Defense

The Uneven Recovery and P&G’s Branding Challenge

5 Aug , 2010  

Procter & Gamble announced somewhat disappointing earning this week.  While fourth quarter revenue grew by +4.7% to $18.9 billion, profit fell from $2.5 billion to $2.2 billion, a decline of -11.3%.  The company’s stock fell by over $2 per share due to the news.

P&G executives explained that the weak results were due to an increase in price promotions and marketing spending.  Apparently, P&G spent heavily and protected share and revenue but at the expense of profit.

The Financial Times quoted P&G CEO Bob McDonald stating “Our new initiatives that are premium priced continue to do very well, and I would say that they appeal to the people with jobs.  At the same time we also see…consumers without jobs…trade down.  I frankly expect that to continue.”

P&G faces a very difficult branding question.  How should the company respond to an economy where some consumers are doing well but many more are struggling economically?

In recent years P&G has focused on big, premium brands, generally one main brand per category.  In the United States, for example, P&G has Crest in dental care, Tide in cleaning and Pampers in diapers.  This approach works well when most people can afford the premium brand and are willing to pay.

As the economy weakens, however, this strategy runs into problems; many people are no longer able to pay for the premium brand.  This raises big questions:

 -Should P&G simply give up the more price-sensitive buyers?  This would lead to significant share loss. 

-Should P&G increase spending and reduce promoted prices in a bid to hold onto share?  This approach hurts profits, as this week’s results demonstrated.

-Should P&G try to reach both groups of consumers with the same brand through the use of products like Bounty Basic?  This seems like an elegant approach but it might dilute the brands.  It certainly makes it easier for consumers to trade down.

-Should P&G promote multiple brands, each tailored to people at different economic levels?  This would be a big shift from P&G’s recent strategy.

These are difficult questions.  Importantly, none of the options is particularly appealing.  If the economy continues to struggle, P&G and other consumer products companies will face some tough choices.


6 Responses

  1. phil corse says:

    Hi Tim,

    Great questions, especially the last one about promoting multiple brands to multiple markets. I think they should; especially in the large emerging countries with exploding middle classes using technology, smaller packages and manufacturing to drive the cost of goods and retail price points down.

    They expanded the market in China by offering disposable diapers at 10 cents each vs. the more acceptable cloth diaper.

    Regards,

    Phil Corse — Global Marketing

  2. Mukund says:

    I would suspect P&G’s marketing dollars in today’s economy is skewed towards protecting market share. This is evident from lower profitability. P&G is probably trying to retain current customers who are trading down by defecting to private label competitors. At the same time they are probably wooing new customers who are on the fence ready to switch to P&G at attractive price points, which could explain their revenue growth (assuming they bring net new customers despite defection)

    Either way, brand dilution would be terribly bad for an iconic company like P&G. So if I were to choose between high brand dilution+lower profits+higher revenues versus no brand dilution+higher profits+lower revenues, I would choose the latter.

  3. […] This post was mentioned on Twitter by Kellogg School, jeroenbolt. jeroenbolt said: RT @KelloggSchool: The uneven recovery and P&G's branding challenge https://ow.ly/2mcqL #Kellogg Prof Tim Calkins blogs about #P&G options […]

  4. Devang says:

    What If P&G try to differentiate premium products from basic products based on tangible features instead of brand name ?

  5. Christopher says:

    Overall I think P&G needs to avoid diluting their brand. Offering a “basic” option of their brands is a solid idea, but if and when things get better they will have to put forth a case to get buyers to trade back up.

    Revenue is up, but so is spending. I’d be more interested in knowing if their marketing approach is focusing on out bidding their competitors or if it is building brand value and giving buyers a reason to continue to pay more.

    • Tim Calkins says:

      Christopher—That is a great question. One risk in boosting spending is that competitors might well follow. This is particularly a problem for price promotions. A big increase in promoted spending will usually force competitors to respond and there is a big risk of escalation.

      Tim

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