Switch to the Low-Income Customer

Tuesday, November 15, 2005

?We?ve changed our standard of innovation so we can serve more of the world?s consumers. So it?s now a better brand experience for the target consumer and a lower product cost structure than the competition can deliver.?

Gilbert Cloyd, Procter & Gamble?s chief technology officer, unfolds a disposable nappy on a table at the company?s Cincinnati headquarters.

With a lightly elasticated edge and a basic inner lining, it is a prototype that, if proven commercially viable, could come to symbolise P&G?s boldest attempt yet to crack the world?s fastest-growing segment of consumers ? the billions of low-income people in developing countries.

The brief: to produce a nappy that should cost a Chinese parent no more than a fresh egg ? or about 10 cents.

For a company long focused on selling detergent, toothpaste and beauty lotion to the world?s wealthiest 1bn consumers, the production of ultra-low-cost products marks a radical shift in its business model.

It is also a signal that for the world?s large consumer goods companies, long-term growth can only come from developing sustainable connections with consumers in places such as China, Brazil and Russia who ? in P&G?s case ? may have yet to come across Tide detergent, Crest toothpaste, Pampers nappies or Head & Shoulders shampoo.

Clayton Daley, chief financial officer, says: ?There are roughly 6bn people in the world. For most of this company?s history, its strategy was pointed at the billion at the top of the economic pyramid. Where did that leave P&G? It meant we were appealing only to the top percentage of people in those developed markets who had the money.

?When [chief executive] AG [Lafley] came in [in 2000] and said, ?We?re going to serve the world?s consumers?, that led us to say, ?We don?t have the product strategy, the cost structure, to be effective in serving lower income consumers?.

?What?s happened in the last five years has been one of the most dramatic transformations I?ve seen in my career. We now have all of our functions focused on that,? says Mr Daley.

P&G, the world?s largest consumer goods company, devotes about 30 per cent of its $1.9bn in annual research and development spending to low-income markets, a 50 per cent increase from five years ago.

Developing markets are expected to grow twice as fast as developed markets over the next five years.

The transformation has seen change in three areas: the way P&G finds out what consumers want; how this affects R&D; and how the company has retooled its global manufacturing systems to be able to make products cheaply ? yet still sell them profitably in places like China.

Mr Cloyd says: ?We?ve changed our standard of innovation so we can serve more of the world?s consumers. So it?s now a better brand experience for the target consumer and a lower product cost structure than the competition can deliver.?

Instead of relying largely on questionnaires and focus groups, teams of P&G researchers spend days, sometimes weeks, in people?s homes studying everyday habits. For example, researchers have observed tooth-brushing frequency in Venezuela, clothes washing in Russia and feminine pads use in Mexico.

In China, research into the prototype nappy took P&G researchers into the poorest homes in Shanghai, where nappy use is almost nil.

Few Chinese parents are familiar with disposable nappies and P&G was, until recently, selling a Pampers-like product to the top 8 per cent of the population.

Most mothers tend to use cloth rags. Or they may dress their babies in clothes designed with open slits between the leggings to allow passage of waste.

It became clear that a barrier to nappy use was cultural and not necessarily a matter of affordability: many Chinese believe that disposable nappies cause infertility or bow-leggedness.

Kathy Fish, vice-president of baby care research, says: ?It was really important for us not to assume that these people just couldn?t afford diapers, but really to get into China and understand the consumer.?

Other insights flowed in from Mexico, this time on feminine pads. Since the early 1990s, P&G had relied for sales of pads on a product initially made in the US and featuring a plastic inner lining. Sales of the product had levelled off because the product was ?polarising?, says Sharon Mitchell, vice-president of global fabric care. Many users found the plastic uncomfortable in the humid Mexican climate.

?How would we appeal to these consumers who weren?t interested in the plasticky product? We had five or six people totally immersed in our technical centre and in people?s homes trying to figure that out,? she says.

