The Procter & Gamble Co.

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The Procter & Gamble Co.

founded: 1837 (incorporated in 1890)

Contact Information:

headquarters: 1 procter & gamble plz.

cincinnati, oh 45202 phone: (513)983-1100 fax: (513)562-4500 toll free: (888)764-7483 url: http://www.pg.com

OVERVIEW

Founded in 1837 by two English immigrants, Procter & Gamble (P&G) markets more than 300 brands to nearly 5 billion consumers in over 140 countries. These brands include Tide, Ariel, Pantene Pro-V, Always, Whisper, Pringles, Pampers, and Oil of Olay. Based in Cincinnati, Ohio, P&G has on-the-ground operations in over 40 countries and employs more than 103,000 people worldwide.

While still heavily involved in household products such as Tide, Procter & Gamble has become a major producer and seller of pharmaceuticals. Its biggest product heading into the twenty-first century is Olean, a fat substitute that was introduced to the consumer market in 1998 through its Pringle potato-chip brand, as well as sold to other companies, including Nabisco.

COMPANY FINANCES

While many businesses were reeling from the Asian financial crisis in 1998, P&G's stock prices remained strong, although earnings for the first quarter of the year suggested the company's four-year streak in growth had slowed. Bent on continued record growth rates, the company continued to introduce brands, such as a revolutionary cleaning product called Febreze, while divesting itself of non-strategic brands, such as Duncan Hines cake mix, long associated with the company.

Perennially America's top advertiser, P&G continued to focus on marketing aspects in the late 1990s, tailoring its campaigns to maximize its ability to capitalize on the immediacy of the Internet. Responding to protests by animal rights activists, P&G has developed alternatives to the use of animals in product testing and donated money in hopes of developing computer modeling techniques that would further reduce the use of animals in product testing. It also continues to field health questions about Olean, although the product has been approved by the U.S. Food and Drug Administration.

Largely through acquisition of leading market brands, CEO John Pepper expects the company's business to double by 2007. After four years of record earnings, Procter & Gamble's growth slowed in the first quarter of 1998, due to new rival products and weakened currencies that hampered sales, although worldwide earnings advanced 9 percent. P&G's net earnings were $961 million in its fiscal third quarter, compared with $881 million in the same period a year before. Tony Vento, an analyst with Edward Jones, said he was disappointed with the quarter's revenue gains and blamed it in part on new-product introductions by rivals Colgate-Palmolive Co. and Frito Lay.

Procter & Gamble achieved record net earnings for the fourth consecutive year in 1997. For the fiscal year ending June 30, 1997, the company's net earnings increased 12 percent to $3.42 billion or $2.43 per share, up from $3.05 billion and $2.14 per share the year before. In 1995, the company reported net earnings of $2.64 billion, up from $2.21 billion in 1994.

ANALYSTS' OPINIONS

Even in the heat of the Asian economic crisis in 1998, Procter & Gamble continued to buck the stock-market trends, suggesting the company will continue to thrive in the coming decade. This bolstered the view of several market analysts who were positive about Procter & Gamble's financial prospects for the late 1990s. A November 1996 report by Merrill Lynch Capital Markets noted that P&G planned to improve its profits by being the market share and profit leader in all of its leading businesses; expanding in developing markets overseas; creating new products (particularly in snacks, tissue/towel and health care); and increasing unit sales in developed markets (such as the United States) by 2 percent each year.

Focusing on Procter & Gamble's Olean product, Brown Brothers Harriman & Co. said in a September 1996 report that the prospects for Olean were generally positive. "Having said that," the report said, "we must also allow that the full realization of the product's potential is many, many years away. Moreover, it is difficult for even a blockbuster product to have a significant impact on P&G's $35.3 billion sales base."

HISTORY

In the 1830s, William Procter, a candlemaker, and James Gamble, a soapmaker, had both settled in Cincinnati after immigrating to the United States from England. In 1837, they merged their small Cincinnati businesses after realizing that they were competing for the same raw materials. Their partnership agreement had total assets of $7,192.94. By 1859, Procter & Gamble was a leading Cincinnati company, with annual sales of $1 million. In 1879, the company introduced what would become its most famous product, Ivory, a floating soap. Crisco shortening was introduced in 1911.

