Can Procter & Gamble Change Its Culture, Protect Its Market Share, And Find the Next Tide?
(FORTUNE Magazine) – Procter & Gamble is desperate--desperate, that is, for a hot new product, a product you haven't even heard of yet, but that ten years from now will be tucked into every kitchen cabinet from Cincinnati to Katmandu. In short, P&G is on a mission to create the next Tide. At ground zero in this mission is Kathy Walkenhorst, a petite brunette homemaker in the suburbs of Cincinnati. Two years ago P&G handed Walkenhorst a sea-foam-green box containing a bottle of liquid, four towelettes, and a white plastic bag. Her instructions: Use the mysterious product, called Dryel, on her soiled silks and linens. Every few months since then, Carol Berning, a Procter & Gamble psychologist, has traveled to Walkenhorst's tidy two-family house at the end of a cul-de-sac to watch and take notes. One Wednesday in early March--with Berning peering over her shoulder--Walkenhorst opens the green box, pulls out the plastic bag, and stuffs it with a black sweater and a wool jacket. Adding one of the moist towelettes, she tosses the bag into her dryer. Now Berning jumps in: How does this make you feel? she asks. Does Dryel make you happy? Are you comfortable with it?
Thirty minutes later Walkenhorst's clothes come out dry-cleaned. Yes, dry-cleaned. Dryel, coming soon to a supermarket near you, is a bold move by P&G to dominate what it hopes will be a new consumer category--home dry cleaning. If P&G pulls it off, Dryel may soon be as familiar to you as the company's other big-name products, old brands like Clearasil, Old Spice, Head & Shoulders, Ivory, and Pepto-Bismol. But the truth is, these days it's not clear that P&G is capable of launching a great new brand like those. The last time P&G hit a home run, a billion-dollar product that invented a new category, was in 1961, the year Pampers introduced the disposable diaper. Tide was rolled out in 1946. Crisco in 1911. Ivory in 1879. You get the idea. The problem, it seems, is that as the world has changed, P&G has not.
The man charged with bringing P&G into the 21st century is Durk Jager, the new CEO. Jager (pronounced YAH-ger) is tough. He's built like a linebacker and talks like Arnold Schwarzenegger. "If it ain't broke, break it," he likes to say. Born in the Netherlands 56 years ago, Jager will tell you himself the nasty things people say about him: "I break knee caps. I make heads roll." Once, in a meeting, a P&G insider recalls, when a colleague droned on for too long, Jager snapped: "What kind of shit are you trying to clutter my mind with here?" People call him all kinds of things behind his back, perhaps the most polite being "Crazy Man Durk." After three years in P&G's No. 2 spot as COO, Jager took charge in January.
At the time there was much speculation over why his predecessor, John Pepper, was stepping down after only three years on the job. The truth is straightforward: Pepper, known around P&G as a "nice guy," a consensus builder, simply isn't what Procter needs right now. Jager, by all accounts, is. "He's like General Patton arriving with the Third Army," says Burt Flickinger, a former P&Ger, now a managing director of the consulting firm Reach Marketing. Except that instead of an opposing army, what's under attack here is P&G itself. Jager is here to deliver Procter & Gamble a serious kick in the pants.
P&G is a great American company. With $37 billion in revenues last year, it has four times the sales of Colgate-Palmolive, and three times those of Kimberly-Clark. It sells more than 300 brands in 140 countries. There's at least one P&G product tucked into nearly every kitchen cabinet or under every bathroom sink in the U.S.
But P&G is a great American company with a big problem: It has stopped growing. Revenues have flattened out. Some of its most famous brands have been losing market share for years. Former No. 1 Pampers--once 70% of the disposable-diaper market--has lost nearly half its market share over the past 20 years. Former No. 1 Ivory now makes up barely 5% of the market, while Unilever's Dove leads with 20%.
