MEMPHIS, Tenn. -- A top executive from Procter & Gamble Co. said logistics is the key to strengthening consumer loyalty to brands and to supermarkets. Durk Jager, executive vice president of U.S. business for the Cincinnati-based company, called for improving productivity and eliminating inefficient business practices that deal with the movement of products through the supply chain. "Many of our current business practices actually chip away or erode our brands' value," he said. "It's mind-boggling to see. The very practices that devour the vast majority of our collective time, energy and resources actually drain consumer value away from brand and store equities."
He spoke here at the annual productivity conference sponsored by the National-American Wholesale Grocers' Association. Manufacturers and distributors of their products are in the same business of delivering value to consumers, said Jager, by finding a balance between quality and price. "It's in our shared interest to figure out how we can build the equity of your stores and our brands at the same time. We need to win consumers who will buy a box of Tide or a package of Pringles at the same store week after week by giving them confidence that they are purchasing the best product at a fair price. If we do that, your profits and our profits will climb. If we don't, we
"At P&G, we're discovering that some of the most important opportunities for improved efficiency are related to logistics."
According to Jager, inefficient practices in the supply chain have forced consumers to demand better value. This has put the value of both brand equity and store equity at risk. It also led P&G "to re-examine everything we do," he said. Changing pricing and promotion practices resulted from this analysis, according to Jager. The change was P&G's well-publicized value pricing strategy. "We took a major part of our inefficient promotion expenditures and used them to partially offset a series of price reductions that we've taken across many of our brands. We've lowered our prices on average by 10% to 25% This has been reflected in lower shelf prices for consumers," said Jager. The program started in 1991, he added, and now includes virtually all of P&G's brands. "Clearly, value pricing was a major step toward improved productivity. But it's just a start. Value pricing is unveiling all sorts of additional opportunities to improve the efficiency of our business practices -- internally and as our brands travel through the supply chain," he said. Value pricing has led P&G to new techniques such as continuous replenishment and cross-docking, he said. "These efforts are producing substantial reductions in your inventory requirements on P&G brands. Unnecessary inventories add to the total cost of the supply chain. These products have to be warehoused, handled and transported. And they consume a lot of working capital. In the end, the consumer is asked to pay for this mess even though these practices do nothing to improve value.
"Indeed, some of the most exciting opportunities for improving consumer loyalty are directly linked to our work on efficient replenishment," he said. Jager used the example of "freshness," saying that research suggests that consumers choose their stores based on product freshness. He said the top three factors rated "extremely or very important" in determining where consumers shop relate to freshness: (1) cleanliness, (2) product quality, (3) product freshness. "Freshness is a good illustration of how we can work together to improve consumer value and increase consumer loyalty. It illustrates the kinds of productivity improvements we must focus on to improve the returns we generate for our shareholders," he said. The supermarket's best customers and P&G's best consumers, he said, are the same people -- "the folks who are loyal to a store or a brand week after week. And the productivity and logistics ideas you're addressing at this conference -- ECR, category management, continuous replenishment, cross-docking, smarter use of technology, logistics streamlining and increased warehouse efficiency -- are foundational to us giving these consumers continually better value," he said. P&G measures its performance in terms of consumer loyalty, according to Jager.
"We know that consumer or retailer loyalty grows only if we offer superior value," he said. "At P&G, we know of only two ways to improve the value of our brands: one, raise the performance or benefits of our brands; two, reduce the relative price the consumer is asked to pay for our brands."
To demonstrate, Jager used the example of Pringles potato chips. In 1991, the brand improved its taste. At the same time, P&G cut out "wasteful promotional spending" and reduced per-unit price by 12 cents. Another reduction of 9 cents per canister soon followed. "As a result of these product improvements and lower prices, consumer loyalty to Pringles has jumped 16% and Pringles volume has exploded 75%," he said. "I use Pringles as the example because this brand is especially important to you, our wholesaler customers. Pringles is America's largest-selling warehouse-delivered snack brand, so it's one of the few sizable opportunities you have to participate in the enormous potato chip category. "As you know, a majority of this business is controlled by manufacturers who use direct-store delivery systems. That's not the case with Pringles, which we ship to stores via your warehouses."