Source: 灵兽 (Lingshou) ID: lingshouke

Henry Karamanoukian looked energetic at the 2018 CCFA conference, walking briskly toward us and shaking hands with a smile and firm grip. As Vice President of P&G Greater China, two years after returning to the Chinese market, Karamanoukian said that, just like when he first arrived in China 12 years ago, the Chinese market still excites him.

What also excites Karamanoukian is the good news from the Chinese market.

In fiscal 2018 (July 2017–June 2018), P&G's global revenue was $66.8 billion, up 3% from fiscal 2017. In China, organic sales grew 7%, and six of P&G's seven categories in China saw growth.

It's worth noting that in 2016, when Karamanoukian first returned to China, P&G was going through one of its worst periods: in fiscal 2016, P&G's sales were only $65.3 billion, down 8% year-over-year. Just in fiscal 2012, P&G had hit an all-time high with sales of $83.7 billion. But in the following years, P&G's glory faded, and performance remained sluggish.

In China, P&G's second-largest market globally and one that carried high expectations, performance was also unsatisfactory.

In fiscal 2015, although China contributed 8% (about 39 billion yuan) of P&G's sales, sales in China fell 5% compared to the same period last year. In fiscal 2016, P&G's sales in China grew only 1%.

"P&G's performance in China is unacceptable," said David Taylor, P&G's new CEO, publicly at a consumer packaged goods industry conference in February 2016.

Over its 181-year history, P&G has had countless enviable moments of glory: it was a bellwether in the daily chemical industry, creating household global brands—such as Tide (launched in 1946), Crest (the first fluoride toothpaste brand, launched in 1955), and Pampers (1961). It pioneered advanced brand management systems and highly innovative marketing methods, becoming an industry benchmark. In China, P&G was once a model that Chinese companies eagerly studied and imitated.

But in recent years, P&G has faced widespread criticism: chaotic management and talent drain; brand aging due to a focus on profits over product renewal; misjudging China as a developing market and missing the high-end segment, while facing strong competition from local Chinese rivals in low-end product lines, leading to price wars and low gross margins; and its once-proud market share being eroded by competitors. Amid complex market changes, P&G, once an industry leader, became hesitant.

That was the grim reality when Karamanoukian took office.

In June 2016, Karamanoukian, who had extensive China experience, succeeded Lin Xiaohai to take charge of P&G's sales in China. Public information shows that Lin Xiaohai, former Vice President of P&G China, was the third sales head to leave in the past four years, with rumors attributing his departure to performance pressure.

Karamanoukian, who took over from Lin Xiaohai, had served as General Manager of P&G China's Customer Business Development from 2006 to 2010, then moved to North America as Vice President of Sales and President of the Canadian regional market.

During his first tenure in China, Karamanoukian led the then Business Development Department to establish the initial model for sales and marketing in the Chinese market. Recognizing the importance of the Chinese market, P&G entrusted Karamanoukian with a key role, sending him back to China to take full responsibility for sales.

In the plan of P&G CEO David Taylor, P&G needed to quickly regain its "dominant position."

(1) Shifting to Premiumization

△ P&G Greater China Vice President Henry Karamanoukian

To regain P&G's "dominant position," the Chinese market is absolutely the most important piece.

In 2016, shortly after taking office, David Taylor repeatedly emphasized publicly that P&G's strategic mistake in China was positioning too low.

At one meeting, Taylor said: "We treated China too much as a developing country, not realizing that China has the most discerning consumers in the world."

But admitting mistakes doesn't mean giving up entirely. P&G's transformation strategy is product upgrades, focusing on new consumer insights from the younger generation to revitalize brands.

Another core of product upgrades is "premiumization." Over the past decade or more, most products P&G sold in China were mid-to-low-end, volume-driven products. But with the rise of consumption upgrading, these mass-market products clearly couldn't meet the needs of emerging consumers.

So, starting in 2016, within just two years, the proportion of high-end and ultra-high-end products among P&G's products sold in China exceeded 50%. Among these, Rejoice Micellar Purifying Series, OLAY Regenerist Luminous Series, and Pampers Premium are typical representatives.