In some ways P&G's success has been its undoing. Because its brands have been so dominant for so long, the company's culture acquired a pervasive, slavish adherence to precedent. P&G has kept going by simply repeating the same formula over and over--coming up with newer, improved versions of the same old products. Tide, for example, has gone through more than 60 product upgrades since its launch. But repeating the same formula works for only so long. The corporate landscape is littered with fallen giants of the '60s and '70s that have failed to change, to adapt: Think of Kellogg, Sears, or Kodak. "Large companies can die," says Jerry Porras, Stanford Business School professor and co-author of management bible Built to Last. "They slowly erode till they get to the point where they're just not great anymore."
In May 1997, P&G promised Wall Street that by 2006 it would double sales to $70 billion. That should have been easy: For the past 20 years P&G's average annual growth rate has been 8%. But now that goal seems unreachable. In 1997, P&G's sales were up just 1%. Last year they grew 4%, to $37 billion. So far this year things aren't looking any better: Sales growth continues to inch along at 2.5%; volume is flat. At this rate, it will take a quarter-century to hit $70 billion. To do it in six years as promised, the company needs to start growing again at 8% per year. And that, most Street analysts agree, is impossible. "I just don't see it happening," says Wendy Nicholson, an analyst with Salomon Smith Barney.
Durk Jager intends to make it happen. When asked about Procter's $70 billion promise to Wall Street, Jager's eyes narrow. For a moment, as he sits in his new office--a vast, oak-paneled chamber overlooking the dreary Cincinnati skyline--it seems as if he's going to pound his fist on the table and throttle out that $70 billion by sheer force of will. Instead, he tilts back in his chair and calmly spells out exactly how he's going to fix P&G. "The core business is innovation," says Jager. "If we innovate well, we will ultimately win. If we innovate poorly, we won't win." His English is difficult to understand at times, but the point is clear: Procter needs a recharge, a big jolt. "To innovate, you have to go away from the norm. You have to be rebellious or nonconventional. You have to do things differently."
What happens when you do things the old way is the kind of catastrophe that befell Crest last year. Crest is P&G's flagship, a brand everyone in the country knows instantly--knows what it looks like, knows what it tastes like. And that's because for 30 years more Americans have been brushing their teeth with Crest than with any other toothpaste. Not many brands, other than Coke or McDonald's, have been on top for so long. But last year--for the first time--P&G lost its No. 1 spot to Colgate. It was an epic, once unthinkable moment in consumer marketing, like Coke losing the cola war to Pepsi, or the Whopper outselling the Big Mac.
When Crest first came out in 1955, it was revolutionary--the first cavity fighter. The trouble is that since then, it has been stuck with pretty much the same sales pitch; the same red, white, and blue box; and the same basic "Look, Ma...no cavities" tag line. Meanwhile, the rest of the world has moved on. Consumers have developed concerns beyond cavities--yellowing teeth, sensitive gums, bad breath. While other toothpaste makers moved in to cater to those concerns, Crest just kept fighting cavities. Arm & Hammer launched baking-soda toothpaste; Rembrandt introduced "anti-aging" and whitening formulas; Tom's of Maine rolled out "natural" toothpaste. Mentadent promised to freshen your breath. Between 1987 and 1997, Crest's market share slipped from 39% to 25%.
But the final stroke came in late 1997, when Colgate came out with a toothpaste that fought everything: cavities, tartar, plaque, bad breath, and, most important, gingivitis--that nasty gum disease every dentist in the country harps on. Some 100 million Americans suffer from gum disease, and Colgate's Total is the only toothpaste with FDA approval to claim it fights it. By the end of 1998, thanks to Total, Colgate had grabbed 30% of the toothpaste market--leaving P&G behind at 26%. In an interview with FORTUNE, John Smale, Procter's CEO from 1981 to 1990 and a former Crest manager, recalled his anger at hearing the news: "I told them, 'You tell the brand manager I'm going to come back like the ghost of Christmas past and haunt him if they don't regain leadership in that brand.'"
