Globalization Requires Patience: CPG Companies

CHRISTINA VEIDERS

WHITE SULPHUR SPRINGS, W.Va. — Procter & Gamble and Kellogg's prove that investing in developing world markets is not for the faint of heart.

During a general session on globalization and international expansion at the Executive Conference of the Grocery Manufacturers Association/Food Product Association here last month, the leaders of the two consumer products giants described experiences of trying to understand and market to diverse cultures. Some of the hurdles confronted in penetrating emerging countries include: navigating approaches to business that are often adverse to American business values, setting up an infrastructure and distribution system and having to make long-term commitments with several years of revenue losses before any gains.

One of the biggest challenges is trying to change culturally diverse consumer habits to embrace Western products.

A.G. Lafley, chairman, president and chief executive officer, Procter & Gamble, Cincinnati, cited the example of converting hair-washing in China from once a week in a work-unit shower to twice a week with shampooing in the home. “We worked on moving the shampooing experience into the home and spent almost 20 years trying to get that second [shampooing] occasion. You double your market and then get a third occasion and triple it. Eventually it will be the same as Western Europe or America,” Lafley explained.

David Mackay, president and CEO, Kellogg Co., Battle Creek, Mich., encountered similar cultural resistance with breakfast cereal. While Kellogg's has been in Brazil for 50 years, Mackay said, “Brazilians don't eat breakfast. They go to bed late, get up and drink coffee.”

In China, different cultural tastes also were an insurmountable challenge for the cereal company. “Consumers [in China] today eat hot, soft and savory for breakfast, and we cook cold, crunchy and sweet,” Mackay explained. Kellogg's pulled out of the Chinese market, but the company is reassessing its position there, according to Mackay.

Besides local consumer habits, CPG companies have to deal with questionable business practices that are sometimes seen as rooted within a culture.

“Most of these countries are on the top of the list of bad actors in fraud surveys, and you have to have your culture in place. Otherwise, you have problems you don't want to deal with. You want to concentrate on running your business,” said Lafley.

Mackay agreed, “The culture in local markets is adverse to the way American companies operate with absolute integrity and honesty.”

Despite culture clashes, both companies have forged ahead in emerging market development.

P&G, with total sales last year at $68 billion, does about $21 billion in emerging markets and has on-the-ground operations in more than 80 countries. Lafley credits P&G's success in developing markets to recruiting locally. “We employ a lot of talent in emerging markets. That is one of the reasons you want to be in emerging markets. The talent is phenomenal,” he said.

The company also works hard to understand the local culture and habits of the people by sending researchers into homes to find out about family habits, practices and attitudes.

“A lot of our responsibility as consumer companies in these markets is to understand these [local] habits, but then again to change them so they can move their consumption patterns closer to what's going on in the world.”

Kellogg's began developing its world markets in the 1920s. However, in the last decade the company has pulled back from emerging markets because mistakes were made, Mackay admitted.

“We haven't done the consumer work we needed to do in understanding how our products would play in those markets, and we got punished as a result,” he stated.

From a historical view, Kellogg's considered itself a pioneer and thought it could take its cereal to the world, said Mackay. In China, Kellogg's built a plant, thinking “they would come, but they didn't,” he related.

According to Grant Aldonas, founder and principal managing director of Split Rock International, a Washington-based trade and investment consulting firm, who also spoke during the session, globalization has boosted the American economy with an estimated gain of $1 trillion in gross domestic product over the last 15 years. He said another $500 billion in GDP is on the table for the United States if it can pursue liberal trade investment worldwide.

“The single most important thing is remaining open to the global economy, because it is no longer competition for markets. It is a global competition for talent, capital and ideas,” he said.

According to Lafley, P&G can operate under what he termed “pretty iffy political environments.” However, the fundamentals, including the demographics and distribution, must be in place, and the regulations and laws have to be good enough to go in, he said.

Referring to the politically charged Venezuela and the policies of its president Hugo Chavez, he said, “I'd never say we would never be the target of an expropriation because we are so far down the pecking order. Chavez needs to keep the lower-income supporters happy, and a big part of happiness is tied to accessibility and affordability of everyday food, beverage, household and personal care products.”