"Chinese consumers have become some of the most demanding in the world. We will focus more on the Chinese market and introduce more high-end and ultra-high-end products," said Karamanoukian.

The urgency to introduce more high-end products may also stem from competitive pressure.

For example, L'Oréal has seen aggressive growth in the high-end beauty and skincare market in the past two years. According to L'Oréal's 2017 financial report, its high-end cosmetics division grew 10.5% year-over-year in 2017. Chinese consumers' enthusiasm for L'Oréal's YSL, Lancôme, and other high-end beauty and skincare products, along with increasing purchasing power, was the main driver of that growth.

Before 2016, P&G's beauty and skincare products sold in China were mostly concentrated in the mid-to-low end, with only SK-II performing well in the high-end skincare line. Enriching the high-end skincare line was clearly the best option to capture high-end market share.

P&G had taken action before. As early as 2009, P&G's skincare brand OLAY began its journey toward mid-to-high-end transformation.

In August 2009, P&G launched the OLAY Professional Prox series with an average price above 300 yuan. Unlike the previous low-priced mass-market lines, this product had a dedicated sales area at counters, and consumers enjoyed higher-end services like skin testing.

However, because OLAY's product line was comprehensive at the time, covering everything from cheap products costing a few yuan to high-end products costing hundreds of yuan, and in most consumers' minds, OLAY was just an affordable skincare brand with a deeply ingrained low-end image, this risky move still failed to help OLAY successfully transform to mid-to-high-end.

To some extent, conservative reforms seem easier to control risk, but they are hard to hit the mark. P&G needed more decisive and courageous transformation.

In 2015, P&G began implementing a streamlining strategy for OLAY in North America, reducing product lines by 20% and cutting products that didn't align with the anti-aging positioning or had poor sales. After the reform, OLAY's overall product line sales grew 27% compared to the previous fiscal year.

Unlike the previous hesitant shift to high-end, OLAY's transformation in China this time was more decisive.

First, OLAY's product positioning became clearer, with anti-aging and premiumization at its core. Second, OLAY closed about 30% of its counters in China, changed product packaging and counter layouts, and adjusted its brand strategy toward high-end.

A notable example: starting in 2016, Chinese consumers easily noticed that the down-to-earth Chinese name "玉兰油" no longer appeared in advertisements, replaced by the original "OLAY" English trademark.

The product line also became more high-end, with low-end affordable products no longer dominating. The proportion of more expensive imported products increased significantly, such as the "Regenerist Luminous Series" from Japan, the "菁醇青春系列" from the U.S., and the "Air Cream" series popular in North America. In 2017 alone, almost all new products OLAY launched in mainland China were imported.

Driven by high-end products, in fiscal 2018, P&G's Beauty segment sales reached $12.41 billion, up 9% year-over-year. Among them, high-end brand SK-II grew 30%. In China, OLAY and SK-II were the main brands driving growth.

(2) Accelerating Product Innovation

Among all criticisms of P&G, "product aging" and "few groundbreaking products" were at the storm's center.

Innovation was once seen as P&G's entrepreneurial foundation and a long-standing magic weapon. But in fiscal 2012, the year P&G's sales hit an all-time high, R&D spending was $2.03 billion, only 2.4% of sales, flat with the previous fiscal year. In fiscal 2002, R&D spending accounted for 4.5% of sales.

From that year on, the chain reaction from insufficient product R&D and innovation became increasingly evident. For example, performance continued to decline, and by fiscal 2016, P&G's sales were only $65.3 billion, down 8% year-over-year.

P&G clearly realized the severity of the problem. After becoming CEO in November 2015, the seemingly modest David Taylor quickly launched bold reforms in P&G's R&D department.

According to Fortune magazine, Taylor insisted, "The new product drought will soon end. The company is restructuring the R&D department, delegating power from executives far from the market to product managers."

Focusing on breakthrough technologies that change people's lives and launching products that wow customers are P&G's core R&D tasks.

