According to SymphonyIRI Group, a Chicago-based market research firm, household cleaner sales fell 1.35% to $1.47 billion for the 52 weeks ending Oct. 3,2010 (see chart). However, that total does not include Walmart, club stores or gas/c-stores.
“We are seeing the signs of the new consumer purchasing paradigm—frugality,” observed Ken Wasik, managing director, Stephens Investment Banking.“It’s not that they are no longer going to buy brands, it’s that they are only going to buy what they need, will work down ‘house inventories’ before buying again, are no longer buying what every the manufacturer says is the latest and the greatest, and are more motivated to comparison shop—often between established brands.”
Why the decline? Blame a weaker economy and stronger skepticism by consumers. According to results of a September poll by GfK Roper Consulting, there’s been a dramatic increase in the percentage of U.S. consumers who say that they are wary of environmentally friendly product alternatives. The share of consumers who think green products are too expensive rose eight points in two years to 61%, while those who believe they don’t work as well jumped nine points to 33% and those who believe they’re not even better for the environment in the first place increased eight points to 38%.
Add to all that are difficult comp sales, as a year ago, the H1N1 scare had every consumer running for the disinfecting sprays and wipes.
Industry observers insist that only true innovation can help the household cleaning products category find its way back to the levels of profitability it enjoyed a few years ago. In a recent conference call to analysts, Clorox reported that cleaning product sales fell 1% in its first quarter while volume improved 1%.
“While our Q1 results were a little weaker than we anticipated, we are winning the competitive battle, as evidenced by several consecutive quarters of share growth,” explained Larry Peiros, executive vice president and chief operating officer. “Investing in the long-term benefits of our brands. When the economy recovers we will benefit disproportionally.”
Peiros maintained that the growth of private label has flattened and has even started declining a bit in the channels tracked by Clorox. Moreover, as the economy improves, the pace of innovation will begin to improve as well.
“We believe that we’re through the worst of it as we get through with this quarter and we head into calendar year FY’11,” explained Don Knauss, chairman and chief executive officer, Clorox.“A lot depends on the pace of innovation that CPG puts out there. You’ll obviously see that ramp up.”
Clorox executives wouldn’t disclose what’s on tap in terms of new product introductions in 2011, only stating that several new items in the home care lineup are in the works. But Knauss insisted that the Clorox team feels very good about the pipeline that its got starting in January.
Unfortunately, maintains Wasik, the company has a lot more to contemplate than a new cleanser or two. In September, Clorox sold its auto care business to Avista Capital Partners for about $780 million.
“Clorox did not get a great price for their auto business—selling to a sponsor and not a strategic could be considered a failure,” he told Happi. “I think Burt’s Bees is tying up more of their time and resources than anyone admits.They have to make it work as they staked so much of the company on it.”
The story was a bit different at Reckitt Benckiser (RB), where surface care sales rose 4% in the third quarter, despite indexing against H1N1. One reason for the gain is RB’s strength in developing markets where, during the past decade or so, the company has been very successful in rolling out its powerbrands such as Vanish and Harpic into countries where specialty products such as toilet bowl cleaners didn’t exist only a few years ago. For example, right now, RB is focused on rolling Dettol disinfectant into new markets.
Consumer sentiment toward green products may have waned in the U.S., but that didn’t stop Method from rolling out its first line of botanical household disinfectant sprays and wipes in August. The Method Antibac assortment of antibacterial, antiviral and antimicrobial products is registered by the EPA and consists of two cleaning sprays—one for the bathroom and the other for the kitchen—and all-purpose cleaning and disinfecting wipes.
For the antibac, Method partnered with CleanWell Company, maker of a thyme-based disinfecting technology, to create a patented botanical formula that kills 99.99% of household bacteria including E.coli, salmonella enterica, influenza A and H1N1 virus on hard, non-porous surfaces.
The bathroom spray is optimized to target soap scum and hard water stains while the kitchen cleaner is designed to cut through grease and grime. Both of these products are effective at killing 99.99% of household germs on hard, non-porous surfaces throughout any room in the home.
Since their debut, Method all-purpose cleaners are growing two times faster than the rest of the category, according to a company spokesperson.
Innovate, Sure. But How?
Innovation was the primary message at a recent household cleaning products conference, which took place last month in Alexandria, VA. Intertech Pira sponsored the event with help from the American Cleaning Institute (formerly The Soap and Detergent Association). The conference was co-chaired by Brian Sansoni, vice president, communication and membership, and J. Keith Grime, president, JKG Consulting and a former vice president of research and development, Procter & Gamble (P&G).
Grime kicked off the conference with a presentation on smart R&D, noting that concerted R&D decisions are required to compete in a dynamic global consumer product market. He noted that today’s market place is filled with uncertainty, marked by global economic turmoil and volatile raw material pricing. These issues result in short formulation lifetimes, demand rapid response capability and lead to a search for alternative raw materials.
Shifting demographics are impacting the industry too, according to Grime. Baby Boomers (those born between 1946 and 1964) are expected to account for 60% of net wealth and 40% of consumption in the U.S. by 2015. Meanwhile, in Europe, 50% of the population will soon be 65 years old or older, while in Japan, seven million people were born between 1947 and 1949. The older populations in Western Europe, the U.S. and Japan have resulted in market fragmentation, proliferation and the rise of line extensions. Despite all of these external forces, Grime noted that the need for innovation remains stronger than ever.
