February, 2005

Fruits of Thought

Lessons From P&G

Proctor & Gamble is getting bigger. The company recently announced an agreement to acquire Gillette, which, all by itself, is bigger than any single company in the produce industry.

When the acquisition was announced, experts on Wall Street immediately declared the P&G had done this deal to increase its leverage against Wal-Mart.

Of course this is really nonsensical. If P&G wanted to increase its power vis a vis Wal-Mart, it would buy a hotel chain or a coal mine, anything that would help it diversify its earnings away from Wal-Mart. Acquiring another big consumer products company, one that desperately wants shelf space at Wal-Mart, hardly give P&G leverage against anyone.

In fact, as a few commentators noted, it makes more sense to say that P&G learned how to work with Wal-Mart and make money at it. Therefore, P&G bought Gillette in the hope of duplicating P&G’s success with Wal-Mart on a broader product line.

The nature of P&G’s success with Wal-Mart should be the subject of study by every marketing executive in the produce business. And perhaps Wal-Mart’s produce team needs to do some rethinking as well.

Marketers in produce tend to have an almost banal goal – they want to sell more. If they are selling watermelons, they hope to sell more than last season; grapes…same goal; potatoes…yup, they also want to sell more. P&G, however, has partnered with Wal-Mart to rethink this paradigm.

Wal-Mart’s customers are the paycheck-to-paycheck crowd, and Wal-Mart’s positioning is to always provide the lowest price. That is great “property” to own in the nation’s psyche, but it is not always easy making a buck by selling the cheapest product at the cheapest price. In fact, both manufacturer and retailer struggle when they are caught in this commodity trap.

P&G and Wal-Mart, though, have a solution: Tap into the aspirational nature of all consumers to sell new products that are at a higher price and profitability point.

Wal-Mart so dominates its space it can’t hope to increase sales and profits simply by more effectively competing against Kmart. Instead it has to get people to either move up the product chain and buy more expensive items that they wouldn’t have bought at all or buy at Wal-Mart things they would have bought at other types of vendors – department stores, restaurants, etc.

In other words, it wasn’t long ago that you could buy an espresso machine only at elite gourmet retailers located in large urban centers, mostly on the coasts. Today Wal-Mart sells them by the boatload. This is all new business for Wal-Mart, and it came about for two reasons: First, because Wal-Mart recognized that, though its customers may have thin budgets, they have dreams and aspirations, including participating in the trend toward better food products – like espresso. Second, the sales came about because Wal-Mart worked with suppliers to get the cost of the machines down to an accessible point.

The Wall Street Journal recently ran a great article that mentioned Veneto coffee, a whole bean coffee P&G developed specifically for Wal-Mart. The story goes that Wal-Mart did a good business selling basic canned coffees like P&G’s Folger’s, but there was a desire among Wal-Mart’s customers to participate in the whole Starbucks phenomenon. The problem was both taste and money; top end whole bean coffees like Starbucks or P&G’s Millstone cost about $4 more than Folger’s and have a very strong flavor. The leap, both in flavor and in cost was a big jump for a Folger’s consumer to make.

Thus was born Veneto, costing about $2 more than Folger’s and with a flavor profile transitional between Folger’s and Starbucks. The joke goes that the coffee was internally referred to as the Fisher-Price version of whole bean coffee as in “my first whole bean coffee.”

The thing to realize here is that P&G and Wal-Mart managed to get $2 more from consumers, give them a better product, satisfy their aspirational longings and make an awful lot more money than you could selling cans of Folger’s. What is more, they captured business that consumers might have given to a coffee shop or supermarket.

Couldn’t the same story eventually be told with produce? After all, produce isn’t much more of a commodity than ground coffee. P&G, through product development, through package design, through marketing, is showing a different path.

Have you seen Ready Pac’s Bistro To Go salad bowl line? Selling spinach salads with egg and bacon, selling Chicken Caesar with real chicken – they are asking the kind of questions that P&G and Wal-Mart ask: How can we get a consumer who was going to buy a salad at Wendy’s to give us the business? How can we get a consumer who was going to give us a few cents for spinach to give us a few bucks for the finished salad?

Wal-Mart’s produce operations also may themselves need rejuggling. The whole notion of distribution center assignments given by product can be limiting since it makes vendors uncertain their new value-added idea would even be in their vendor classification.

In the end, though, the supplier/retailer partnership must go beyond trying to sell more cabbage more efficiently; it needs to be about recognizing that the power shift is not from supplier to retailer, it is from supplier AND retailer to consumer. The focus has to be on respecting the aspirations of that consumer and putting the whole industry, supplier and retailer both, in service to those aspirations.  pb