In the past fiscal year, P&G launched more than 40 new products in China, with high-end and ultra-high-end products accounting for 90% of overall growth. P&G Greater China Vice President Henry Karamanoukian told 灵兽 (Lingshou), "This is a product innovation explosion we haven't seen in China for many years. We have enough in the pipeline for innovative products."

What changed isn't just the number of new products, but also the product development cycle.

For example, Rejoice Micellar Essence went from zero to market in 9 months, while Pantene's new "Energy Water" took only 4 months. Previously, P&G's new product cycle took two to three years or even longer, because extensive research was conducted before launch to ensure the product's effectiveness.

A typical example: in early 2010, P&G launched the OLAY Men's series in China. Before launch, P&G's R&D department spent 4 years validating the product's feasibility. By then, competitors had already filled the channels with men's skincare products.

"Product innovation in the past 18 months equals the total of the previous 3 years, with a very high success rate for new products," said Xu Min, President of P&G Greater China Brand Operations & Media and E-commerce, at the 2018 China Retail Digital Innovation Conference on March 21, 2018.

For the Chinese market, changes in new product R&D may be even more unprecedented. P&G is no longer just introducing technology and products to China; it also tailors products for the local market, and even products developed for China are exported abroad.

At the P&G House event in June this year, P&G Greater China Communications & Public Affairs Vice President Xu Youjie said, "Every one of our global brand presidents, in a year, does 5 things, and the No.1 consideration must be China. That's the rule."

Xu Youjie revealed that P&G has reached an internal consensus: even if a product is only needed by Chinese consumers, they will still develop it. But usually, if something sells well in China, it will definitely sell well in other markets. "For example, P&G launched Micellar Shampoo last year, designed for China, but now it's already being exported abroad."

There are many such examples. For instance, OLAY Regenerist Luminous Repair Serum (also known as "Small Face Essence") launched in September last year was developed specifically for Chinese skin needs.

Unlike the previous focus on whitening effects, Chinese consumers have shown a clear change in the past two years: skincare products not only need to make skin whiter but also look younger. So P&G's R&D department studies how to make consumers look younger.

Through big data research, P&G's R&D department found that as Asian women age, in addition to common skin aging issues like sagging and wrinkles, their facial contours also tend to expand outward horizontally. In other words, a large reason Asian faces look older is skin sagging. Therefore, P&G launched OLAY "Small Face Essence" to address skin sagging, making consumers look younger perceptually.

In fact, when manufacturers focus on local Chinese consumers, they often gain more. In February 2018, at a conference call, P&G CFO Jon Moeller specifically noted, "In this quarter (October–December 2017), OLAY brand sales in China grew 30%, and e-commerce sales surged 80%."

(3) The Secret of Channel Experience

Continuously launching new products that meet consumer needs is P&G's duty as a manufacturer. But interestingly, P&G may go further than most channel players in optimizing shelves and providing better consumer experiences.

After all, no daily chemical brand can ignore the importance of offline retail channels.

"P&G's hair care brands hold about half of the market share. If we want to grow, we must grow the category. If only we grow and the category doesn't, then this business can't continue," Zhang Hongfei, P&G China Hair Care Category Market Strategy & Sales Director, told 灵兽 (Lingshou). "What P&G wants to do is help retailers expand the entire hair care category."

Zhang Hongfei said that through market research, they found that consumers find it hard to make choices in the hair care shopping environment of hypermarkets and supermarkets, and hard to find the products they want. Second, consumers can't recognize the product functions they want among the vast array of products. Third, consumers rarely have a pleasant shopping experience during the process.

Therefore, P&G launched the SBD5.0 shelf innovation solution. Simply put, P&G reclassifies shelves by function, continuously highlighting related and high-end new products, making it easier for consumers to choose in front of the shelf, and also facilitating in-store sales associates to replenish and maintain in time.

For example, in the past, P&G's shampoos in supermarkets were displayed vertically by series, from top to bottom, with different sizes like 200ml, 400ml, 750ml. While consumers could quickly find the size they wanted, finding the desired function took time.

