Saturday, March 13, 2010

How P&G Brought the Diaper Revolution to China

When Procter & Gamble set out to sell Pampers in China more than a decade ago, it faced a daunting marketing challenge: P&G didn’t just have to persuade parents that its diapers were the best. It had to persuade many of them that they needed diapers at all. The disposable diaper — a throwaway commodity in the West — just wasn’t part of the cultural norm in the Chinese nursery. Babies wore cloth diapers, or in many cases, no diaper at all. And that, says Bruce Brown, who’s in charge of P&G’s $2 billion R&D budget, is why China presented — and still presents — such a huge opportunity.

Today, after years of exhaustive research and plenty of missteps, Pampers is the No. 1-selling diaper in China and the company, in many ways, is just getting started there. The diaper market in China is booming. It stands at $1.4 billion — roughly a quarter the size of the U.S. market — and is projected to grow 40 percent over the next few years, according to research firm Datamonitor.

P&G’s success in China has helped CEO Bob McDonald set some bold goals. Last October, he laid out a plan to add one billion customers over the next five years by promoting P&G brands throughout some of the poorest corners of the world. How will P&G go about doing that? To get a sense, just look at the way it cracked — and to a large degree created — the market for disposable diapers in China.


Learning From Failure

When P&G first launched Pampers in China in 1998, the effort flopped. Instead of developing a unique product for the market, P&G made a lower-quality version of U.S. and European diapers, wrongly assuming that parents would buy them if they were cheap enough. “It just didn’t work,” Brown says.
A child wearing Chinese diapers, or split pants called kaidangku 
It didn’t help that Chinese families had always gotten along just fine without disposable diapers. There, potty training often begins as early as six months, and children wear what’s called kaidangku — colorful open-crotch pants that let them squat and relieve themselves in open areas.

Pampers’ pitch wasn’t compelling people to try something new — and neither was the product itself. “We scrimped on the softness in the earlier versions,” says Kelly Anchrum, director of global baby care, external relations, and sustainability. “It had a more plasticky feel. It took us awhile to figure out that softness was just as important to moms in a developing market.”

P&G had tried a similarly watered-down approach earlier in the decade, when it launched laundry and hair-care brands in several emerging markets. Those products also failed, Brown says. After these experiences, the company in 2001 came up with a new approach to product development: “Delight, don’t dilute.” In other words, the diaper needed to be cheap, but it also had to do what other cheap diapers didn’t — keep a baby dry for 10 hours and be as comfortable as cloth.

So P&G added softness, dialed down the plastic feel, and increased the absorption capability of the diaper. To bring down the cost, the company developed more efficient technology platforms and moved manufacturing operations to China to eliminate shipping costs.

The revamped diaper, Pampers Cloth Like & Dry, hit retail shelves in China’s largest cities in 2006, selling for the equivalent of 10 cents in local currency, less than half the cost of a Pampers diaper in the United States.


The Universal Pitch

P&G had the right diaper and the right price point. Now it faced the bigger challenge. “You have to convince someone that they need this thing,” says Ali Dibadj, an analyst who covers P&G at Sanford C. Bernstein & Co.

For Frances Roberts, global brand franchise leader for Pampers, every trip to China was (and still is) an opportunity to learn more about Chinese nursery habits. It’s part of the P&G ethos that brand leaders visit consumers in their own homes — something Roberts has done in dozens of countries, including Germany, Russia, and Jakarta. The goal is to uncover the nuances of each market, and early on in its diaper research P&G discovered a universal need. “Moms say the same things over and over,” Roberts says. Their cry: We want more sleep.

With the help of the Beijing Children’s Hospital’s Sleep Research Center, P&G researchers conducted two exhaustive studies between 2005 and 2006, involving 6,800 home visits, and more than 1,000 babies throughout eight cities in China. Instead of cloth, the research subjects were tucked into bed with Pampers. The results: P&G reported that the babies who wore the disposables fell asleep 30 percent faster and slept an extra 30 minutes every night. The study even linked the extra sleep to improved cognitive development, a compelling point in a society obsessed with academic achievement.

