Understanding fragmented consumer tastes in China

Thursday, November 17, 2005

Matt Doyle, Procter & Gamble’s director of healthcare products research, has an unusual invitation for his guests during a visit to the company’s Cincinnati headquarters: “C’mere, you want to go to Alaska?”

The group has just been standing in a store room in which P&G’s products neatly line the shelves. The temperature is 40?C and the humidity 75 per cent, replicating the heat of a Chinese summer. In the second room, the temperature has dropped to -5?, turning breath into plumes of instant condensation – like a day in Alaska, or a winter in Russia or rural China.

The consumer-goods giant operates such “stability environmental rooms” to test the resilience of a range of its products, copying conditions found in merchants’ shops in far-away places. There are plastic bottles of Crest mouthwash, Glide dental floss and tubes of tooth-whitening toothpaste.

“We’re interested in finding out if the adhesives let go, if the labels start to peel off,” says Mr Doyle. “Is there anything that affects the quality of the products and could impair the experience the consumer will have?”

That P&G goes to such lengths is a sign of its commitment to cracking low-income markets such as China, where there are millions of consumers the company is trying to reach. Indeed, P&G believes that developing markets will be growing at double the pace of those in the developed world by 2010.

Yet P&G is not merely selling low-cost toothpaste, laundry detergent and shampoo in the developing world. It has conducted far-reaching consumer research that shows that even here, as in mature consumer markets, the market is fragmented. Some consumers are willing to pay a premium fortea-flavoured Crest toothpaste; others will only pay the equivalent of a few cents for a basic version, using salt as a cleaning agent.

In recognising this, P&G has changed the way it develops products for low-income markets. Gone are the days when it would ship a toothpaste commonly sold in the US to China. Now P&G wants to find out which consumers require certain characteristics from a product, and which are willing to pay for them.

Gilbert Cloyd, P&G’s chief technology officer, says: “The premium tier dentifrice (tooth-cleaning materials) consumer in China likes multiple health benefits in the dentifrice. The mid-tier consumer wants just basic cleaning and basic caries prevention. They don’t really prioritise the other values of gum and breath benefits.”

By differentiating between its customers, the company is able to ensure that it does not overspend on innovation at the low end and can more accurately meet the needs of the various tiers of consumers in its markets.

Mr Cloyd says: “Prior to 2000 we were always going to deliver the absolute best, then ’cost save’. We have changed that to ’cheaper and better’. That’s the innovation standard, so that for the target consumer in a segment we provide them with an experience that they find better than any other competitive product in that category and price tier and at a cost structure that the competition can’t match.”

He concedes that in the past there were some in P&G who “saw those objectives as contradictory”. But he says the game is about “accepting up front that the true innovation goal is being both better and lower cost. And that has caused us to rethink a lot of things”.

Lillian Xu is a senior scientist in P&G’s research and development office in Beijing, currently seconded to P&G headquarters. She, like 40 per cent of P&G’s R&D staff, is a local employee based in her home market. In a presentation showing photos of Chinese women washing laundry and hanging it from apartment windows to dry, she suggests such practices have helped expand sales of the company’s Chinese version of its Tide laundry detergent.

In 2000, P&G was only selling to the wealthiest 8 per cent of people – those lying at the top of a three-tier pyramid it now uses to categorise the Chinese laundry market. Visits to homes in poor areas of Shanghai revealed that while many households had washing machines, women were often reluctant to use them because of the costs of water and electricity involved.

With unemployment growing in Shanghai P&G researchers found that jobless Chinese preferred to spend idle time working manually on their laundry, rather than pay money for a machine to ease the task. Ms Xu says: “In that environment it’s very difficult to get them to trade up to use a higher tier or more expensive product, so the right way is to give them a product they can afford.”

P&G then created two further versions of its existing, top-tier product: Tide Triple Action, which was launched in 2001 and aimed at the middle-tier low-income consumer; and Tide Clean White, launched a year later and targeted at the bottom tier. The cheapest product contained no water softener because lowest tier consumers were found to be more willing to do the extra ???manual washing to compensate for water-hardness.

Sharon Mitchell, vice-president of research and development at P&G’s fabric-care division, says: “There really is no substitute for being there in consumers’ homes watching what they do. It helps you get to a very smart formulation that meets their needs at the cost that they can pay.”

A similar approach has been taken in experiments with an ultra low-cost nappy. P&G hopes that the nappy will spearhead its efforts to persuade poor Chinese mothers, who use cloth rags, to switch to disposables, or those who use nothing to try a derivative of P&G’s flagship Pampers brand, which has annual sales of Dollars 6bn (Pounds 3.46bn).

P&G has sold nappies in China since 1999 but with 18m-20m births a year, it still sees opportunities at the very low end of the market. Kathy Fish, vice-president of R&D in the family health division, says: “Disposable diapers are still virtually non-existent in towns and villages, so there is an absolutely huge opportunity.”

Lessons are being learnt from Brazil, which accounts for one-third of all babies born in Latin America and is thus about one-third of the size of China’s nappy?market. P&G had until recently been competing in the premium segment of the Brazilian market and while it was the market leader, it was losing money until it tried to deepen its appeal to lower-tier consumers.

Ms Fish says: “Overnight dryness was our entry point – that was the ’torture test’ for the consumer. The lower-tier consumer is really focused on getting more hours of absorbency.”

Research in China has echoed this finding. Rags can cause skin rashes, which are exacerbated by winter cold.

Ms Fish concludes: “We are in a small test in China and it’s still experimental. We don’t yet know where it’s going to come out but our goal is to better understand what percentage will try disposable diapers, how often they will use them and how they will use them.”

Source: Financial Times (link opens in a new window)