On SBD5.0 shelves, when different sizes are placed together, consumers can more easily compare which product is more cost-effective and make quick purchase decisions.

On the other hand, SBD5.0 uses unified category theme colors and adds themed end caps for new and hot products, such as placing new and hot products in the middle or giving them more shelf space to attract consumer attention and drive sales.

There are many strategies to attract consumer attention and stimulate purchase desire. For example, in the light luxury care area, consumers can also find conditioners and hair masks. The benefit is that when consumers buy shampoo with the same function, they often also choose conditioners and hair masks with similar care functions. This is the cross-selling effect of SBD5.0.

Compared to SBD4.0 launched in 2015, which emphasized brands, SBD5.0 focuses more on consumer experience. For example, interactive electronic devices are installed on display shelves. When consumers pick up a product, they can see clearer product introductions on the shelf's electronic interactive screen.

Another more direct experience is that shelves also have "try to smell" labels. For example, next to the newly launched Rejoice first fragrance shampoo, there are dedicated try-out products—several artificial flowers with the shampoo's fragrance. Consumers can pick up the product and smell it to experience what the shampoo smells like after use.

"Since promoting SBD5.0 last year, P&G has cooperated with more than 20 retailers, promoted it in over 100 stores last year, and will expand to more this year. The application of SBD5.0 has increased clients' overall hair care category performance by 5% to 10%," Zhang Hongfei said. Behind these 5 to 10 points is actually an improvement in consumer awareness, "because you simplified their choices."

From the perspective of improving consumer experience alone, there is still much room in offline retail channels.

Through big data research, P&G found that most consumers don't like sales associates' pushy selling; they prefer professional beauty consultant services. Therefore, P&G independently developed digital smart shelves and applied this achievement to the sales of its brands like OLAY and Oral-B.

When consumers pass by an OLAY digital shelf, the shelf quickly profiles the consumer. When consumers pick up an OLAY product, the smart shelf screen automatically displays product information and other consumers' reviews. Consumers can also scan the QR code on the counter to take a skin age self-test and get a personalized skin age report.

For consumers, the OLAY digital shelf is a virtual beauty consultant, allowing them to enjoy one-on-one service from the brand. The real-time capture of foot traffic and consumer purchase paths by digital shelves helps brands grasp consumption data and better serve consumers.

At P&G's booth at the 2018 China Retail Expo, 灵兽 (Lingshou) also experienced P&G's digital joint display solution, which is still in internal testing. It aims to help consumers find new products hidden on shelves, using visual experiences to encourage consumers to actively explore new products in stores.

This is a very interesting experience process. We needed to wear a black ring-shaped experience device around our necks, with the device's air outlet facing up, and then we could start the experience. During the process, an electronic screen on the shelf showed a virtual shopping guide giving detailed step-by-step directions.

When the electronic screen showed P&G's Downy fabric softener beads, the device emitted a strong hot pot smell, followed by the fragrance of the beads. Consumers could perceive in 3D that using this product can remove the hot pot smell from clothes.

When the screen showed Crest's new toothpaste, the device emitted a coffee smell, then a fresh scent.

"Smell awakens people's instinctive experience, letting them feel P&G products. Because these smells are from daily life, they can bring consumers into the scene to perceive," said the on-site staff. In other words, this immersive experience not only arouses consumer interest but also more easily stimulates purchase desire. Consumers can also scan codes to learn about product information.

For P&G, offline retail channels are places for consumer experience and important channels to help regain consumer trust. Online e-commerce platforms have a different significance; they are P&G's testing ground for new products.

In 2015, P&G opened its first overseas flagship store on Tmall, introducing more than ten new brands for sale. Through this platform, P&G can conduct small-scale market tests for some new products, then optimize prices and other aspects, thereby reducing the risk of introducing new products.

For example, P&G's Tmall overseas flagship store once introduced high-end SARASA laundry detergent from Japan. Due to high costs, P&G executives hesitated about whether to introduce it, so they first tested it on the Tmall overseas flagship store. Because the product is additive-free and suitable for newborns, it was very popular with young Chinese mothers. During the pre-sale period of just one week on Tmall, sales exceeded one month's expectations.