P&G found that lower income women in Mexico faced long commutes to work, often with scant access to bathrooms to allow a change of pad. Public bathrooms were unhygienic yet ?from a value standpoint, they [women] could only afford to use a few pads a day?, says Ms Mitchell.

Camomile came up frequently in conversation with the women, leading P&G to incorporate a soothing camomile-based lotion in the absorbent pad next to the skin.

Since launch in 2003 the new product, known as Naturella, has doubled P&G?s Mexican market share in feminine pads.

Gathering such consumer insights has also helped P&G design products more cost-effectively.

P&G uses consumer research to ascertain which types of low-income consumers are likely to want certain product characteristics.

In China, for example, P&G found that very poor consumers were prepared to do the extra hand-washing needed to compensate for local water hardness, so in response P&G produced a version of its China Tide detergent without water softener.

?This gives us the basis for tailoring the product so you can invest in the things that are important for a consumer and save in areas that are not,? says Mr Cloyd.

Savings have also resulted from how P&G innovates. Computational modelling and simulation ? using ?virtual babies? to tweak the design of nappies, for instance ? have helped to make products ?better and cheaper?, he says.

The company is also making extensive use of ideas from outside. P&G employs an Indian company to make tubes for the toothpaste that it sells in China.

Mr Cloyd says: ?We would not be able to work across a broad front of opportunities if we were trying to invest on our own. Innovation productivity becomes a key part of being able to deliver to our low-income markets.?

He estimates that cheaper innovation has enabled P&G to get a 40 per cent greater return on products ?broadly, across the line?. Equally significant savings have come from retooling P&G?s manufacturing systems.

Keith Harrison, global product supply officer, says: ?In the absence of a cost-effective supply chain all this great low-cost innovation gets wasted.?

Three years ago, P&G set up an experimental factory in Vietnam called The Garage. It was P&G?s first attempt at finding a cheaper way to manufacture goods for low-income markets and involved an ?off-the-shelf?, low-cost nappy manufacturing line from China.

Yet The Garage is already ?a museum piece?, Mr Harrison says. P&G has since perfected a new system that has cut the cost of sourcing nappy manufacturing lines by 30 per cent compared with three years ago.

A network of 150 ?low-cost machine builders? across Brazil, China, Vietnam and India provides P&G with manufacturing system components that are assembled in secret in Shanghai.

?We brought our approach to high-speed, sophisticated manufacturing and combined it with a low-cost supplier network to create a technology base that allows us to be much more efficient from a cost of capital and production basis than what?s typically available off the market in these low-cost operations,? says Mr Harrison.

The same approach has allowed P&G to sell its Naturella pads in Mexico for 20 per cent less than its existing product.

Such has been the success of the system that P&G is starting to swap old nappy-making lines in North America with cheaper ones from Asia.

Mr Cloyd says: ?The work we do to focus on more of the world?s consumers actually makes us more effective even in premium countries than we were previously.?


P&G has implemented change at almost all levels to take account of a shift in priorities towards the low-income consumer:

Consumer research: rather than mostly using focus groups and quantitative research, P&G staff spend time in consumers? homes to gain insights into daily habits and how these help in the design of a product. The company also uses ?metaphor communication? techniques pioneered by Gerald Zaltman, a marketing professor at Harvard University.

Cost innovation: P&G uses proprietary technology and computer imaging similar to that used at the Los Alamos nuclear laboratory in New Mexico to design low-income products more cheaply than before, when the company would take a high-end product design and ?cost save? down to an appropriate price point.

Innovation productivity: four years ago P&G decided to get half its ideas from outside sources. In the past two years 35 per cent of new products had an important external component. The company uses ?matchmakers? such as 9Sigma and InnoCentive to find companies or individuals with potential problem-solving ideas.

Manufacturing efficiency: P&G has cut manufacturing costs by developing a network of suppliers in China, Brazil, Vietnam and India that bid for the building of nappy-making lines, rather than using expensive western systems typically used by P&G in North America and Europe.

(Via PSD Blog)

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