Procter & Gamble (NYSE: PG ) may be one of the most admired companies in the world. The consumer-products giant has built a portfolio of 22 brands with more than $1 billion in annual sales and another 19 with yearly revenue topping $500 million. Among the brands in its arsenal are household names like Tide, Gillette, and Crest, giving the company a market value of more than $200 billion.
But in this age of social media and e-commerce, P&G and other consumer-goods giants like Unilever (NYSE: UL ) are falling victim to a surprising threat: Start-ups and other small players are taking a bite out of the industry bigwigs' market share. From 2009 to 2012, market share for companies with more than $5 billion in sales in the industry fell 1.6 share points, the equivalent of $10 billion, a trend that comes at a time when the Tide maker is struggling to grow its top line. In its last fiscal year, organic sales edged up just 3%, and grew only 0.6% when currency translation effects are factored in. While profit growth was stronger, cutting costs will only go so far. If revenue growth stalls, earnings will eventually follow.
David & Goliath: Consumer-goods edition
So who's behind this shift? Well, several different brands in a variety of categories are pushing the envelope, including Hello oral-care products. Created just three years ago, the company has taken on a much different brand identity from the traditional heavyweights. Hello's website has a lighthearted tone, giving dosage recommendations based on situations like "date with celebrity from '90s" and "meeting child's PE teacher." Founder Craig Dubitsky said the marketing angle is designed to buck the industry trend in which toothpaste and mouthwash are generally advertised as killing and fighting germs, often relying on fear to drive sales. Hello products, on the other hand, are marketed as "friendly."
Dubitsky's innovations didn't stop at marketing. He hired BMW's design agency and his own formulator, as his products use only natural ingredients and come in exotic flavors like mojito mint. He also thought differently about packaging and the application process, adding a cake tip to the toothpaste tube. "Everything is art," he says, explaining his approach to USA Today.
Dubitsky's innovations have paid off. Hello products are now available in more than 18,000 stores, including big-name chains like Walgreen, Kroger, and CVS. In just five months on Walgreen's shelves, Hello products have grabbed 22% market share in the breath-freshener category. The impressive start seems to indicate that creative products are in demand in even the most staid of categories. In an industry that's been mostly free of major changes for decades, perhaps it's no surprise to see insurgents like Hello stealing market share.
It's not just the drugstore that's changing
While Dubitsky certainly deserves credit for his company's success, brands like Hello seem to also benefit from a cultural and technological shift in shopping habits. Younger consumers are seeking more customization and a personal connection out of the daily products they use, and are looking for a more unique brand experience. The charm and tradition of using Mom's favorite brands is fading, a development seen in other consumer-facing categories as well.
Domestic sales of Coca-Cola's namesake beverage, for instance, has declined in recent years, but the company has found growth by acquiring nontraditional drink brands such as Honest Tea and Odwalla. Meanwhile, sales of macrobrews such as Budweiser and Miller Lite have suffered as craft beer sales have skyrocketed. More and more today, consumers want options and they want quality.
Meanwhile, the rise of social media and online retail means that buzz about new brands spreads like wildfire, and access isn't limited only to your nearest retailer's shelf space. As online retail grows, the potential of these smaller companies will only increase. Notably, the best-selling cereal on Amazon.com isn't Cheerios or Corn Flakes, but a gluten-free brand called Bob's Red Mill. Social media also has the added benefit of leveling the playing field in the advertising game as small investments go a long way, making it harder for companies like P&G and Unilever to gain leverage from traditional TV ads.
Indicating the growing relevance of the online channel, the analyst firm Sanford C. Bernstein said it expects 25% of consumer packaged goods sales to take place on the Web 10 years from now, a total category it projects will be worth $222 billion.
With large companies still controlling 60.6% of the consumer-staples market, the rise of the smaller players may seem like a minor threat, but this is a trend that's likely to gain speed. The supermarket industry offers a corollary. While most competitors have struggled to eke out gains in the sluggish economy, same-store sales at Whole Foods jumped 7.5% in its last quarter. The organic grocer notably avoids stocking mainstream brands like those of P&G and Unilever, using its own store brands or those of niche competitors instead. The privately held Trader Joe's, another grocery upstart, follows a similar model. The rise of farmers' markets, whose numbers have doubled since 2004 to more than 8,000, similarly provides a growing channel for these innovative, start-up brands.
Procter & Gamble has the market power and brand awareness that smaller players envy, but those strengths can become albatrosses if the company fails to adapt to changing times. Its well-known brands may become stodgy, and its marketing perceived as unoriginal. Start-ups may not be an immediate threat to P&G, but brands like Hello are siphoning away the very customers that the traditional powerhouses want, the young and upwardly mobile. In addition, as online retailers like Amazon move closer to same-day delivery, the smaller companies' distance from the customer decreases.
P&G has nearly 180 years of experience under its belt, but as times change, this old dog may need to learn some new tricks.
What's next for Procter & Gamble?
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