A Healthy Gamble

By Daniel Eisenberg/Cincinnati

The only time he loses sleep, says A.G. Lafley, is when he thinks a competitor might beat him to a hot new product. And Lafley is sleeping pretty well these days. The soft-spoken, silver-thatched CEO is leading consumer-products giant Procter & Gamble from one hit to another. Crest's battery-powered SpinBrush for dental care and its Whitestrips for tooth brightening have helped Crest global sales grow 50% in the past two years--a surge unheard of for such a big, mature brand. That kind of innovation has sent P&G's profits into double-digit growth and made the company the best performer on the Dow Jones this year, rising 14%, to nearly $90 a share.

Things looked very different little more than two years ago, when Lafley, 55, took over P&G, based in Cincinnati, Ohio. His gruff predecessor, Durk Jager, had launched a crash course to shake up the notoriously insular, slow-footed company but was forced out after just 17 months of expensive product launches that left consumers yawning. P&G had repeatedly failed to deliver expected earnings, and its stock tumbled 50% in six months. With most of the company's resources and best people focused on developing the next blockbuster new product, sales for the established brands were stagnating, market share was eroding, and morale was sliding. An overly aggressive, ill-timed restructuring program left a good number of P&G's 110,000 employees in new jobs, disoriented and distracted.

Under Lafley, P&G has stopped swinging for the fences and is once again playing small ball, dreaming up countless "new and improved" versions of its classic brands like Tide, Charmin and Folgers, and developing line extensions like Pampers baby clothes and the forthcoming Old Spice body spray. "We had gotten into a mind-set where innovation had to flow into new categories and new brands exclusively, and all I did was open people's minds to [the possibility] that it could also flow through our established brands," Lafley says in his typically self-effacing style.

Yet if the core brands are the foundation of P&G's makeover, its faster-growing, more lucrative beauty and health-care businesses--once considered the company's poor stepchildren--are providing the shine. That's why Lafley last year made P&G's biggest acquisition ever, paying $5 billion for Clairol's hair-care business. The beauty and health-care sectors together account for about a third of P&G's $40 billion in annual sales and could reach 40% within the decade. Most of Procter's next generation of billion-dollar brands will probably come out of this area, which includes Olay skin care, Cover Girl cosmetics, Clairol Herbal Essences shampoo and Actonel osteoporosis prescription medication. Two of the most recent ones to join the elite club are Crest and Iams, the high-end pet food that P&G acquired in 1999 and has since turned into a mass-market brand. Driven by aging baby boomers and image-conscious youngsters, demand for skin-care products, cosmetics, shampoos and all manner of over-the-counter and prescription remedies is growing at about 4% to 6% a year--far faster than for commodities like laundry detergents and diapers. Hair coloring, in particular, a big business for Clairol, is becoming increasingly popular among teenagers, both girls and boys. Bruce Byrnes, president of global beauty and health care at P&G, says his are "arguably the most global of all products."

Consumers tend to be less price sensitive when buying health and beauty products and less attracted to private-label store brands than when they're shopping for, say, dishwashing liquid. And with many beauty products, "people are always willing to try something new," says Marc Pritchard, vice president of P&G's suddenly hot cosmetics division. Its Cover Girl and Max Factor lines are enjoying banner sales with the introduction of their Outlast and Lipfinity long-lasting lipsticks. Of course, the success of cosmetics and other beauty products depends much more on fashion and sex appeal than do sales of toilet paper. As AllianceBernstein analyst Jim Gingrich notes, "P&G still has things to learn about how to market products where benefits are more intangible."

But it is getting better. To help seed demand for Actonel, for instance, the company set up bone-density screenings in chains like Wal-Mart. Pantene, a billion-dollar brand that had reached a plateau, has practically reinvented its marketing pitch and as a result is growing by double digits. Instead of targeting customers with normal, dry or oily hair, P&G has reclassified each kind of the shampoo based on the style consumers are looking for, from straight to curly to thicker. Olay, which has shed its greasy "Oil of" moniker, created early buzz about its Daily Facials cleansing cloths by handing out samples at subway and bus stations and airports filled with sweaty commuters. The cosmetics division helped build demand by rolling out Tiny Tries, which are small, low-risk samples that cost its loyal teenage customers just over $1.