Procter & Gamble, which today is the biggest advertiser in the world, was a pioneer in advertising and marketing directly to the consumer. By sponsoring "daytime drama" radio and then television shows, the company helped create the more common term "soap operas."

FAST FACTS: About The Procter & Gamble Co.

Ownership: The Procter & Gamble Company is a publicly owned company traded on the New York Stock Exchange and other stock exchanges around the world.

Ticker symbol: PG

Officers: John E. Pepper, Chmn. & CEO, 1997 salary & bonuses $2,600,000; Dirk Jager, Pres., 1997 salary & bonuses $2,600,000

Employees: 103,000

Chief Competitors: Because of its diverse product line, Procter & Gamble competes with multinational corporations in a variety of industries, including: Alberto-Culver Company; American Home Products Corporation; Amway Corporation; Church & Dwight Company Inc.; The Clorox Company; Colgate-Palmolive Company; Gillette Company; Helene Curtis; Kimberley-Clark Corporation; Nestle; Philip Morris Companies Inc.; The Quaker Oats Company; Rhone-Poulenc; Unilever; and Warner-Lambert Company.

The company introduced its flagship Tide brand of detergent in 1947. In subsequent years Procter & Gamble grew more by acquiring brands than creating them. It purchased Spic and Span in 1945, Duncan Hines in 1956, Charmin Paper Mills in 1957, Clorox in 1957, and Folgers Coffee in 1963 (Clorox was sold in 1968).

Procter & Gamble did develop several innovative products during this time as well. Crest, introduced in 1955, became the first fluoride toothpaste to be endorsed by the American Dental Association, and was widely seen as a brilliant marketing idea. In 1961 Procter & Gamble created a new product category when it introduced Pampers disposable diapers. In that same year it launched Head & Shoulders anti-dandruff shampoo.

While Procter & Gamble is famous for creating popular and enduring brands that lead their categories, a few of its products have been expensive failures. The company acquired Crush soft drinks in 1980, but could not compete effectively against soft drink giants Coke and Pepsi, so Crush was sold in 1989. P&G launched a line of Duncan Hines cookies in the early 1980s, but was bested by Nabisco. Its Rely tampon had to be withdrawn from the market in 1980 after investigators linked them to toxic shock syndrome (TSS), a sometimes fatal condition. Also, its acquisition of Citrus Hill orange juice was ultimately unsuccessful and the brand was abandoned.

Procter & Gamble made a major move into the health care market in the 1980s. In 1982, it acquired pharmaceutical manufacturer Norwich-Eaton. It also bought Richardson-Vicks and G.D. Searle's nonprescription drug division in 1985. These purchases brought in powerhouse brands NyQuil and Metamucil, respectively. The company bought Noxell in 1989 and Max Factor in 1991, making P&G the biggest cosmetics company in the United States.

In the mid-1990s, Procter & Gamble continued to adjust its line of consumer products. It sold its Fisher Nut snack food products, and Bain de Soleil skincare products in 1995, and in 1996 purchased the baby wipes business of archrival Kimberly-Clark Corporation, which was forced to divest its wipes business by the Federal Trade Commission following its merger with Scott Paper Company.

CHRONOLOGY: Key Dates for Procter & Gamble Co.

1837:: William Procter and James Gamble form Procter & Gamble to manufacture candles and soap
1851:: The moon and stars symbol is created as the company logo
1860:: P&G stock up on rosin in anticipation of war and prosper when other companies had to cut back due to war-time shortages
1878:: P&G's White Soap, high quality but inexpensive, hits the market
1880:: White Soap becomes Ivory and, in a factory accident, is made with the ability to float
1890:: P&G incorporates
1911:: Crisco vegetable shortening debuts
1933:: P&G becomes a key sponsor of daytime radio dramas, leading to the term "soap opera"
1947:: Tide laundry detergent is introduced
1955:: Crest toothpaste is introduced and launches P&G into the toiletries market
1956:: Acquires Duncan Hines
1957:: Acquires Charmin Paper Mills and Clorox
1961:: Introduces the disposable diaper with Pampers
1962:: Crest becomes the number one toothpaste on the market
1963:: Acquires Folgers Coffee
1967:: Due to antitrust proceedings, P&G is forced to divest itself of Clorox, not make any grocery acquisitions for seven years, and not make any coffee acquisitions in 10 years
1982:: P&G purchases the maker of Pepto Bismol and Chloraseptic
1985:: Acquires Richardson-Vicks; removes the moon-and-stars symbol from product packaging because of wild rumors linking the logo to occult practices
1988:: Purchases Noxell, maker of Noxema and Cover Girl cosmetics
1991:: Purchases Max Factor cosmetics
1996:: Purchases Scott Paper Company and the baby wipe division of Kimberly-Clark; is forced to divest the baby wipes in another antitrust hearing
1997:: Divests itself of Duncan Hines

