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P&G's Gillette Edge: advertisement
The Playbook
It Honed at Wal-Mart
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Company Research January 31, 2005; Page A1
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Video Center Procter & Gamble Co. Chief Executive A.G. Lafley has a strategy in
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mind for Gillette Co., and he learned it from navigating one of the
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business world's most intertwined relationships -- P&G and Wal-Mart
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Mr. Lafley realized soon after becoming CEO nearly five years ago that
The Online Journal Wal-Mart's strategy is not only to supply products at the lowest cost but
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to get people to turn to Wal-Mart for things they normally find
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elsewhere, at specialty stores, restaurants or even the doctor's office.
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SOAP AND LATHER So P&G is upgrading its
• Graphic: Key brands at Gillette Olay face creams and
and P&G marketing them as better
• Complete coverage
than department-store
brands and just as good
as a botox shot from a
plastic surgeon. Tooth-whitening used to be an expensive process that
was available only at the dentist's office. P&G's Crest Whitestrips gave
it a $25 price tag and made it possible for the masses. P&G, maker of
the Actonel osteoporosis drug, helps women get bone-density tests in
stores instead of a doctor's office. All of this is available at Wal-Mart.
And now that P&G is buying Gillette for $52.4 billion based on COMPANIES
Dow Jones, Reuters
Friday's close, P&G is likely to push even more such programs using
Gillette brands. Procter & Gamble Co. (PG)
PRICE 52.87

For P&G and Wal-Mart, "it's a lot like a marriage," says Lou Pritchett, CHANGE -0.36
who, as P&G vice president of sales, met with Wal-Mart founder Sam U.S. dollars 2/1
Walton to establish the companies' relationship in 1987. "Sometimes
you want to slice each other's throats, and there are other times when

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 WSJ.com - P&G's Gillette Edge: The Playbook It Honed at Wal-Mart

it's a love-in." Gillette Co. (G)

PRICE 50.30
Fully 17%, or $8.7 billion, of P&G's $51.4 billion in sales come from CHANGE -0.42
Wal-Mart's 5,100 stores world-wide. The companies link their
U.S. dollars 2/1
computer systems and share sales data and marketing plans. One of
P&G's largest offices outside its Cincinnati headquarters is in Wal-Mart Stores Inc. (WMT)
Fayetteville, Ark., down the road from Wal-Mart headquarters. The two PRICE 52.61
companies cozy up to each other, only at times to pull back and
CHANGE 0.21
compete fiercely.
U.S. dollars 2/1

Being the best-selling brand is always a goal for consumer-products Costco Wholesale Corp. (COST)
companies. But it has become a matter of survival as Wal-Mart has PRICE 46.96
become a bigger player in the world of retail. Wal-Mart is brutally
CHANGE -0.31
focused on stocking only a few brands on its shelves. Moving products
quickly through its stores is crucial to the company's profitability, so U.S. dollars 2/1

Wal-Mart swiftly abandons products that aren't selling well.

Target Corp. (TGT)
PRICE 50.70
Before becoming CEO, Mr. Lafley ran P&G's beauty business, which
CHANGE -0.07
trained him in the power of selling an upscale image. He aims to push
brands that were once mid-tier into the premium echelons. "Here's our U.S. dollars 2/1
real strategy -- secret sauce. We want to make the ... middle to the top
of the market as big as it can possibly be through innovation and new * At Market Close
ideas," said Mr. Lafley, in an interview as he was laying out his strategy
in the summer of 2003. RELATED INDUSTRIES
• Consumer Products
The drive by P&G, Gillette and Wal-Mart to
offer increasingly elaborate products at Personalized Home Page Setup
reasonable prices is helping reshape consumer Put headlines on your homepage
taste across America. Items like cappuccino about the companies, industries and
topics that interest you most.
makers and spa treatments that were once the
domain of specialty stores in cities on the
coasts are now common throughout the country. Wal-Mart argues that it forces
suppliers to become more efficient and passes gains to consumers in the form of
lower prices and a broader selection.

P&G's acquisition was not driven by a desire to have greater leverage with Wal-
Advertiser Links Mart, Mr. Lafley said in an interview Friday. Asked if the balance of power has
shifted to suppliers, he likes to reply, "The power has shifted to the consumer."
FEATURED ARCHIVE
P&G says it offers the same programs to all its suppliers and doesn't give any
CIGNA Presents special treatment to Wal-Mart.
"The Benefits of Caring"
An archive of WSJ health- Instead, Mr. Lafley spoke of the potential of expanding into products like women's shaving, a market
care articles.
Gillette leads with its Venus brand but one that isn't nearly as developed compared with its men's lines.
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Mr. Lafley, who had already established himself as P&G's most acquisitive CEO, buying up beauty
companies like Clairol and Wella, wasn't looking for a deal. After expanding a restructuring that had begun
under his predecessor, Mr. Lafley was finally shaking the nagging concern on Wall Street that P&G relied
on one kind of restructuring program or another to achieve earnings growth. In recent months, he has told
investors P&G was focused on internal growth, not dealmaking.
So when Gillette CEO James Kilts initially approached Mr. Lafley last fall, the talks didn't go far. Then
earlier this month, Mr. Lafley, attracted by Gillette's brands, went back to Mr. Kilts and they quickly
hammered out a deal. The acquisition of Gillette would be far larger than any previous acquisition in P&G's
168 years. Its next largest was Wella for $7 billion.