With the SpinBrush, P&G showed that it no longer suffers from the Not-Invented-Here syndrome. Making a bet on a small Cleveland, Ohio, start-up called Dr. John's and its invention of an ingenious battery-powered toothbrush that could be sold at a profit for roughly $6, Crest bought the firm at the beginning of last year and, by applying its marketing and distribution muscle, has turned it into a $200 million category killer. Lafley hopes it can be a model for the future. "I'd love to see a third to half of 'discovery' come from outside," he says. "I really want the doors open."

If anybody can keep them that way at P&G, it's Lafley. Though he has been with the company for a quarter-century, he didn't sign on fresh out of college, as many of his cohorts did. After studying history at Hamilton College in upstate New York, he joined the Navy, where he gained his first merchandising experience as a supply officer during the Vietnam War. He made his mark at P&G overseeing the successful launch of Liquid Tide in 1984, and made an even bigger impression during his three-year stint in Asia in the mid-'90s, building the company's now booming business in China almost from the ground up and resuscitating its faltering cosmetics business in Japan.

A long-suffering Red Sox fan with a vast baseball-card collection (including every complete Topps set from 1952 to the present and a prized Fleer Ted Williams card), Lafley swims, bikes and works out several times a week. In recent years, he has spent downtime learning to play the guitar along with the younger of his two sons, who is in high school. Even as a member of a fraternity at Hamilton, Lafley was known as a consummate consensus builder. Around P&G, he is admired for being unusually approachable and a great listener. Unlike Jager, who alienated his top managers so much that they stopped keeping him in the loop, Lafley "wants to hear any bad news--and as a result, he hears far less of it," says Gary Stibel, CEO of the New England Consulting Group and a longtime P&G watcher.

Though he has firmly held opinions--and is crisply decisive once he makes up his mind--Lafley isn't afraid to give everyone a fair hearing. At a board meeting, he took the unusual step of having separate teams come in and vehemently make their case for and against the idea of outsourcing many of P&G's back-office operations, a controversial proposal that the once rigidly controlled organization is seriously considering. "Boards typically don't see that level of debate. They're usually hidden by the CEOs," says director Scott Cook, a former P&G brand manager and co-founder of financial software firm Intuit.

Lafley has urged employees as well as board members to make more frequent store visits. He wants the company to work more closely with powerful retailers like Wal-Mart and CVS to reach consumers at what he calls the "first moment of truth" in the store. (There's a reason so many snazzy new graphics and displays are showing up in the aisles.) He has sold off underperforming products that don't fit the new mix, like Jif peanut butter and Crisco shortening.

Thanks to his easygoing demeanor and natural curiosity, he has begun to achieve what all of Jager's bluster could not: a transformation of the insular, arrogant culture that plagued P&G for decades. Once firm in the belief it needed to go it alone on everything, P&G is much more open to partnering with and learning from outsiders. One of Lafley's chief lieutenants, global-marketing officer James Stengel, occasionally meets with his peers at a range of other companies, from Kraft and Nestle to Toyota and Gucci, to keep abreast of new marketing trends--something that would not have happened at Procter just a few years ago. "In the old days, they kept us almost entirely in the dark," says Tom Kelley, general manager of leading design firm IDEO, which is studying people's bathroom-cleaning habits for P&G.

For all his focus on line extensions, Lafley knows that P&G can live off its existing brands for only so long without developing a new blockbuster product, the kind it hasn't had since the Always feminine pad debuted in 1983. The Swiffer electrostatic mop and ThermaCare heat wraps have been only modest successes. And despite the early encouraging reception for Actonel--and the prospect of promising future treatments for diabetes and female sexual dysfunction--the relatively small, billion-dollar pharmaceutical division is still a major question mark. As Duke University business professor Kevin Schulman argues, consumer products and drugs "have very different product life cycles. Compared with P&G's core business, pharmaceuticals is very risky." Some observers think Procter should stick to the over-the-counter business, leveraging its marketing savvy and retail relationships to help bigger pharma companies roll out nonprescription versions of their drugs, as it is doing with Astra Zeneca for its heartburn medication, Prilosec. Fortunately, at least for the moment, Lafley shouldn't have much need for that kind of remedy. --With reporting by Daren Fonda/New York

With reporting by Daren Fonda/New York