P&G - Leveraging Web 2.0 to Sell Pre-Web Products

Note: this post was carried today on Wallstrip

Overview

Beauty is in the eye of the beholder, and P&G’s stock price performance has been something to behold. And this from a “boring” consumer goods conglomerate that counts diapers, shampoo, and recently acquired disposable batteries and men’s grooming products among the assets in its portfolio. It’s not difficult to imagine why first year Investment Banking analysts dread being placed in the consumer products vertical. Who could possibly want to cover a company whose biggest revenue generator is laundry soap? But hey, they make a ton of cash, and are a virtual Harvard case study on the value of intangible assets. IBM might have the largest patent portfolio, but who has the largest intangible asset portfolio? Without running a number I would hazard a guess that P&G is near the top of the pack. And not wanting to be complacent, Management has been working overtime to extend its brands and to deepen its products’ appeal to the massive and massively profitable 15-34 demographic. How? By becoming a Web 2.0 company. And it is this adaptive behavior which gives P&G a decidedly growth stock luster.

Bringing Active Management to the Brand

P&G, throughout its long history, has changed the model of consumer decision- making. And Neil McElroy, former President of P&G, was the individual who changed the face of marketing forever.

The shift to brand management began on May 13, 1931, with an internal memorandum from Neil McElroy (1904-1972), an athletic young man who had come to P&G in 1925 right after his graduation from Harvard College. While working on the advertising campaign for Camay soap, McElroy became frustrated with having to compete not only with soaps from Lever and Palmolive, but also with Ivory, P&G’s own flagship product. In a now-famous memo, he argued that more concentrated attention should be paid to Camay, and by extension to other P&G brands as well. In addition to having a person in charge of each brand, there should be a substantial team of people devoted to thinking about every aspect of marketing it. This dedicated group should attend to one brand and it alone. The new unit should include a brand assistant, several “check-up people,” and others with very specific tasks.

The concern of these managers would be the brand, which would be marketed as if it were a separate business. In this way the qualities of every brand would be distinguished from those of every other. In ad campaigns, Camay and Ivory would be targeted to different consumer markets, and therefore would become less competitive with each other. Over the years, “product differentiation,” as businesspeople came to call it, would develop into a key element of marketing.

Brand Management. That’s P&G’s entire business model. Create the perception of value through brand management and a fundamental understanding of consumer behavior. Flip through P&G’s 10-K, and it’s no surprise that the number one risk factor is “material change in demand for products.” Trivial, but important since the consumer pays a massive premium for the label. P&G needs its consumers to associate brand names with goods, and that means establishing the connection at the optimal time.

Bringing Web 2.0 Techniques to Brand Management

As you know, I am a big buyer of methods by which investors can leverage the internet (Web 2.0 tools and content) to make better investment decisions, but this article I came across was yet another reminder of how corporations can leverage social media to boost their profits.

Procter & Gamble’s Crest Whitestrips is giving college students something to really smile about this year with Smile State — its new sponsored group on Facebook.com. The group is giving undergrads at 20 select campuses across the nation VIP access to concerts, other exclusive events, promotions, contests, behind-the-scenes web content and more, all for free. All they have to do to join in on the fun and collect prizes is become a member of Smile State.

The benefits of joining are many, culminating with the chance for four campuses to win a stop on the Smile State Tour. At the end of the first semester, the four schools with the largest Smile State membership will score an exclusive concert on their campus featuring the latest acts from Island Def Jam all happening at the close of the fall semester. In addition to the tour, each of the 20 chosen schools is guaranteed to receive two free VIP pre-release movie screenings right at their school and Smile State is also tapping into the latest competitive craze and hosting rock, paper, scissors contests on select campuses, all of which will be open only to Smile State members.

Facebook Groups are mini-communities within the social networks. They allow users to post on discussion boards, send out mass emails, and general promote their interests. Facebook recently allowed corporations and organizations to build their own groups for a nominal fee, with some Groups (like Apple) surpassing half a million users. With such an addictive tool on every college student’s monitor, you can be sure they’re getting the most bang out of their buck.

A study conducted at CalTech explains how brand loyalty has little to do with quality of the product and more with emotions.

Subjects of the experiment were shown images of different brands while undergoing a brain scan. The images cause a reaction in an area of the brain tied to social image and identity.

Michelle Nelson, who is a University of Wisconsin assistant professor of journalism and mass communication, said the use of brain scans in the field of market research, or neuro-marketing, confirms how important brand images are to consumer behavior.

“This work actually shows the power of brand perceptions,” Nelson said.

It goes on to say that college-age kids (who are nearing the point of financial independence) are a particularly important target.

Conclusion

I realize that this Facebook group of less then 10,000 users (even if they ALL purchased massive amounts of Crest Whitestrips) will have nothing more than an infinitesimal effect on the stock price. The point is that with this relatively inexpensive advertising technique, P&G has potentially created a portfolio of perpetuities, solidifying revenue streams for years to come – that’s what their business is all about. Multiply this a couple million times and your position in P&G will pay enormous dividends for years to come. It is Management’s willingness and ability to meet its rapidly changing markets head-on that is most impressive. Bringing Web 2.0 techniques to a pre-Web company - this is a good story that is only getting better.

Thanks to Rick Calmon for his assistance with this post.
The author does not have a position in the securities of Proctor & Gamble.

Comments

[Yaser Anwar]

Last year when P&G bought Gillette, management said they "expect the transaction to be dilutive to earnings in the first two years," so far even with the dilution the company just reported very good numbers ahead of the street today and raised guidance further.

Management is on track to "derive $14 billion to $16 billion in synergies from this combination over time," as they had said during a press conference in Oct. 2005. This is clearly evident in their numbers today, "Profit margin expanded during the quarter as sales growth, cost-cutting initiatives and the benefit of adding the higher-margin Gillette business more than offset acquisition-related expenses and higher commodity costs."
http://online.wsj.com/article/SB116135674313498983.html?mod=yahoo_hs&ru=yahoo

A great company like P&G attracts great institutional investors. Warren Buffet's Berkshire Hathaway owns upto 3.5% of their outstanding share float. It's always nice to see WB on the side of shareholders.

One of the areas where growth for P&G will come is developing countries, where it has 23% of the market share. This should also reduce it's exposure to the unfavorable dollar outlook vs the Euro and Yen. Another positive about P&G is it's high ROIC, about 24%.

The falling energy and raw material prices should further help the company in it's 4th Q as management acknowledged them as culprits in P&G's rising expenses. On the positive side of this, the strong brand helps P&G, as it can raise prices.