Procter publicly insists that Total's victory is only a minor setback, what with all the new, improved toothpastes it has out there or is about to deploy. There's Crest Extra Whitening, Multicare, and a slew of other variants. And yes, sales of Crest are still gigantic--$400 million in the U.S.--but P&G was obviously spooked by its loss of first place. When you talk to rank-and-file P&Gers, Crest is very much a touchy subject. During an interview in his Cincinnati office, Gordon Brunner, the head of R&D, becomes visibly uncomfortable when asked about it. His face reddens, and he stares stonily across his desk. Clearly he doesn't want a discussion. Finally he says tightly, "I credit Colgate in being very creative in their approach to get approval. Have they produced major benefits to the American population? I don't think so." ("I don't know what that comment means," retorts Ian Cook, president of Colgate North America.) P&G went so far as to send out thousands of telegrams to dentists trashing Colgate's clinical trials just as Total was launching. Colgate says it did everything by the book. P&G has since backed off.
Squabbles aside, the real issue is how Procter got left behind. "They were too focused on what they had always been and never really saw the trends emerging," says Tom Hall, a former P&G brand manager, now a marketing director at Beiersdorf, maker of Nivea. P&G, he says, has had all the technologies that its competitors have exploited for years. Procter even has had its own gingivitis-fighting toothpaste for at least six years. But instead of being in supermarkets, it's still in testing. In this case Procter, which spends $1.5 billion on research--nearly 4% of sales--was beaten to market by Colgate, which spends 2%.
Procter is nothing if not meticulous. It is also achingly slow. Olestra, its fat substitute, took 30 years to get to market. The company blames this on the glacial FDA approval process. Still, on average, the company estimates that it takes five years to get a new product out. Typically it takes six months just to put through a request to start manufacturing a product. Creating a prototype takes five months. Scrappier competitors do it in half the time or less. Last year Arm & Hammer took nine months--from inception to market--to launch its first kitty litter product. "Colgate'll give you a project--in a week it's out the door," says one packager who supplies both Procter and Colgate. By contrast, he says, "a P&G project can take years."
Almost anyone who has worked at Procter will rant about the "P&G way" of doing things. "There's a P&G way for using the bathroom," grouses one former employee. There's actually a set of guidelines, called "Current Best Approaches," directing employees on everything from how to run market tests to how to approach retailers. "People often don't use their heads--they kind of look up what they're supposed to do," says Wolfgang Berndt, head of the laundry business. Even P&G ads have a formula: problem, solution, product demonstration. Think: Bounty is the quicker picker upper; Tide gets out the stains other detergents can't. "You could probably recognize a P&G ad anywhere," says Tom Hall of Beiersdorf. Memos--or "recos" in Procter-speak--must be written in a specific format; otherwise they get sent back over and over until you get it right. "A reco...probably went through 15 changes before you could give it to your brand manager," says Vince Hudson, a P&G brand manager.
Breaking the mold can mean big trouble. Mark Wirthlin, a former brand manager, says he got hauled into his department head's office and chewed out for being a "troublemaker" when he tried to create an ad outside the P&G formula. He left in 1993 to start his own business. Former and current P&G employees talk about the firm's obsession with security as though it has an internal secret-police force. "If you're at a cocktail party, talking too loudly about something you're working on, the next day you'll get called in by security," one P&G vet says. The company says its security policies are no different from any other large company's.
After so many decades of rigid conformity, P&G has become known as the land of the Proctoids--a place that squelches entrepreneurs, creative types, and freethinkers--where "troublemakers" don't belong. "I don't think they ever said, 'Individuality's bad,' but it felt that way," says Brandon Neace, 25, a systems analyst.
Over the years P&G has lost some of the best business minds around. AOL's Steve Case, Microsoft's Bob Herbold, Intuit's Scott Cook--all got their start at P&G. Cook, who left in 1976, says he felt stifled by Procter: "It was very traditionally run--the kind of thing Silicon Valley has rebelled against."
Jager says he is changing all that. He is looking for rebels, for people who are willing to stick their neck out and go with their gut rather than with some rule book. Above all, he's looking for people who can come up with big, bold, new ideas--the kind that give birth to billion-dollar brands. Jager is convinced that these people exist somewhere within P&G's pool of 110,000 employees and that his job is to emancipate them. "You will find that...there are people that have the ability and the want and the desire to be little rebels," says Jager. Now underlings, however lowly, can go straight to the top with an idea--and they might even be rewarded with some of the stock options P&G has been handing out for the best ideas employees come up with. On the company's intranet there is a "My Idea" site, where employees can post their zaniest ideas; in the three months it's been up, there have been more than 3,000 postings. As for the rule books, Jager is openly trashing them. On one employee video, Jager tells employees to scrap their "Current Best Approaches" manuals and think for themselves.
