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FEBRUARY 7, 2005
Welcome To Procter & Gadget The consumer giant is leading the way in building brands with mechanical gizmos It looks as cool as an iPod and costs nearly as much: a sleek, handheld device that sprays ionized particles of makeup foundation on the face. But the company that will launch the $200 appliance in the U.S. within a year is hardly perceived as a cutting-edge gadget maker. It's Procter & Gamble Co. (PG ), the Cincinnati consumer-goods company best known for household staples such as Pampers, Crest, and Tide. The SK-II Air Touch, already selling in Japan and Britain, is leading a P&G strategy to jazz up those humdrum brands by placing them inside nifty new delivery devices. Not coincidentally, that also allows the company to boost pricing. It's a lesson P&G learned from watching Gillette's well-worn razor-and-replacement-blade strategy and its own runaway success with its $14 Swiffer mop (and $5.75 replacement pads) and the $7.69 SpinBrush electric toothbrush. P&G is spreading the strategy to multiple categories, redefining how it interacts with consumers and using the experience that is created through a device to foster greater loyalty to its brands. Says longtime P&G consultant Gary Stibel of New England Consulting Group: "It's a substantial shift in how P&G is thinking about brands." Rivals such as S.C. Johnson & Son Inc. and even blade king Gillette Co. (G ) are also placing bigger bets on gadgets. But P&G is stepping on the gas. In the past year it has launched at least eight mechanical or electric gizmos. They include Febreze Scentstories, an electric air freshener machine that plays CD-like scent disks; Tide Buzz Ultrasonic Stain Remover; and Tide StainBrush, a battery-powered brush. It also introduced Swiffer Sweep + Vac, a device that combines a Swiffer electrostatic dust mop with a vacuum, and Mr. Clean AutoDry, a water-pressure-powered car-cleaning system that dries without streaking. Sales of all P&G's gadget-related items grew 16% last year and now total about 8% of its $54 billion in annual sales. That's up from 2% in 2000, estimates Lehman Brothers Inc. (LEH ) analyst Ann Gillin Lefever. COFFEE PADS Consumer-products companies need new growth wherever they can find it. Sales in packaged goods are crawling ahead at just 3% annually. Gadgets not only create new sales but also drive future sales through replacement items. P&G is advancing that strategy by partnering with appliance makers who make hardware to support unique P&G products. Last year, home-appliance maker Applica Inc. (APN ) launched the Home Café, a one-cup coffee maker that uses distinctive Folgers and Millstone coffee pads from P&G. Royal Philips Electronics (PHG ) introduced a Sonicare electric toothbrush that calls for specially formulated Crest toothpaste. These profitable devices are lifting otherwise stagnating profit margins of soaps and household cleaners, thus offsetting margin pressure on sales in developing countries. And while consumer-products companies typically struggle to win any price increases these days, P&G is launching a $34 higher-powered premium version of AutoDry that also works inside the car and costs 70% more than the original. That beats a 22-ounce bottle of Mr. Clean for $2.99. By signing up contract manufacturers to make the devices, P&G gets to share capital costs. Profit on these devices is one reason P&G has been able to absorb rising costs of raw materials better than rivals Unilever Group and Colgate-Palmolive Co. (CL ), which haven't followed the gadget strategy, says Banc of America Securities analyst William Steele. P&G Chief Executive Alan G. "A.G." Lafley believes the most important aspect of his gadget approach is its potential to increase brand loyalty. Since taking the top job in 2000, Lafley has expanded the definition of P&G's big brands. Instead of just toothpaste, for instance, Crest now includes whitening products and the low-price electric SpinBrush line. The cheap, fun-to-use brush, Lafley says, has created a new and positive vibe around the whole Crest brand. "People remember experiences," Lafley notes. "They don't remember attributes." Competitors are taking note. Last year, Gillette launched its M3Power battery-powered wet shaver after a first-time collaboration among the company's razor group, its Braun appliance division, and its Duracell unit. Clorox Co. (CLX ) introduced Swiffer competitor ReadyMop. S.C. Johnson rolled out Scrubbing Bubbles Fresh Brush, a toilet cleaning brush with a flushable disposable head that requires refills, and is testing a gadget under the same brand that hangs in the shower and automatically cleans the tub and tile. Are companies creating demand by inventing new categories or responding to consumers' wants? Both, say executives and consultants. "Inexpensive personal care gadgets is where the desire to self-pamper meets the gadgeting of our briefcase, belt, and car," says independent marketing consultant Dennis Keene. Add a willingness to spend more on personal grooming by baby boomers and Generation X, plus a growing distaste and lack of time for housecleaning by the same consumers, and it adds up to a huge opportunity for new devices, Keene says. Gillette's M3Power did little else but make the disposable razor head vibrate, but that was enough to grab 35% of the U.S. razor market in dollar terms and 6% of the disposable blade market within a short seven months of launch. "This has the potential to be the biggest-selling product ever in the blade and razor market," says Peter K. Hoffman, president of blades and razors at Gillette. But there is clearly a fad worry to the gadget boom. As consumer-products companies generate new devices, margins inevitably will contract, predicts William A. Sahlman, a Harvard Business School professor who has studied the success of SpinBrush. Consumer demand for such devices, too, is difficult to gauge. And execution isn't always on target. Drug chain Walgreen Co. (WAG ), for example, reports that sales of P&G's $7.49 Dawn Power Dish Brush have eased since its launch in 2003. And some Procter & Gamble managers worry about the quality of devices, which can ultimately hurt the overall brand. P&G recently had to recall the Swiffer Vac because of electrical problems. Lafley acknowledges there's no telling when consumers will max out on gadgets. "We have to be careful we don't push it too far," he admits. But for now, P&G is determined to find new ways to pack consumers' cabinets with nifty gizmos.  By Robert Berner in Cincinnati, with William C. Symonds in Boston
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