How Did P&G Reach the Top in China?

 In early 2013 the BBC asked global brand research company Millward Brown to identify the 20 most powerful foreign brands in China: the ones that have gone in and succeeded where many others have failed.

 When the results came back one noticeable feature was that one company - Procter and Gamble ("P&G") - had three of the top 5 brands!

 Of course you might expect P&G to be successful in China. After all, P&G is the world's largest maker of household and personal-care products. At the start of this decade P&G had set itself an ambitious corporate objective. It aimed to add 1 billion customers by 2015 (a 25% increase) and P&G were clear that emerging markets would be crucial in achieving that goal. Of all the emerging markets, P&G is strongest in China, which by 2012 had become its second-biggest national market with around 6% of the firm's worldwide sales.

 So how has P&G managed to achieve such a strong position in China? Why had P&G succeeded when so many other Western brands had struggled to establish a leading position there?

 To understand the achievement, you need to go right back to when foreign firms were first allowed to enter China. Here are some key features of the P&G approach to building its business in China.

Start Early with Building Brand Awareness - the Power of Advertising

P&G was one of the first Western businesses to address the opportunity of doing business in China.

P&G's entry strategy for China started in 1985 with market research and advertising. This was quite an unusual approach, but it worked well. The advertising campaigns began 1-2 years before P&G even began selling products in China as part of a promotional strategy of building brand awareness and a reputation for the company. Every advert ended with the P&G name.

P&G finally entered China through a joint venture with a Hong Kong company, Hutchison Whampoa. The joint venture business formed another joint venture with Guangzhou Soup Factory and began producing P&G's first product for the Chinese market - Head & Shoulders shampoo. Within a year of launch, Head & Shoulders had gained about 15% of the Guangdong market.

The next product launch was Crest toothpaste, introduced in 1997 after an extensive advertising campaign designed to raise awareness of tooth cavity prevention and dental hygiene.

In the same year, P&G's Pampers brand of disposable nappies was launched in the same region, although not with great early success.

This article describes in more detail how P&G introduced disposable nappies into China.

Initially, P&G failed with this product in China. 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 disposable nappies, wrongly assuming that parents would buy them if they were cheap enough. It didn't help that Chinese families had no tradition of using disposable nappies. 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.

The article above describes how P&G changed the product to better meet local customer needs. They added extra softness, made it look and feel less "plastic" and increased the absorption capability of the nappy. To bring down the cost, P&G developed more efficient technology platforms and moved manufacturing operations to China to eliminate shipping costs. P&G also invested heavily in advertising campaigns to promote the claimed benefits of using disposable nappies, linking them to longer sleep for babies. The result was that the disposable nappy market grew strongly in China with P&G quickly taking market leadership.

So, from a modest start of just $50 million total sales in 1991, P&G reached a milestone of $5bn revenues in China in 2009 and had become the largest consumer products producer there.

Developing the Marketing Mix: Products & Distribution

Like many other multinationals, P&G had initially entered Chinese markets with either premium products targeted at affluent consumers or “watered down” versions of their popular products targeted at less affluent consumers. However, as we have seen with the Pampers example, P&G then shifted to an approach that required them to really understand the Chinese customer in much more detail and to develop and market products to meet the specific needs and at prices that would appeal to a much larger potential customer base.

One way in which P&G did this was to send thousands of P&G employees to live with and observe potential customers around China to help develop the right products for them and work out how to reduce production costs.

By 2010, P&G was actively engaged in its “$2 a day” project, attempting to identify ways to serve low-income consumers in developing countries that had to live on just $2 per day.

In order to achieve the kind of product innovation for the $2 day project, P&G realised that it would need to reduce costs by between 30-50%. However, P&G’s greater scale and extensive supply network meant that it was able to achieve this. P&G has long been regarded as a world-class manufacturer and operator of efficient supply chains and it invested heavily in production capacity in China to supply its product ranges. By 2010 P&G had 10 factories in China and committed to investing a further $1bn by 2015 in new production capacity.

When P&G entered China back in 1985, there was very limited national distribution for consumer goods. Most brands and shops were local. So P&G’s challenge was to build a network of distributors who could also handle the demands of distributing fast-moving consumer goods like toothpaste, nappies and shampoo. P&G initially focused on the largest (Tier 1) cities such as Guangzhou, Shenzhen, Shanghai, Beijing and Tianjin which also tended to have the largest and most affluent consumer base. However, by 2010 P&G had extended its distribution network well beyond the biggest cities and were supplying over 500,000 shops across much of China using 150 distribution centres.

Building an Organisation Based on Local Talent & Investing in CSR

Another key feature of P&G’s success has been how it focused on building an organisational structure and resource based on local employees and managers. For example, P&G was among the first multinationals to actively recruit at Chinese universities and it developed extensive training programmes for its China staff.

P&G’s recruitment and staff development approach has followed a similar pattern in developed economies where it actively promotes from within as a way of instilling a strong corporate culture, improving staff retention and building staff loyalty. As a result, by 2010, only around 2% of P&G’s employees in China were non-Chinese.

P&G also recognised the need to focus on CSR as it developed its presence in China. It worked closely with central and local governments on projects in areas such as education, public health and rural development – which were seen as priorities by China’s leaders.

One project of note for P&G in China was the Hope Schools programme. By 2010, P&G had built more than 200 Hope Schools around China.