P&G then put its marketing machine into motion. Pampers launched the “Golden Sleep” campaign in 2007, which included mass carnivals and in-store campaigns in China’s biggest urban areas. A viral campaign on the Pampers Chinese web site asked parents to upload photos of their sleeping babies to drive home the study’s sleep message. The response was impressive: 200,000 photos, which P&G used to create a 660-square-meter photomontage at a retail store in Shanghai. The ad campaign boasted “scientific” results, such as “Baby Sleeps with 50% Less Disruption” and “Baby Falls Asleep 30% Faster.”

No diaper brand, not even rival Kimberly-Clark, maker of Huggies, has come close to spending as much on advertising in China, according to CTR Market Research, the China-based division of American media researcher TNS Media Intelligence. Since 2006, Pampers’ measured media spend topped 3.2 billion yuan, or about $476 million — more than three times as much as any other brand. In 2009 alone, P&G spent $69 million, compared to Kimberly-Clark’s $12 million spend for Huggies.


Ruling the Nursery — in China and Around the World

Today, Pampers is the top-selling brand in China, a country where about a decade ago the disposable diaper category hardly existed. P&G does not release sales figures for specific countries, but Datamonitor estimates that the company has captured more than 30 percent of the $1.4 billion market.

Karl Gerth, an Oxford professor who researches the spread of consumerism in China, says P&G’s marketing campaigns strike the right tone. “You don’t want to come off as paternalistic,” says Gerth, who wrote the book “China Made: Consumer Culture and the Creation of the Nation.” “The idea that Pampers brings a scientific backing and gives children an edge in their environment — that’s a brilliant way to stand out from the competition.”

You could argue that it’s easy being No. 1 when the market is still small. But P&G still has a lot of work to do. The company faces challenges from private-label and domestic brands, including the No. 2 market leader, Hengan International Group, which has steadily grown its market share to 20 percent. Local brands, meantime, are catching up with better products, marketing, and distribution. “Chinese consumers are going to want to root for the home team,” Gerth says.

And there’s still the challenge of making disposables a habit. On average, diaper use still amounts to less than one a day. “We’ve only just begun to scratch the surface [in China],” Dimitri Panayotopoulos, vice chairman of global household care, told investors in a 2008 analyst meeting.

There’s even bigger potential in India, where the birth rate is almost double that of China but the diaper market remains tiny at about $43.4 million. (Pampers is the top-selling brand there, too.) So now, P&G plans to take the sleep argument throughout rural and poor areas in India and elsewhere. The company also makes its case by positioning itself as a baby-care educator. Pampers sponsors healthcare-outreach programs such as a rural immunization program in China and mobile medical-care vans in Pakistan and Morocco. In India, there’s a door-to-door program that offers baby-care tips and diaper samples for moms.

Of course, P&G tweaks the sales pitch to fit different markets; that’s what the company is known for. In India, for instance, the convenience of disposable diapers doesn’t resonate with parents. The company’s consumer research found that many Indian mothers think that only lazy moms put their babies in disposable diapers that last a full night. As Pampers brand manager Vidya Ramachandran reported in an internal video shown to employees, “We really had to change that mindset and educate [mothers] that using a diaper is not about convenience for you — it’s about your baby’s development.” 

The Ultimate Dye Job

A.G. Lafley prefers khakis over Armani and systems over charisma. But despite his soft-spoken style, Lafley’s transformation of Procter & Gamble made him a star in business circles, as he earned a reputation as one of the country’s most effective CEOs. Chief Executive magazine named him CEO of the Year in 2006, and during his tenure P&G made enormous strides in innovation and financial performance.

That is somewhat ironic because business was not Lafley’s first love. A graduate of Hamilton College, he was studying for a doctorate in European medieval and renaissance history at the University of Virginia when he joined the Navy. He spent much of his five-year military career running retail operations at a large military base in Japan. The experience intrigued him enough that he forsook renaissance history for Harvard Business School.

Joining P&G in 1977, Lafley started as a brand manager for Joy dishwashing liquid; he went on to posts in the laundry, cleaning products and advertising divisions. A stint in Asia proved particularly influential, instilling a love for design that he brought back to Cincinnati in 1998, when he became president of the North American business unit. In 1999, Lafley added global beauty care to his portfolio; and in 2000, he became president and CEO. Though he stepped down as CEO in June 2009, he is still chairman of the board.

In this interview with BNET, Lafley describes the decisions that went into buying Clairol, the first major acquisition of his tenure.

