The Game-changer: How You Can Drive Revenue and Profit Growth With Innovation

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JUST last year, when Alan Lafley, the dominate at the time of Procter & Gamble (P&Grand) released his book "The Game-Changer: How You Can Drive Revenue and Profit Growth With Innovation", readers flocked to empathise the concern strategy of the world'southward largest consumer-appurtenances firm, then worshipped as a paragon of potent management and profitability. At present, nevertheless, the company is confronting a game-changer that Mr Lafley had not foreseen: a global economic downturn.

Before this calendar month P&G reported profits of $two.5 billion, down 18% in the almost contempo quarter from a yr earlier. Sales of its products—which include such brands every bit Bounty paper towels and Tide detergent—were down eleven%. Analysts worry that it might accept years for the visitor to restore its profits to their erstwhile levels.

For virtually packaged-goods firms, contempo earnings reports were grim. Unilever, the world'southward third-largest consumer-goods business firm by sales, announced this month that profits in the second quarter were downwardly 17% from a year ago. Kimberly-Clark, the maker of Kleenex tissues and Scott newspaper towels, Sara Lee, a manufacturer of frozen foods, and Colgate-Palmolive, with its eponymous toothpaste and soap, all saw revenues drib in the by quarter. Firms that specialise in nutrient, including Nestlé, Kraft and Kellogg, are belongings up ameliorate than those that sell products for cleaning and grooming, but but considering consumers are preparing more meals at home.

Consumer goods were once believed to be every bit recession-proof every bit any industry can be. Shoppers might not be able to beget Rolex watches and champagne during a downturn, the theory ran, but everyone still needs staples such as soap and toilet paper. Yet sales have fallen in this downturn, thanks largely to growing competition from stores' own brands, or "private labels". Private-label appurtenances tend to cost nigh a quarter less than branded ones, and so appeal to penny-pinching consumers. Some shoppers are besides forgoing birthday items that they used to consider staples, such as air fresheners or special detergents for sensitive skin. The big brands' recent, sick-timed toll hikes of as much as a fifth in response to rise commodity prices take accelerated the trend.

Retailers have also been giving more shelf space to their own products, on which they earn amend margins, further squeezing the large brands past making them less visible. Jan-Benedict Steenkamp, a marketing skilful at the Academy of North Carolina, estimates that the share of private-label goods is now 20% at Wal-Mart and 35% at Kroger, two huge American retailers.

In the by year private-label sales accept grown by around 9% in America and five% in Europe, gaining market share from branded goods in many categories. Middle-market brands, measured by cost or sales, are particularly vulnerable to competition from private labels; fifty-fifty in countries similar Deutschland, where individual labels now business relationship for about 40% of sales, the best-selling and most expensive brands have not lost much footing (see chart).

Many analysts believe that the flight to private labels will outlast the downturn. Ali Dibadj of Sanford C. Bernstein, a enquiry firm, estimates that about half the people who have recently switched to private labels will never go back. The quality of private-label appurtenances has improved, making information technology harder for consumers to discern whatsoever difference between a store's brand and a more than expensive rival, particularly for commodities such as paper towels or milk.

Yet not all consumer-goods firms have succumbed to the onslaught of the private label. Reckitt Benckiser, a medium-sized British firm, reported a fourteen% increase in profits in the second quarter compared with the previous twelvemonth, and an 8% increase in sales. The firm, which is the world'due south biggest manufacturer of household cleaning supplies, such as Lysol disinfectants and Spray 'n Launder stain remover, has raised its sales and profit targets for the year, whereas P&Thou has reduced them and Unilever has scrapped them altogether. This was not just a lucky quarter. While Reckitt'due south cyberspace revenue grew by ix% betwixt 2005 and 2008, P&M's was upwardly just 5% and Unilever's six%.

Reckitt puts its success downwardly to direction, marketing and the positioning of its brands. Its hierarchy is surprisingly shallow: at that place are only one or two managers between the chief executive and his regional marketing officers. This allows the house to make decisions more speedily than its competitors, says Bart Becht, Reckitt's boss. The firm can turn ideas into goods on shelves in around nine months, at least three months faster than its rivals.

Mr Becht insists that consumers tin still be persuaded to pay for more expensive, branded goods. Reckitt increased its spending on marketing past 25% last twelvemonth, when nearly of its competitors were cut dorsum. The firm takes pains to cater to all budgets. Information technology sells four versions of its Finish dishwashing detergent, for example, at different prices. (The latest and most expensive version of Finish, called "Finish Breakthrough", costs more than twice every bit much every bit the nearly basic variety.) Reckitt is nevertheless calculation extra frills to its goods, and pricing them appropriately. Information technology recently released a new air freshener with a motility sensor to tell it when to spray its perfume, which is a fifth more than expensive than the humbler sort, for example. Mr Becht says consumers will not pay for minor alterations, such every bit new flavours and scents, merely they volition for more significant innovations. "Nosotros've proven that in a downturn, consumers don't walk away from meliorate products," he says.

This is a very different strategy from that of Reckitt'due south rivals, which, later years of sprucing up their products and pushing up their prices, are scrambling to introduce cheaper options. P&G, which has one of the nearly loftier-end brand portfolios of whatsoever of the packaged-appurtenances firms, has tried to attract customers by launching "basic" versions of its popular brands. It recently released Tide Basic, which costs effectually a fifth less than its more upmarket cousin. But taking an existing brand downmarket in this way can be unsafe, analysts say. Consumers are unlikely to revert to the more expensive version if they are offered a similar product for less.

Unilever, P&G and others are besides cutting their prices and increasing sizes to compete with private labels—although that can plainly cut into profits. Targeted advert, which directly compares the quality of a branded production with a private-label rival, is also a brusque-term solution for consumer-goods companies, which are keen to remind their customers why paying more is a good idea.

The worst of the pressure on consumer-appurtenances firms should misemploy when the recession ends. But if the pessimists are correct, and a proficient number of Western consumers stick to the frugal habits they take learned in contempo months, branded products will keep to suffer. One fashion to revive growth will be to place a greater emphasis on emerging markets in Asia and Latin America, where private labels are unlikely to take hold in the almost term, since retailers are smaller and do non have the knowledge or resources to produce their ain brands. In that regard Unilever, which already gets over half its revenue from emerging markets, is improve positioned than P&One thousand.

Some other strategy would be to sidestep retailers completely and sell straight to consumers through the internet. P&G'south new dominate, Bob McDonald, has alluded to this sort of programme. Information technology could exist exactly the type of "game-changer" his company badly needs.

This article appeared in the Business organization section of the print edition under the headline "The game has changed"

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Source: https://www.economist.com/business/2009/08/20/the-game-has-changed

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