Can P&G make money in places where people earn $2 a day?

Thursday, January 6, 2011

Despite the growing belief that the billions of poor — what the late management thinker C.K. Prahalad termed the “bottom of the pyramid” — can actually make up a viable economic market, most attempts to harness it have failed. Procter & Gamble (PG), a $79 billion (in sales) company better known for its middle- and upper-middle-class brands than for its low-end offerings, thinks there’s another way to reach those consumers. So it has quietly launched a skunkworks, populated mostly by technical folks rather than market researchers, to approach the $2-a-day consumer from a new perspective. Rather than try to invent products first or rely on market research alone, the group spends days or weeks in the field, visiting homes in Brazil, China, India, and elsewhere. It’s the same approach the company uses in developed markets but requires much more effort, without the obvious potential payoff from consumers with disposable income. “Our innovation strategy is not just diluting the top-tier product for the lower-end consumer,” says Robert McDonald, P&G’s CEO and chairman. “You have to discretely innovate for every one of those consumers on that economic curve, and if you don’t do that, you’ll fail.”

For P&G the stakes are high, in part because of some harsh new realities. Start with the fact that the global recession put a dent in P&G’s up-the-curve strategy. Then there is the simple paradox of growth: For a giant company to grow at the levels it has in the past — and satisfy its investors, as its stock is about where it was five years ago — P&G must expand aggressively, even if it means moving away from its core strength. P&G says developing markets are growing at 6% to 8% annually, compared with 1% to 2% in the developed world. The market for the poor remains largely untapped.

“We’re late to those markets,” says McDonald, who spent much of his career overseas, including in Japan and the Philippines. “As a result, we’ve got to do things smarter.” He’s not exaggerating. In Brazil, which many think is poised to exhibit China-type growth, Colgate-Palmolive (CL) has a 71% market share in toothpaste; P&G wasn’t even in the category until 18 months ago. Unilever (UL), with its Anglo-Dutch colonial heritage, already gets more than 50% of its sales from developing markets. “P&G is still very U.S.-centric,” says Paul Polman, Unilever’s CEO (and until 2006 a P&G exec). “What Bob is doing is not wrong, but it will take some time. Emerging markets are in the DNA of our company.”

Source: (link opens in a new window)