1. Lal Bhadhur Shastri Institute of Management
Case Study:
The Procter & Gamble – Overcoming Challenges in
Rural Areas
Focus: Strategy for rural penetration
(Demand management, cost minimization and pricing)
Submitted to
Prof. Shikha Singh
Tanmay Batra
(Section B, Roll No: 50)
2. The Procter & Gamble – Overcoming Challenges in Rural Areas
Abstract
Penetration in rural markets has always been very complex. However, Procter & Gamble
(P&G) has successfully embarked in rural areas. They bagged in rural areas by thoroughly
understanding the nature of the market and thereby overcoming pricing and distribution
challenges.
P&G had to penetrate in Indian rural market as it has been experiencing stagnant growth in
most of the leading urban markets. Global recession had put a dent in P&G's up-the-curve
strategy. Rise in prices, single digit growth owing to economic crisis and market saturation
have challenged the long term growth strategy of P&G in developed nations. Hence, P&G
expanded aggressively even though it had to step away from its core strength.
Case Study
As Western companies duke it out for a piece of the developing-market pie, Procter &
Gamble is going deeper- courting not just the newly rich but also the very poor. The
company's vaunted R&D operation is turning up surprises.
-Opening Statement, June, 2011, Fortune Magazine
P&G: An Overview
Procter & Gamble is a Fortune 500 American multinational company headquartered in
Downtown Cincinnati, Ohio, that manufactures wide range of consumer goods. As of mid
2010, P&G is the sixth most profitable organization in the world and fifth largest corporation
in the United States by market capitalization. In the quarterly earnings statement recently
published August 5th, 2011, the net sales of P&G grew at the rate of 10% to $20.9 billion in
the fourth quarter and 5% to $82.6 billion for fiscal 20111. Organic sales2 grew at the rate of
five percent for the quarter and at the rate of 4% for the fiscal year.
P&G has operations in nearly 80 countries and markets around 300 brands in more than 160
countries around the world. Company’s operations are categorized into three global business
units: Beauty care, household care and health and wellbeing. P&G has 50 leadership brands3
which are doing very well worldwide. Moreover, in the last 16 years, P&G has had 132
1 Annual Report, 2011
2 Organic sales exclude the impact of acquisitions, divestitures and foreign exchange
3 These 50 brands represent 90% of sales and 90% of P&G profit.
3. products on SymphonyIRI Group’s4 list of each year’s 25 most successful new products,
more than six largest competitors of P&G combined5.
Personal Care Market in India: An Overview
Personal care market showcased double digit value growth in 2010, driven by increase in
income level, greater focus on innovative ingredients to create interest, and continuous
advertising campaigns throughout the year. Companies also made use of herbal, traditional
ayurvedic and mineral ingredients in cosmetics, as a means to monetise the current desire of
consumers to make use of natural-based products. With men becoming more comfortable
with the notion of using personal care products for looking good, sales of men’s grooming
products increased further in 2010. Apart from pre-shave and razors, men’s skin performed
well. The market share of direct sellers, both multinational, for example Amway6 and
Oriflame7, and domestic, for example Modicare, rose in 2010.
P&G: Expansion Strategy
P&G’s relationship with India dates back to 1985 when it acquired Richardson Hindustan
Limited (RHL), who held an Industrial License to manufacture of Menthol and de
mentholised peppermint oil and VICKS range of products such as Vicks VapoRub, Vicks
Cough Drops and Vicks Inhaler. RHL became an affiliate of The Procter & Gamble
Company, USA, and its name was changed to Procter & Gamble India. Since then, Procter &
Gamble kept growing in the country, and presently has two subsidiaries, namely P&G
Hygiene and Health Care Ltd. and P&G Home Products Ltd. P&G Hygiene and Health Care
Limited is one of India’s fastest growing Fast Moving Consumer Goods Companies in the
Asian subcontinent.
P&G is striving to expand its presence in India. In order to acquire more customers, Indian
unit has decided to manufacture Indian goods locally, shifting from its age-old policy of
importing popular brands like Olay and Pampers into the Indian market.8 The retail giant,
who holds second position to Hindustan Unilever in the Indian market, has decided to go by
the forerunner’s style that will not only save cost but will also be more readily accepted by
4
SymphonyIRI Group (formerly Information Resources, Inc.) is a market research company which provides
clients with consumer, shopper, and retail market intelligence and analysis focused on the consumer packaged
goods (CPG) industry. SymphonyIRI’s clients include 95 percent of the Fortune Global 500 CPG, retail and
healthcare companies
5
Source: SymphonyIRI Group 2010 New Product Pacesetters™ report (non-food brands), March 22, 2011
(measured as total year-one dollar sales across food, drug, and mass channels, excluding Walmart).
