PROCTER & GAMBLE (P&G)

Going Local: Procter & Gamble’s Homegrown Success in Japan

Key Points
• Carries out extensive local market R&D and also uses what is develops
elsewhere in the region
• Produces and distributes goods locally, tailoring processes to fit Japan’s
market
• Chose to base itself in Kansai
• Remains committed to Japan despite strong competition
• Continues to expand into new product lines through strategic M&A

Procter & Gamble entered Japan in 1972 when it started a ¥2 billion joint venture
with Nippon Sunhome and Itochu Corporation called P&G Sunhome. P&G chose Kansai
instead of Kanto and Tokyo as its Asian hub in the belief that the latter is more cost-
effective, has the necessary infrastructure and a good pool of talent, and provides a
high quality of life.

P&G later bought out its joint venture partners and used this base to expand. Initially
marketing products that were successful in the United States and elsewhere, such
as detergent and diapers, the company has since moved into feminine products,
cosmetics, and pet food through both organic growth and global acquisitions that had
operations in Japan. P&G went through some ups and downs in the early seventies
and late eighties but made a strong comeback in the nineties after renewing its
efforts and further localizing R&D, marketing, and distribution. P&G’s longstanding
commitment to the Japanese market has borne fruit.

Some Background
Started in 1837 as a seller of soap and candles, Procter & Gamble has grown into
a global company that operates in over 160 countries and markets close to 300
different brands. The company initially entered the Japanese market in 1972 with
several products that had proven successful in Europe and Latin America, including
Cheer laundry detergent powder, Bonus liquid laundry detergent, and Camay soap.

In the mid-seventies, P&G successfully test-marketed Pampers disposable diapers

in Japan, and proceeded to market them aggressively. Even though Pampers had a
significantly higher price tag than the cloth diapers then in use, the initial launch in
Japan went so well that P&G invested $50 million to construct a greenfield plant in
Japan.

Unfortunately, the competition for Cheer from local companies Kao and Lion became
fiercer starting in 1977, and P&G started to lose ground. P&G defended its market
position through price cuts, but this once again put the company in a serious financial
position. The second oil shock in 1979 dramatically increased the price of raw
materials used in detergent, worsening the situation. At the same time, there were
concerns emerging among Japanese consumers and government officials about the
use of phosphates in detergents.

In 1981 came the launch of Pampers’ first serious competitor, Uni-Charm’s Moony
diaper, marketed at a 40 percent price premium to Pampers. Moony captured a 23
percent market share at the sole expense of Pampers.
 Recovering and Regrouping—The Great Leap
By 1983, P&G had swallowed 10 years of operating losses of $250 million, on
declining annual sales of $150 million. But the company believed Japan was the door
to the rest of the Asian market, so in 1985 it started a reform project. The three-year
plan - called ichidai hiyaku, meaning The Great Leap - was designed to develop a
profitable base business while planning for future growth. The plan’s objectives during
the first year were to increase volume dramatically, without causing further operating
losses. In the second year, the company sought to build current brands and get
new ones into test market, and in the final year achieve a break-even position while
developing a sound volume base for expanding test brands.

A local R&D team was formed to conduct product development, become the technical
support center for P&G in Asia, and develop a P&G worldwide technology group.
With only 60 people in the group, however, this represented a major challenge; by
contrast, Kao had 2,000 people in its R&D section. With the help of the company’s
R&D unit in the United States, however, the Japan group was able to create the
world’s thinnest and most absorbent diaper, far superior to the products released by
Uni-Charm and Kao.

“Locally focused R&D resources have helped us to gain valuable insights into
local consumer needs, habits, and practices, which is critical to designing winning
products,” said P&G’s President of Northeast Asia, Werner Geissler. “They also gave us
a better understanding of our local competition’s technologies and innovation.”

Geissler added: “Since Japan serves as the major technical center in Asia, the
work done here is a mix of working on development of certain global technologies,
adaptation for Japanese local needs, and adaptation and development for the other
Asian markets.”

Marketing, Sales, Manufacturing, and Distribution Moves

The marketing team examined the growth patterns of the company’s rivals and
conducted studies that determined a number of unique cultural and communication
patterns had a big impact on advertising execution in Japan. For example, the tone of
advertising was always friendly, never aggressive, and commercials used background
music and well-known celebrities to promote the goods. More important, they
explicitly identified the manufacturer.

By reducing the average number of plant management staff from 36 to 9 managers

and eliminating the 12-month lead time for U.S. custom-made diaper production,
P&G was able to radically cut costs and handle product changes more smoothly. The
company maintains a strong manufacturing presence here, with three factories in
Akashi (diapers, FemCare products), Takasaki (fabric and home care products), and
Shiga (cosmetics).

Through intensive in-house research and with the help of a consulting firm, P&G
realized that the distribution system relied heavily on primary and secondary
wholesalers, not retailers as in the United States. The company began to concentrate
its business in the hands of fifty core wholesalers - down from 500 - and cut the
number of secondary wholesalers from 2,500 to 1,000.

Deploying the Best Technology Here First

Japan is a supremely demanding marketplace. In the diaper market, for example,
the performance demands of Japanese consumers clearly exceeded those of
the European and American consumers. P&G, battling Kao and Uni-Charm for
technological leadership, decided to roll out its best worldwide technology in the
Japanese marketplace first rather than in the United States. By late 1989, Pampers
had reclaimed the market leader position with a 23 percent share.

Similarly, P&G entered the tough feminine hygiene product market in 1986 with
Whisper, and was able to achieve a market leadership of 25 percent within three
years of launch. P&G also successfully replaced Cheer in 1988 with a new brand called
Ariel, which incorporated P&G’s best worldwide detergent technology.

It has been over thirty years since P&G entered the Japanese market. Even though
the cost of research and development is high here, P&G believes Japan is the best
place to have R&D facilities since the country is a hotbed of innovation where new
products are introduced at an accelerated pace.

Another Key Growth Ingredient: Acquisitions

Years after the original buyout of the Nihon Sunhome joint venture, P&G bought out
Max Factor in 1991. This was a global acquisition, but a large part of the business was
in Japan. Max Factor had good products and technology and a good understanding
of the Japanese consumer, but the company lacked a good, solid business strategy.
By providing a clear business plan and effectively utilizing its understanding of the
consumer, P&G quickly turned the business around, growing revenues significantly.
The Max Factor business became very successful with its SKII line of beauty products,
which started off as a Japan-only brand but has since taken firm root in Taiwan, Hong
Kong, Singapore, and a few European countries.

In 1999 P&G also acquired IAMS, a global pet food business that had substantial
operations in Japan. Capitalizing on its efficient low-cost offshore production and
marketing know-how and distribution reach, P&G supercharged IAMS’ revenue growth
with brands such as IAMS and Eukanuba.

Conclusion
P&G’s story is one of multifaceted excellence - applying the “best of breed” technique
regardless of a product’s geographical source. The company’s success has come from
a combination of unrelenting commitment to the Japanese market; localized R&D,
marketing, and distribution; global marketing skills and the efficiency and flexibility of
offshore production; and global and domestic M&A transactions to accelerate strategic
expansion. The company stayed in the Japanese market despite some discouraging
financial returns, and in fact chose to make Japan a hub for regional operations and
R&D.