STRATEGY

In 1990 Procter & Gamble cut costs dramatically in manufacturing and marketing. In 1993, the company eliminated 13,000 jobs and closed 30 manufacturing plants. It also took a one-time charge of almost $3 billion to cover costs for restructuring its operations and disposing of its unsuccessful Citrus Hill juice business.

The results of this program were dramatic. In 1996 Procter & Gamble's revenues, earnings, and profit margins were at record levels, due primarily to the company's cost cutting measures, according to Fortune magazine. Procter & Gamble reduced expenses by $3 billion from 1992 to 1996 and planned to cut an additional $2 billion through 1998.

As part of the move to cut costs, Procter & Gamble dramatically reduced the number of products it produced. Instead of having many different versions and sizes of the same product, the company "slimmed down" its product lines by concentrating on only the best-selling versions.

INFLUENCES

As a dominant producer of consumer products in many food and non-food categories, Procter & Gamble has often initiated significant changes in marketing strategies that are copied by other companies.

In the 1990s, the company attempted to offer fewer "deals" to the stores that sell its products and fewer coupons to consumers. Instead, Procter & Gamble established an "everyday low-pricing" policy that reduced the retail price of its products without hurting the company's profits. While the move succeeded in reducing "peaks and valleys" in the process of manufacturing and selling products, it was not without controversy. For example, in January 1996, Procter & Gamble announced that it would end the distribution of all coupons and reduce regular prices in three New York cities: Syracuse, Buffalo, and Rochester. Other manufacturers said they would reduce or eliminate couponing in the area. However, Procter & Gamble soon encountered consumer boycotts, public hearings, and a petition drive demanding that they reinstate coupons. In March 1997, the New York State attorney general's office demanded that Procter & Gamble end the test. In April 1997, they ended the test early, calling it a success, and denied that adverse publicity led to the decision. However, Procter & Gamble did not say if it would use the "no coupon" strategy in other areas of the country.

CURRENT TRENDS

By acquiring other category leaders, Procter & Gamble expects to double its business by 2007 and stay in the top third of peer companies in terms of total shareholder return. One example is the acquisition of Tam-brands and its market-leading tampon brand, Tampax. The company expects to apply lessons learned in marketing its other brands to bolster Tampax's position in this $2 billion market.

Already the nation's biggest advertiser, Procter & Gamble responded to the demands of the Internet by becoming quicker in the production of advertising copy, and better at choosing the media it uses for each brand. The internal initiative, named the Agency Renewal Project, was triggered by the emergence of the Internet and increasingly fragmented sources that people turn to for news and entertainment.

PRODUCTS

In March 1998, Procter & Gamble introduced Febreze, a revolutionary new household product that uses a unique odor removal technology to clean away odors from fabrics. The first product of its kind, Febreze marks the creation of an entirely new category in fabric care.

At the same time, Procter & Gamble also pursued its strategy of selling off non-strategic brands. In December 1997, the company sold its $250-million-a-year Duncan Hines baking mix business—the biggest divestiture in company history—in preparation for the company's fast-growing Pringles potato chips and emerging olestra business. The fat substitute olestra came to market in 1998. The ingredient looks like fat, tastes like fat, and fries like fat, but it passes through the body unabsorbed and so does not contribute fat or calories to the foods in which it is used. In January 1996, the FDA allowed the use of olestra in salty snacks but required that all products containing olestra carry a label that says: "Olestra may cause abdominal cramping and loose stools." Procter & Gamble is marketing olestra to other food manufacturers as a branded ingredient called Olean, and has also introduced Pringles with Olean.