To dye or not to dye? We spent a long time in purgatory on this. Beginning in the 1990s, we started working on hair colorants, looking at everything from the chemistry to the product formulation to understanding the consumer experience. We saw this as a sleepy category; there hadn’t been much product change for decades. Also, we did a lot of in-home, one-on-one research. What we found, by spending entire days with women, was that hair coloring was inconvenient, messy and, frankly, a little bit scary. You were dealing with things that bleached your hair, and then things that dyed it. P&G already had superior conditioning and safer bleach; if we could just nail the dye part of the coloring, we would be in.

When I came back from Asia in 1998, we were still working on this and brought what we had into consumer testing. It didn’t deliver — the brand, the concepts, none of it was very exciting. It became quite clear we were not creating anything new that was as strong as what L’Oreal and Clairol already had. That was a real blow. The stark reality is that you learn more from failure than you ever do from success. The key is to learn from that failure and to fail early and cheaply. And we did learn from that exercise, and everyone understood why we had not succeeded. It laid the path to our success in this category later on. In 1999, I picked up the global beauty business unit as part of my portfolio. The question I faced was whether to bury the whole [hair color] thing. I knew we had learned a lot, and I thought we had a good lead on the product and technology side. But I also realized that a new brand had a low probability of success. The category was a walled city, with L’Oreal the biggest wall. It came down to two things. First, we knew that there were unmet consumer needs in terms of performance, convenience and the overall experience; and second, we had a coloring technology that looked promising. With that in mind, I made the first major decision — not to give up on the category. The question was how to enter it.

Making the case for Clairol Then in early 2001 Bristol-Myers Squibb put Clairol on the block. Should we buy it? At the time, our technology was not ready to go, but we couldn’t affect the timing of the auction; the business was for sale when it was for sale. I thought we should go for it. The board, though, was a little skittish and plenty skeptical. I had to sell them. We met in the boardroom at P&G’s headquarters in Cincinnati. I went in with one or two overheads. I wanted to have a discussion, not a slideshow, and we did. The members of the board challenged me on my market assumptions, the investment situation, and our assessment of consumer opportunity. I was also probed on the technology and product and pushed real hard on what we had that was proprietary. Could we do what we said we could do? I made the case that hair care was a core business. P&G was then the leader in shampoo and on the verge of becoming the leader in conditioning and treatment. The next two big segments, as I saw it, were styling and colorants. I told them we had been working on colorants for years and that we were close to a superior, proprietary product. Then I laid out the consumer behavior. There were more women coloring, and they were starting to color younger. And because women were living longer, they were going to color longer — once you start to color, you color to the end. The market was growing faster than other hair markets. All the trends looked good. We also knew a lot about the consumer — things the competitors were not acting on. Then I had to deal with the brand issue. Clairol was a good No. 2 — behind L’Oreal —that we could build on. Nice n’ Easy [Clairol’s major coloring brand] still had a lot of brand equity, but it had been neglected. It sort of had become your grandmother’s brand. I thought that with our marketing expertise, we could do something with it. At the end of about three hours, a majority of the board agreed with me that there was enough equity in the Clairol brand, and that we had enough equity on the consumer side, to make it worth bidding for. They bought the argument and we agreed on a price to offer. It was an incredible vote of confidence in the small team working on this — and in me.

Convincing the board, round II
On Friday around 6 pm, I got a phone call: We had lost. I asked Peter Dolan, who was running Bristol-Myers Squibb at the time, “Will you give us 48 hours for a best and final offer?” He said, no, he had a good offer. I argued that he had nothing to lose; if our bid comes in lower, you have the other offer in hand. If it’s higher, you’re going to get more money, and look like a hero. He said, OK, you have until 8 on Monday morning.

We worked all day Saturday; on Sunday, we had a board meeting. This one was by phone, and no, people were not happy to have to give up a Sunday afternoon. For another three hours, we debated and discussed how high we could go. The questions were even tougher this time, about the competitive situation and the market. Those who were skeptical were even more skeptical. Finally, we agreed to increase the offer.

We got the revised offer to Peter Dolan the next morning; he called me back in an hour or two to accept; we ended up paying $4.95 billion. Then we had to do the contract in something like 24 hours.

On Tuesday morning, when we signed the contract in New York, one of our best attorneys was asleep in her chair in a corner, and one of the finance guys was asleep on the floor. And of course, that was just the beginning. Then we had to deal with the regulatory agencies, and integration, and making it work.