6 Amway is a direct selling company and manufacturer that use network marketing to sell a variety of
products, primarily in the health, beauty, and home care markets.
7 Oriflame Cosmetics S.A. (Luxembourg) is a cosmetics group, founded in 1967 in Sweden by the
brothers Jonas af Jochnick and Robert af Jochnick. The company sells skin care, cosmetic products and
other related products through an independent sales force.
8
Sorce: Economics Times, November, 2011
4. the Indian consumers. Henceforth, P&G has stressed on producing and marketing premium
products like Head & Shoulders, Ariel and Pantene, which generates over 60% of its total
revenue, in India. Through this, the company will be able to produce goods at a lower cost
and sell them to the Indian mass at an affordable price. At present, a large number of personal
care products are imported in to India resulting in extra distribution and transportation cost.
With the decision to manufacture personal care good locally, P&G is cutting on its
operational cost.
Targeting Rural Customers: Bottom of the Pyramid
The concept of ‘Bottom of the Pyramid’9 refers to people worldwide having purchasing
power of EUR less than or equal to 1000 per year. BOP segment provides huge potential to
companies to expand their markets. Initially P&G targeted upper segment. Hence, the
company catered to niche segment. It focussed on profit margins instead of volume driven
profits. Eventually, it shifted its focus from upper and middle segment to lower segment 10.
P&G realized that upper segment of the price pyramid constitutes only 3.6%11 of the
consumers in the Indian market. So it formulated a strategy of targeting bigger chunk of the
pie by choosing to become a volume player. Therefore, it embarked its entry into rural areas.
Additionally, penetration levels in urban areas are very high so additional growth can come
from deeper penetration in rural areas.
Rural Market: Huge scope
With urban markets getting saturated, P&G is making a move towards rural sector. The big
reason for this is that India's rural consumers are steadily gaining more spending power.
Several factors have led to an increase in rural purchasing power. The increase in
procurement prices [the government sets the minimum support price -- MSP -- for many farm
products] has contributed to a rise in rural demand. A series of good harvests on the back of
several good monsoons boosted rural employment in agricultural and allied activities.
Government schemes like MNREGA reduced rural underemployment and raised wages12.
P&G: Rural Strategy
P&G successfully tapped ‘Bottom of the pyramid’ by effectively understanding the needs of
the rural consumers. Rural consumers are extremely sensitive to changes in the prices 13.
Hence, P&G followed the strategy of followed the strategy of launching an extensive range
of package sizes and prices to suit the purchasing preferences of India's varied rural consumer
segments. This increased consumption and penetration of skin creams by breaking the
affordability barrier and driving price point strategy. In 2004, P&G launched low-priced
sachets of shampoo, which were specifically aimed at the rural segment. It also slashed the
prices of premium products making them available to the rural Indian consumer.
9
The concept was proposed by C.K Prahalad and Hammod in 2002
10
Source: Evalueserve research report, 2006
11
Source: National Council of Applied Economic Research (NCAER)
12
Source: National Council of Applied Economic Research (NCAER)
13
Source: Technopark research
5. To realize manage the demand generated from this exercise, P&G improved, its distribution
network to ensure reach and availability of the products. P&G has laid down committee to
develop and leverage distribution in the rural markets of less than 5,000 population strata.
The company has consigned in place three experiments. Certain experiments were carried in
the below 10,000 population strata rural markets to leverage distribution. The company has
already established a system of stockiest and super stockiest in small towns with population
of 10,000 plus14.
P&G also came up with a new rural penetration strategy in the form of a character called SB,
a dedicated housewife. The personality was conceived to push P&G’s leading personal care
products like Head and Shoulders15. The purpose was to communicate to the target rural
customers on the advantages of using a superior brand.
Demand was also created by spreading awareness. They went to the rural areas of South India
where people rarely used shampoo. They showed them how to use it. They did live
demonstration on a young boy and asked those present to feel and smell his hair. They also
distributed free sachets. After this the shampoo sales went up three to four times.