While Procter & Gamble was not a major force in pharmaceuticals in the mid-1990s, it was selling about $500 million worth of prescription drugs as of 1996. Also, in August 1996 the FDA approved what could be Procter & Gamble's first top-selling medication: Helidac Therapy. The product is a combination of three drugs designed to eliminate Helicobacter pylori bacteria in the stomach and small intestine, which are the cause of 90 percent of all duodenal ulcers.

Procter & Gamble purchased Tambrands Inc., the manufacturer of Tampax brand tampons, in April of 1997. The $2-billion purchase was the company's largest acquisition ever and gave it the world's leading tampon brand. Tampax held 45 percent of the global tampon market and 45 percent of the U.S. market as of 1996. The acquisition marked Procter & Gamble's return to the tampon market, which it exited after withdrawing its Rely tampon in 1980. Procter & Gamble already dominated the feminine sanitary pad market with its Always brand, which held 36 percent of the market in 1996.

Procter & Gamble posted big numbers in 1997 in the paper industry, while most paper companies reported dismal figures due to the sharpest pricing collapse in modern paper-industry history. According to the Paper Industry Management Association, P&G ranked third in this market.

CORPORATE CITIZENSHIP

Procter & Gamble's image was tarnished by problems with the Rely tampon, which was linked to toxic shock syndrome before the company withdrew it from the market. In March 1998, a federal appeals court ruled that a woman claiming she developed toxic shock syndrome in 1990 while using Tampax tampons could take her case to trial. Procter & Gamble, which had purchased the company producing Tampax in 1997, said it would appeal. Also in 1998, the company continued to find itself answering health questions about its fat substitute Olean, even as it debuted in test markets across the country.

Perhaps trying to counteract these image problems, in 1998 Procter & Gamble began emphasizing its work in reducing the use of animals for product safety testing. In October 1997 CEO John Pepper said that, in response to a question about its animal testing policies from Lauren Sullivan, president of In Defense of Animals, the company will make $1 million in donations to the San Diego Supercomputer Center to provide initial funding for a long range project to allow researchers to create better computer biological models. This could allow researchers to predict how humans and other organisms respond to drugs, chemicals, or other physical factors using computer models rather than animal tests. About 30 people protested Procter & Gamble's animal testing outside the company's headquarters during the company's annual meeting in 1997. Already Procter & Gamble had reduced use of animals for non-drug consumer product safety testing by 85 percent, Pepper told shareholders in 1997. Also in 1997, the company invested another $9.5 million in developing alternatives to animal testing, bringing the total investment since 1984 to more than $64 million.

GLOBAL PRESENCE

Procter & Gamble is a major player in the international market, and as of 1996 generated just over half its income outside of the United States and Canada. In 1998, it owned and operated 85 manufacturing facilities in 43 other countries. In 1996, North America accounted for 49 percent of the company's sales, followed by Europe, Africa, and the Middle East at 34 percent, Asia at 11 percent, and Latin America at 6 percent.

THE DEVIL MADE THEM DO IT

From Procter & Gamble's perspective, their logo seemed harmless enough. All it contained was a man-inthe-moon face situated among a cluster of 13 stars. Yet for years the company was bedeviled by rumors that this logo indicated that they were involved in Satanic worship of some kind. The other rumor generated by the logo was that Procter & Gamble had been taken over by the Reverend Moon's Unification Church. In 1991, Procter & Gamble won a $75,000 lawsuit against James and Linda Newton of Parsons, Kansas. The Newtons were found responsible for spreading rumors that the company supported the church of Satan. What possible motive could the Newtons have had to spread such a pernicious and absurd rumor? They were both distributors of Amway products, and Amway, coincidentally enough, is a direct competitor of Procter & Gamble.

Procter & Gamble's sales in Asia increased 1,000 percent from 1986 to 1996, to $3.8 billion. Sales in China alone were growing at a rate of 50 percent per year in the mid-1990s and were expected to reach $1 billion in 1997. Many of the products that Procter & Gamble sells in developing countries are smaller, cheaper, and less profitable than what it sells in the United States. For example, in China the most popular size of Pantene shampoo is a one-use packet selling for the equivalent of $.06.