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 WSJ.com - P&G's Gillette Edge: The Playbook It Honed at Wal-Mart
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For both P&G and Gillette, Wal-Mart is the largest single seller of their products. It accounts for 13% of
Gillette's $9.25 billion in annual sales. P&G's sales at Wal-Mart traditionally have grown faster than its total
company growth rate, which was 19% in its last fiscal year, ended June 30. Wal-Mart has even lately
worried about suppliers becoming too reliant on it, noting that any time companies rely too much on each
other, they inherit all the risks of the other.
Close partnerships between stores and manufacturers are becoming more common now, with such retailers
as Costco Wholesale Corp., Target Corp. and Carrefour SA of France moving to that model. P&G and Wal-
Mart pioneered the idea and created the template for others. So many manufacturers have offices near Wal-
Mart that they dub the town "Vendorville." P&G and Wal-Mart representatives declined to discuss their
relationship, citing a policy not to discuss supplier-retailer relationships.
About 300 people work in P&G's Arkansas office, overseeing sales of its brands to Wal-Mart and devising
cross-marketing and other tie-ins. After a few years on the account, P&G tends to send managers on to the
next assignment because they can often start to identify as much with Wal-Mart's needs as with P&G's, says
Tom Muccio, who headed P&G's Wal-Mart team until retiring last year.
"The people were paid by P&G and sat in P&G's office, but it was like they were working for Wal-Mart and
P&G equally," Mr. Muccio says. "The payroll just happened to come from P&G."
When Wal-Mart discovered a downside to P&G's and Gillette's pricier products like Crest Whitestrips and
Mach3 razors -- these products were the most popular to steal -- it turned to the suppliers for an answer. One
Saturday in January 2001, Tom Coughlin, a Wal-Mart vice-chairman, summoned executives from both
companies to Bentonville, asking them to fix the problem, Mr. Muccio recalls.
So, P&G altered its packaging to make its products harder to steal. It changed its Olay package from a box to
a clear plastic container with a flat piece of cardboard, known as a "clamshell" because it is so difficult to
open. It made the Crest Whitestrips package larger and added an extra layer of plastic. It assumed the extra
cost. Gillette also adopted clamshell packaging for its razor packs. For the blade refills, it created a clear-
front, plastic dispenser system fitted with drawers that let customers take just one package at a time.
Until Messrs. Walton and Pritchett canoed down Arkansas' Spring River for two days in the summer of
1987, there was barely a relationship between the two companies. "We shipped them products and they sent
us a check back," says Mr. Pritchett. "It was we sell. You buy. Good-bye." Years before, Wal-Mart had
named P&G its supplier of the year, and P&G hadn't bother to show up to pick up the award.
But advances in technology made Mr. Pritchett believe the two could work together to sell P&G products
more efficiently. Mr. Pritchett proposed that P&G share some of its consumer research with Wal-Mart in
exchange for a better picture of how P&G's products were selling. Mr. Walton agreed, as long as Mr.
Pritchett could sell the idea to his "Yankee bosses." Mr. Pritchett realized then how little the two companies
knew about each other. "Cincinnati is in the Midwest," he recalls thinking. (Mr. Walton died in 1992. Mr.
Pritchett, who has retired from P&G in 1989, now advises companies on the importance of partnerships.)
Early on, P&G employees, who relocated to Fayetteville to be close to Wal-Mart, called their adopted home
Fayette-nam, and often griped about Wal-Mart's demands. Still, P&G and Wal-Mart came up with specific
goals. In their first collaboration, Wal-Mart complained that Pampers diapers sat for too long in its
warehouses, costing it money. Wal-Mart buyers were shipping diapers from the factory every two weeks.
After gaining access to Wal-Mart's sales data, P&G assigned one manager to monitor the data and order just
enough Pampers to meet sales but not too much so that the diapers sat in the warehouse.
By the mid-nineties, as P&G was starting to struggle to maintain its sales and earnings momentum, Wal-
Mart's business was taking off with the rapid expansion of its supercenters. Wal-Mart was quick to take
advantage of a P&G miscalculation. P&G had let the trademark on its White Cloud toilet paper lapse in
1994, in order to concentrate on its pricier Charmin brand. A private entrepreneur snapped up the trademark
and sold it to Wal-Mart. Wal-Mart started displaying White Cloud with open rolls so shoppers could touch
WSJ.com - P&G's Gillette Edge: The Playbook It Honed at Wal-Mart

and compare. White Cloud sales quickly increased, hurting P&G's Charmin.