The number of brands introduced alone shows P&G's emphasis on e-commerce channels. In 30 years in the Chinese market, P&G introduced more than 20 brands, but within one year of entering Tmall Global, it introduced more than ten brands. At this year's P&G House event, He Yabin, Vice President of P&G Greater China Brand Operations, Media, and Consumer Insights, said that e-commerce channels have become the largest and fastest-growing channel.

(4) Truly Useful Big Data

For daily chemical giants like P&G, nothing is more important than understanding consumer needs.

In the era before digitalization and online-offline integration, P&G mainly relied on market researchers to call consumers, visit them, or chat with them at home for hours to understand their habits and needs. Even P&G's former CEO A.G. Lafley, during his tenure, often visited consumers' homes under an alias.

Now, P&G can conduct real-time consumer research online and get timely feedback. "Only when we more accurately obtain consumer feedback and their needs can we respond more quickly and rapidly develop products," Karamanoukian told 灵兽 (Lingshou).

For example, through big data analysis, P&G knows that Chinese consumers have a strong demand for high-end skincare products, so it launched higher-end OLAY series.

More importantly, from consumer research to product development to product sales, big data analysis makes P&G's communication with consumers and content push more precise.

Of course, there's also an area consumers don't see: supply chain management. "With this big data, we can more accurately calculate our inventory, plan our production, ensuring no inventory backlog and no production delays. For our clients, it also helps them better manage their product supply."

In Karamanoukian's view, the true significance of big data analysis and reading new technologies is to help P&G conduct consumer research, develop products, communicate with consumers, carry out brand marketing, and manage the supply chain, ultimately improving the efficiency of the entire chain from production line to end consumer. "This is where big data truly empowers us," Karamanoukian said.

(5) A New P&G

"P&G is old" was the criticism from outsiders a few years ago, but now more people say, "P&G seems younger."

In addition to product and channel innovation, P&G has also attracted emerging consumers to its consumer base through marketing innovation.

One of the most notable examples is that more and more young people are becoming interested in P&G's high-end products. They are willing to spend more on these so-called "luxury" skincare products. For example, a large portion of users of P&G's high-end skincare brand SK-II are under 25.

P&G once conducted research in Shanghai and found that most college students interviewed use SK-II products averaging over 1,000 yuan, and also use Oral-B electric toothbrushes costing 700-800 yuan each.

Beyond the rise of consumption upgrading, these products were also boosted by social media.

On social platforms, SK-II's "ex-boyfriend mask" and "facial treatment essence," OLAY's "small white bottle," Pantene's "energy water," and Downy's "scent beads" are affectionate nicknames young consumers use for P&G products.

P&G found through surveys that before making a decision on a product, the new generation of young consumers prefers to check reviews from KOLs or other netizens on social networks before "planting grass" (being persuaded to buy).

For example, on Xiaohongshu (Little Red Book), OLAY's "small white bottle" has been actively recommended by many KOLs and beauty bloggers. It's compared to a budget version of SK-II's "small bulb" because both contain P&G's patented ingredient niacinamide. The "small white bottle" quickly became a viral hit, with sales surging. During this year's Tmall Double 11 pre-sale, 140,000 bottles of OLAY Light-Perfection Small White Bottle (50ml) sold out in just 4 days of pre-sale.

At this year's P&G House event, He Yabin from P&G's Consumer Insights and Media Operations used the phrase "good-looking skin, interesting soul" to summarize the new generation's personalized and diverse product needs. What P&G needs to do is actively embrace young people and build brands with personality, character, youthfulness, and resonance with consumers.

Karamanoukian told 灵兽 (Lingshou) that returning to the Chinese market again still excites him, because the Chinese market is complex, diverse, and developing very fast. "This forces all of us to constantly innovate in this market to win."

Karamanoukian still maintains keen attention to the market. When new business formats and channels emerge, he also observes and studies them, such as social e-commerce and social marketing. "We are also studying them to understand why consumers are willing to buy through such channels and platforms. This could also be a new model," Karamanoukian said.

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