Share |

Focus: Supply Chain Trends/Issues

Feature Article from Our Supply Chain Trends and Issues Subject Area - See All

From SCDigest's On-Target E-Magazine

Sept. 21 , 2011

Supply Chain News: Procter & Gamble, others Target Low Income Consumers, not Just in Emerging Markets, but in the US

Middle Market and Products Getting Squeezed; The Gini Index Tells the Tale; P&G Says it needs to Learn how to Make High End Goods in Small Quantities Profitably

SCDigest Editorial Staff

Procter & Gamble is one of many companies that have made a number of product, logistics and marketing changes over the past decade to capture the low income consumer in developing countries. Now, P&G is embracing something of an equivalent strategy in its home US market as well.

The consumer packaged goods giant, which built its business over many decades based on selling its major brand names in soaps, detergents, toothpaste and more to the large US middle class, is finding that target market is changing.

SCDigest Says:

In 2009, the most recent calculation available, the Gini coefficient totaled 0.468, a 20% rise in income disparity over the past 40 years, according to the U.S. Census Bureau.

What Do You Say?

Click Here to Send Us Your Comments

Click Here to See Reader Feedback

Now, according to a story in the Wall Street Journal last week, "P&G executives say many of its former middle-market shoppers are trading down to lower-priced goods—widening the pools of have and have-not consumers at the expense of the middle," as stagnant wage growth and high unemployment are increasing the level of income inequality in the US.

That in turn means a "high/low" product strategy that involves slashing costs and prices to get the lower end consumer, "fundamentally changing" the way P&G designs and sells many of its products - with obvious supply chain implications.

That change is coming in large part because P&G does not believe the current scenario is simply a temporary result of the financial crisis and currently weak economic recovery. Rather, P&G execs see current conditions in terms of income levels and buying habits to persist for many years.

The Wall Street Journal quotes Melanie Healey, group president of P&G's North America business, as saying that this shift has "required us to think differently about our product portfolio and how to please the high-end and lower-end markets. That's frankly where a lot of the growth is happening."

There are other supporting signs on the low end. Sales and stock prices at so-called dollar stores continue to rise, as recession-weary and tapped out consumers migrate to the cheapest retail channels available. For example, same stores sales at Dollar General, which has an amazing 9144 outlets, were up 5.9% last quarter, as the stock keeps hitting 52-week highs.

Even before the recession, middle class incomes were not keeping up with inflation. The middle of the middle class have incomes today adjusted for inflation lower than they did in 1998, as the recession accelerated the existing trend. Lifestyles were often maintained through excessive debt for both housing and personal credit, contributing both to the financial crisis and the slow recovery, as consumers have tried to save more and pare down debt levels.

Meanwhile, the high end consumer all told has continued to do pretty well. The analysts at Citibank say the data led them to create the "Consumer Hourglass Theory" (the middle gets squeezed), and since 2009 the bank has urged investors to focus on companies best positioned to cater to the highest-income and lowest-income consumers. The portfolio of 25 companies it created of companies catering to either end (Saks and Estee Lauder among those focused on the top, Family Dollar and Kellogg more focused on the bottom) has trounced the overall stock market over the past two years.

An interesting example is jeweler Tiffany's, which has usually carried a line of somewhat more modestly priced items for the mid-market consumer who wanted to partake a bit in owning something from this high end brand name. A company executive says sales of those products have plummeted since the recession, even as its core high end offerings have remained strong.

(Supply Chain Trends Story Continued Below)

CATEGORY SPONSOR: SOFTEON

P&G Saw Faster Sales Growth in Low End Since 2008

The Wall Street Journal article says that "In late 2008, unit sales gains of P&G's cheaper brands began outpacing its more expensive lines despite receiving far less advertising. As the recession wore on, U.S. market-share gains for P&G's cheaper Luvs diapers and Gain detergent increased faster than its premium-priced Pampers and Tide brands."

Gain detergent is a product released in 2010 that can sell for as little as 50% less per ounce than its more premium brands.

Lower prices, no-name brand competitors were eating into P&G's market share in a number of areas. For example, P&G's dominant fabric-softener sheets business, including its Bounce brand, saw a market share drop of 5 percentage points to 60.2%, from 2008 to 2011 as sales by lower-priced options from Sun Products Corp. and private-label brands increased.

The Gini Index Tells the Tale

P&G is among a growing number of companies that take a look at the "Gini index," developed by Italian mathematician Corrado Gini early in the 20th century, and which measures income inequality. In this index, if income in a country was distributed perfectly even, the score would be zero. Perfect inequality would result in a score of 100.

The US CIA actually tracks Gini scores by country, though much of the data is from a few years ago or more, as can be found here: CIA's Gini Score Numbers by Country.

In 2009, the most recent calculation available, the Gini coefficient totaled 0.468, a 20% rise in income disparity over the past 40 years, according to the U.S. Census Bureau.

"We now have a Gini index similar to the Philippines and Mexico—you'd never have imagined that," says Phyllis Jackson, P&G's vice president of consumer market knowledge for North America. "I don't think we've typically thought about America as a country with big income gaps to this extent."

The recognition of this reality has led P&G to significantly change its R&D, product development, and go to market strategies.

The Wall Street Journal says that globally, "P&G divides consumers into three income groups. The highest-earning "ones" historically have been the primary bracket P&G chased in the U.S. as they are the least price sensitive and most swayed by claims of superior product performance. But as the "twos," or lower-income American consumers, grew in size during the recession, P&G decided to target them aggressively, too. P&G doesn't specifically target the lowest-income "threes" in the U.S., since they comprise a small percentage of the population and such consumers are typically heavily subsidized by government aid."

Obviously, there are supply chain implications to all this, as not only production costs need to be pared to meet the price points needed to reach this lower income consumer, but even decisions around transportation and inventory levels may need to be rethought. For example, the lower cost of inventory holdings for lower priced products might change the curve for them relative to inventory-transportation trade-offs.

P&G is also trying to bring out more premium products for the high end - but that strategy contains its own supply chain challenges.

"We do big volumes of things really well," said Bruce Brown, P&G's chief technology officer. "Things that are smaller quantities, with high appeal, we're learning how to do that."

What is your take on this story of how P&G is changing its product strategy? Is your company adopting anything similar to this high/low strategy? What are the supply chain implications? Let us know your thoughts at the Feedback button below.

Recent Feedback

No Feedback on this article yet