can sell for euros and boost its revenue in the conversion to dollars. P&G's Western Europe sales have been growing at the company-average annual rate of about 5 percent, Polman says.
In 1999, P&G adopted a global restructuring program called Organization 2005. The far-reaching change organized the company by product divisions, such as health care or fabric care. Market development groups, including Russia and Western Europe, would handle sales and distribution. As part of the reorganization, P&G stopped reporting financial results by geography, instead reporting sales and profits for each global business unit.
In some regions, it went smoothly. Russia was dealing with issues related to the collapse of the ruble and the operations there were less complex.
But in Western Europe, Polman concedes, the reorganization had a bumpy ride. The sophistication of consumers made the market more fragmented. French, German and British demands don't always conform with those of Italian, Danish or Dutch consumers, and that affects decisions on which brands to market in specific countries. For example, P&G sells Crest White-strips only in Germany, of the Western European countries. In Britain, it sells Crest toothpaste, but in Germany, its toothpaste brand is Blend-a-Med.
"That didn't go well here, at a time when we were disrupting the organization," he says of Organization 2005. "It's more complex. We have different portfolios to compete with in each of these countries."
In 1999, for example, unit volume - the number of products sold - fell 5 percent in the reporting region that included Western Europe. And a year later, P&G lowered its earnings expectations, blaming in part higher costs in Europe "associated with a large number of new initiatives launched in the region at a time of unprecedented historical change."
In June 2001, Polman joined Lafley at a Wall Street investor conference in New York and laid out the strategy: Concentrate on major brands in Europe's biggest countries, try to "harmonize" prices across Europe, and take advantage of its scale by consolidating the supplier base.
The financial results have improved, but P&G still faces the same challenges of a fragmented market
In the United States, P&G has been able to use the Crest name to make a success out of the Crest Spinbrush. And it's buying the Glide line of dental floss, and no doubt will use the same strategy.
In Europe, that's much harder to execute because brand identity is inconsistent from country to country.
"You might launch the Spinbrush, but you don't have any leverage," Polman says. "You don't stand for anything."
Now, many of the operational difficulties are ironed out, and Polman says P&G is well positioned. It controls about half the market share in baby care and feminine care, two of its core categories.
But market shares are only in the low 20s in hair care (No. 2 behind L'Oreal), and above 30 percent in laundry, leaving plenty of room for growth.
Polman hopes the recovery here will last and pick up steam.
"The organization has its pride back," he said.
In Moscow, Daniela Riccardi's staff is watching Western Europe closely.
As the Russian market matures, intense competition and heightened consumer demand someday will bring both the profits and challenges that P&G has experienced in Western Europe.
That's what business is all about in the emerging global marketplace.
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