P&G executives felt betrayed, executives involved in the business at the time say. All the consumer market
research P&G had shared with Wal-Mart on how to sell toilet paper was being used against it. "The beauty
about White Cloud for Wal-Mart was that we had built that Mercedes image and they brought it in at Chevy
prices," Mr. Muccio says.

When Mr. Lafley hastily became CEO in June 2000, P&G was reeling from months of turmoil under his
predecessor, Durk Jager. Mr. Jager realized P&G needed to innovate more quickly to keep its products
relevant, but he went about it by trying to invent new ones like at-home dry cleaning kits and fruit-and-
vegetable washes and neglected some P&G's core brands like Tide and Pampers. Mr. Lafley reversed that.
He said he wanted innovation in the company's top 10 brands.

Mr. Lafley, who has a B.A. in history from Hamilton College

and briefly pursued a master's degree in medieval and
Renaissance history at the University of Virginia, latched onto
Wal-Mart's effort to fill an ever-greater role in its shoppers'
lives. P&G's consumer research helped develop specific
programs for Wal-Mart that bundle P&G's products into a
theme, like "Speaking of Women's Health," a nonprofit program
that hosts several thousand women each year at a meeting in
Cincinnati and hosts dozens of smaller events, to discuss topics
like breast cancer and osteoporosis in Wal-Marts across the
country. Another, "Babies First," is an initiative that supports
children's immunizations, safety seats and a healthy diet. It is
sponsored by Pampers, Wal-Mart and the American Academy
of Pediatrics.

While P&G doesn't necessarily promote its products at such

events, company marketers calculate that such events lend both
P&G and Wal-Mart a halo, presenting P&G as an authority on
parenting and health and Wal-Mart as a place to get an
education on such topics. P&G thinks its sales of diapers
increase as a result, giving its brand the clout to expand into new products like foaming wash mittens and
disposable bibs.

In 2001, Mr. Muccio says P&G developed a brand of coffee, called Veneto, just for Wal-Mart. Seattle's Best
Coffee, a mid-size brand then owned by AFC Enterprises, had approached Wal-Mart about selling its coffee
beans for about $2 more than P&G's canned Folgers and about $2 less than P&G's higher-end Millstone
brand. P&G's Mr. Muccio quickly suggested another option to Wal-Mart: P&G would develop a new mid-
tier coffee specifically for Wal-Mart.

P&G came up with Veneto, a whole-bean coffee not as strong as Millstone or the similarly priced Starbucks.
P&G and Wal-Mart employees on the project joked that Veneto was the Fisher-Price version of whole bean
coffee, as in "my first whole bean." The product was specifically designed to appeal to consumers who had a
taste for Folgers or its main competitor, Kraft Foods Inc.'s Maxwell House, but who wanted to participate in
the Starbucks phenomenon. P&G's team helped Wal-Mart run consumer taste tests comparing Veneto with
Seattle's Best, which is now owned by Starbucks Corp. Today, Wal-Mart stocks Seattle's Best at some stores
and Veneto at others, but the P&G brand helped keep the competition from dominating that middle tier,
according to Wal-Mart.

Coffee isn't even a priority product for P&G, and, with Veneto, P&G designed a product to get consumers to
trade up from its own Folger's. The product, though, showed what has become one of P&G's greatest
strengths under Mr. Lafley -- making consumers pay a premium for products that are only marginally
different from the staples they've purchased for years.

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WSJ.com - P&G's Gillette Edge: The Playbook It Honed at Wal-Mart

Similarly, Gillette introduces major new product shifts in its razors every five to 10 years, and with them
substantial price increases. Its trade-up strategy has a second part: As it introduces new razors, Gillette
slowly pulls up the price of its "tail" brands, the older generations. Eventually, the company figures, a
Mach3 user will notice that the new Mach3Turbo isn't that much more and will jump to the costlier product.

P&G is planning to leave Gillette's razor and battery businesses and its Braun line of small appliances intact,
but meld the rest of the company's deodorant and other products into P&G's structure, according to a person
familiar with the negotiations between the two firms. Mr. Kilts sees male skincare as an area where the
companies could possibly team up to develop new products. P&G's knowledge of skincare, with its Olay
anti-aging creams for women, combined with Gillette's reach with male consumers, makes it a natural, Mr.
Kilts said in an interview. "That's something that exists as a sort of East Coast West Coast phenomenon
now," says Mr. Kilts, "but we see it moving into the middle of the country and really taking off."

Write to Sarah Ellison at sarah.ellison@wsj.com, Ann Zimmerman at ann.zimmerman@wsj.com and

Charles Forelle at charles.forelle@wsj.com

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