Innovation in Consumer Staples
Back in the halcyon days of 2011, with the Great Financial Crisis firmly in the rear-view mirror and a steadily improving global economic picture, the management team at Procter & Gamble (P&G) could have been forgiven for feeling pretty good about its male grooming business, Gillette.
The male shaving business is so attractive that it lends its name to other high-margin, high-repeat purchase models: razor/razorblade. The model was simple, yet effective: a company would sell a razor “handle” very cheaply, with one or two disposable razorblade heads thrown in for free. Then, when those heads were depleted, the customer came back to buy replacements to fit the handle they had grown accustomed to. However, the replacement razors were exorbitantly expensive (as evidenced by the fact they are often locked in special security-tagged boxes within stores), meaning profit margins were high.
“Gillette totally dominated the industry, with a market share of roughly 70%”
And Gillette totally dominated the industry, with a market share of roughly 70%.
What happened next will be taught in business schools for years to come: for the first time in decades, credible challenger brands entered the market and started to make a name for themselves.
The poster child for these advertising-driven start-ups is Dollar Shave Club (DSC), which began operations in 2011 and gained wide acclaim in 2012 with the launch of a snappily titled video that successfully went viral. In the advert, the CEO Michael Dubin is seen extolling the virtues of a new, direct-to-consumer razor business that sought to upend the traditional razor/razorblade model.
The marketing campaign was a huge success, and between DSC and another new online-only entrant, Harry’s, the challenger brands had finally disrupted the status quo. DSC was acquired by Unilever for $1bn in cash in 2016 and today, Gillette’s market share is down to around 50%.
However, whilst there is little debate that these entrants succeeded in disrupting the market for male grooming, one thing that isn’t clear is whether these online-only business models have created economic value. Unilever hopes for DSC to be “breakeven” this year, whilst Harry’s now sells through physical retail stores, embracing the exact business model it sought to upend in its early years.
The reason for this simple: whilst the marketing and route to consumer were novel, the product remained the same.
Compare this to P&G’s innovation in the laundry category. A decade ago, almost all laundry detergent sold in the US was in either powder or liquid form. In 2011, P&G launched Tide Pods, a single-use gel pack containing laundry liquid, promising ease-of-use and better results, but at a higher per-wash price point. The impact on the overall laundry market has been impressive, with pods now accounting for almost 20% of the overall laundry market and accounting for 90% of the overall laundry market growth during this time.
Growth is actually accelerating, with 28% of US households using pods, up from 16% three years ago. In the UK the number is closer to a third of households, and in Poland it’s 50%, suggesting a long runway for growth.
In addition, P&G has also launched further innovations including scented beads and dryer sheets, products designed to improve results for customers, as well as drive additional revenue for the company. When a customer uses all four products (pods, fabric conditioner, beads, dryer sheets), the average retail price of a load doubles from about $0.30 to about $0.60, whilst delivering a meaningfully better experience for consumers.
P&G continues to replicate this innovation playbook globally across many of its categories, to great success. In early 2020, the company announced that 45% of all market growth across its categories in the US came from P&G, despite only having 32% market share. This demonstrates that P&G is gaining share as well as growing the overall market, which is a win for both the company and the retailers. Walmart recently named P&G as “Supplier of the Year” for the first time in over a decade.
“45% of all market growth across its categories in the US came from P&G, despite only having 32% market share”
Consumer Staples companies such as P&G are (rightly) seen as a predictable businesses, offering modest growth year-in, year-out. With this in mind, innovation is likely to be smaller and more incremental than say, an electric car, but remains important nonetheless, and flashy marketing and branding by challenger brands is not the panacea it was once seen as.
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