P&G Project Shiksha: Rural initiative
Project Shiksha is a national consumer program run by Procter & Gamble (P&G) in
partnership with Child Rights and You (CRY)16. This program allows consumers to
participate in a national effort to support the education of underprivileged children in
India via simple brand choices. Every time a consumer buys a large pack of Pantene, Head
& Shoulders, Rejoice, Whisper, Gillette Mach 3 Turbo Gillette Series, Oral B, every
purchase made a definitive contribution towards enabling a child’s right to education. P&G
has committed a minimum of Rs. 1 cr to Shiksha, which will be allocated to projects focused
on enabling the child’s right to education.
Corporate social responsibility helps in gaining competitive advantage. This increase
credibility and goodwill among the customers. This helps in reaching to economically
backward rural areas which otherwise had been difficult to reach.
Transition: New Strategies for Rural Connect
PROCTER & GAMBLE P&G FutureWorks recently funded Healthpoint Services, which
runs rural clinics providing potable water and affordable primary healthcare17. It will give the
MNC access to rural consumers to test-launch some of its water, energy, health and beauty
products. It is also in touch with other startups in India to reach consumers through
unconventional and innovative distribution models. This is a business relationship where
P&G provides investment and technical support and in turn learns about rural services
14
Source: ACNielson ORG- MARG
15
Source: Rural market initiative of FMCG companies by VS Rama Rao
16
Source: www.pg.com
17
Source: Economics Times, September, 2011
6. markets by participating with Healthpoint Services India. P&G hopes to leverage its alliance
with Healthpoint to reach rural consumers who earn less than 100 (roughly $2) a day.
Besides, P&G has made a move forward by catering to the needs of local markets by
deciding to manufacture Indian goods locally, shifting from its age-old policy of importing
popular brands like Olay and Pampers into the Indian market. The move to manufacture the
products locally is part of the company’s strategy to acquire one billion additional consumers
by 2014-15 in India and China. To achieve this goal, the company has launched lower-priced
product extensions of its global premium brands such as Tide and Gillette. These products
will target consumers in the lower end of the social pyramid in these economies. The
company also aims to expand its distribution network to cover the previously inaccessible
rural areas.
7. Annexure 1
Company History
Important Dates:
1837: William Procter and James Gamble form Procter & Gamble, a partnership in
Cincinnati, Ohio, to manufacture and sell candles and soap.
1851: Company's famous moon-and-stars symbol is created.
1878: P&G introduces White Soap, soon renamed Ivory.
1890: The Procter & Gamble Company is incorporated.
1911: Crisco, the first all-vegetable shortening, debuts.
1931: Brand management system is formally introduced.
1946: P&G introduces Tide laundry detergent.
1955: Crest toothpaste makes its debut.
1957: Charmin Paper Company is acquired.
1961: Test marketing of Pampers disposable diapers begins.
1963: Company acquires the Folgers coffee brand.
1982: Norwich-Eaton Pharmaceuticals is acquired.
1985: P&G purchases Richardson-Vicks Company, owner of the Vicks, NyQuil, and Oil of
Olay brands.
1988: Noxell Corporation, maker of Noxema products and Cover Girl cosmetics, is acquired.
1991: Max Factor and Betrix cosmetic and fragrance lines are bought from Revlon, Inc.
1992: Pantene Pro-V shampoo is introduced.
1993: Major restructuring is launched, involving 13,000 job cuts and 30 plant closures.
1997: Company acquires Tambrands, Inc., maker of the Tampax line of tampons.
1998: Organization 2005 restructuring is launched.
1999: Premium pet food maker Iams Company is purchased.
2000: A.G Lafley became President and chief executive
2001: P&G acquires the Clairol hair-care business from Bristol-Myers Squibb Company.
2002: Jif peanut butter and Crisco shortening brands are divested.
2003: Company acquires a controlling interest in German hair-care firm Wella AG.
2005: P&G and Gillette merged into one company
Source: Compiled by author
8. Annexure 2
Sales Growth Trend
P&G, Revenue ($ billion)
84 82.6
82
80 78.9 79.3
78 76.7
76
74 72.4
72
70
68
66
2011 2010 2009 2008 2007
Revenue by business segment (%)
Baby Care &
Family Care
19%
Beauty
24%
Fabric Care & Grooming
Home Care 9%
Health
30%
care
14%
Snacks and Pet
Care
4%
Source: Annual Report 2011