But for all the rebellious rhetoric, Jager is a P&G guy through and through. He has, after all, spent the past 29 years at the company. On weekends he spends hours prowling drugstores and supermarkets to check up on P&G products. "He's the only guy at that level who I've visited stores with--besides Doug Ivester at Coke," says Ronald Floto, a former Kmart president who now runs a big drugstore chain along the Pacific Rim. "In a store--I mean there could be a fire in the vestibule--he'll go right to powdered detergents and count the facings." Can an old-timer like him really change the place? From the looks of it, he already has. Wall Street seems to think so: Since Jager took over in January, P&G's stock price has gone up 11%, to $100.
Wandering through P&G's Cincinnati headquarters these days, you feel as if you've entered a city just liberated from an occupying army. Suddenly everybody's a rebel, jumping at the chance to bash the old system. When asked about the old days at Procter, Brandon Neace responds by falling into a parody of the classic Proctoid. He moves his arms up and down mechanically, tilts his head rigidly, and in a tinny voice announces: "We are robots. We are here to do our work." Outside P&G, the mood is catching on as well. "My people feel liberated!" exclaims Kevin Roberts, CEO of Saatchi & Saatchi, the ad agency that produces Tide ads. Tide's new ads, he promises, will be long on creative story lines and short on mundane product demonstrations.
Out of all this, Jager is hoping to make P&G grow again. After all, the only true measure of the company's transformation is growth. Jager wants P&G to start catching up in emerging markets, where he expects to tack on an extra 3%--or $1 billion a year--to revenues. Here, too, the company has fallen behind competitors: Unilever is entrenched in Africa and India; in parts of South America, "col-gah-tay" (Colgate) is a common word for toothpaste. To coordinate P&G internationally, Jager is reshuffling the company into seven global business divisions; each will be run essentially as an independent multinational corporation.
But what P&G needs more than anything is great new products. The company has pinned its future on a small group of items you never thought you'd need: Fit, an antibacterial fruit-and-vegetable cleanser; Thermacare, a portable heat wrap; Swiffer, a dry mop; Febreze, a spray-on odor eliminator; and, of course, Dryel, the home dry-cleaning product that Kathy Walkenhorst was testing. These are P&G's new inventions, the future Pampers and Tides of the world--it hopes. From now on, Jager says, Procter will launch approximately five new products a year. It has just spent millions building a new prototype lab to help get them out to market. At least $200 million a year, or 15% of the R&D budget, is now devoted to major new business projects. Over the next five years Jager expects new products to generate another $1 billion in sales a year.
Can he deliver? Think about Dryel. For the first time in a long while, Procter is operating in uncharted territory. Jager expects Dryel's sales to reach $500 million, making it as big as Downy or Bounce. But selling a new kind of home dry-cleaning product is not like selling the newest version of Tide; it's much harder. Procter has to convince consumers they need a kind of product they've never heard of. P&G reasons that Dryel will sell because it's cheaper ($9.99 for a box that cleans 16 articles of clothing) and more convenient than professional dry cleaning. And most important, because it works. (FORTUNE concurs; we did our own home test.)
But will consumers buy it? Dryel--and Fit and Thermacare and other, as-yet-unconcocted innovations--may be the future of Procter, but none comes with a guarantee. Which is exactly the point. Jager believes P&G has no choice but to leap into the abyss, to invent new categories like home dry cleaning.
Ironically, even here P&G is being out-innovated. As it happens, in the great, untapped market for home dry cleaning, a New Jersey startup, Creative Products Resource, is years ahead of P&G--it started selling a home dry-cleaning kit called the Custom Cleaner on QVC in 1994. Custom Cleaner is now available in stores for $6.99. "We are the innovators here," says founder-inventor Betty Murphy. "We're already in supermarkets all over the country, and they're still in tests." Clearly, this P&G rebellion has a long way to go.