“The product development cycle has become increasingly complex,” noted Grime. That’s because while consumers are demanding more products that are truly innovative, sustainable, customized and relatively inexpensive, they have been met by lower R&D budgets, fewer resources and less raw materials to choose from.
“We must innovate in this environment, but how?” he asked. The answer, he suggested, is laser focus when it comes to R&D choices, such as making sure that every decision counts on project choice and use of resources, while minimizing distractions.
“We have to work smarter,” Grime insisted. “Yesterday’s methods and tools can’t deliver the business of today.”
Consumer product executives must start by asking themselves five key questions:
• What do we want or need to work on?
• Do we have the capability and resources to deliver?
• Who can help us (is there a true partner and can we learn capabilities)?
• Is an external technology search required (are we organized for open innovation)?
• Do we have capability for rapid screening?
Grime explained that portfolio creation and management (PC&M) is where business strategy and R&D strategy meet, and that it is the choices made in PC&M that define success or failure for an innovation program. Unfortunately, a lack of discipline in this area too often leads to stretched R&D organizations and incremental project creep. The key, then, is deciding where to play and where not to play, as Grime cited a recent McKinsey survey of executives who admitted it was difficult to stop an idea once it got started.
“It’s easy to start a project, but difficult to stop it,” noted Grime. “It’s not an R&D subject or a business subject. It’s for everybody.”
To remedy the situation, Grime advocated smart portfolio management. To get started, organizations must truly understand their core capabilities that differentiate them from the competition. Once identified, executives must understand what they excel in (and reduce all distractions), what partners can help them create an open innovation platform, and what needs to be done to excel in the future, such as identifying critical, but under resourced, functions.
Unfortunately, according to Grime, most strategic partnerships fail because they are loaded with barriers or are a bad match from the beginning. He pointed out that most companies don’t take full advantage of their partner knowledge network, which can include retirees, retail customers, consumers, contract labs and even venture capitalists.
The solution, according to Grime is open innovation—one of the newest buzzwords in the corporate world. When done correctly, open innovation can increase ideas, extend core competence, free up internal experts, increase speed, agility and flexibility, and spread risk. But while company executives insist that they are ready to embrace the concept, most don’t fully grasp the concept.
“Things don’t fall from the sky. It’s not an abdication of the internal generation of ideas, (nor is) open innovation a source of cheap R&D,” Grime cautioned.
Bill Schmitz, an analyst with Deutsche Bank, agreed that true innovation is the only real solution for the household product category.
“Volume gains are great, but the negative pricing mix is killing you (the industry),” asserted Schmitz. “Selling on deal has to stop!”
Other analysts agree.
“P&G brought down the pricing structure to stave off private label and now wants to move it back,” observed Wasik, who added that while P&G was attempting to build marketshare during a downswing with spending and new products, the strategy did not work as well as company executives had expected.
The new Antibac line from Method.
Schmitz, citing Euromonitor International statistics, put the global household cleaning product market, which includes laundry, dishwashing and surface care, at $122 billion in retail sales in 2009—down about 3% from 2008 levels. By category mix, laundry care sales accounted for 53% of the total last year, followed by surface care (13.9%), dishwashing (11.0%), air care (6.3%), insecticides (6.2%), toilet care (3.6%), polishes (3.0%) and bleach (2.9%). Looking ahead, Euromonitor predicts that the global home care category will grow 2% a year over the next five years, with most of the gains coming in emerging markets.
Analysts may be skeptical about new product launches, but a couple of presenters at the household cleaning products conference insisted that their recent introductions represented real breakthroughs in the market.
First up was Mike Wong of Henkel who provided details on Purex Complete 3-in-1, a laundry care product that cleans, softens and provides anti-static benefits all in one. In Henkel surveys, consumers labeled the laundry process as endless, thankless and tedious. To help them overcome all that drudgery, a 40-member Henkel team spent four years developing Purex Complete 3-in-1, which uses less water thanks to its 10x compaction formula; less packaging, the refill uses 62% less packaging than the three items (detergent, softener and antistatic agent) it replaces and the lighter product results in 79% less CO2 emissions from transportation.
Donald Versteeg of P&G took up the topic of sustainability. According to the speaker, only 7-9% of consumers purchase green products in the U.S., Europe and Japan. Moreover, 12-18% of consumers are just making (or failing to make) ends meet these days. So, P&G is going after the middle, the more than 70% of consumers who are willing to try environmentally-friendly products without having to pay more for them, give up any performance benefits or be inconvenienced in any way. For this“vast majority,” P&G rolled out new compact versions of its laundry powders and Tide Coldwater.
The compaction project resulted in up to a 24% reduction in packaging, or 22 million pounds, which is the equivalent to the annual municipal solid waste of nearly 14,000 Americans. Use of the compact powders can even reduce water usage by as much as 2.9 billion liters. Meanwhile, using Tide Coldwater could reduce the average U.S. consumer’s energy bill by $15-60 a year and would eliminate nearly one million tons of CO2 from the atmosphere.
Saving water and energy are noble efforts, but if household product companies want to save their lofty price valuations, they’ve got to start boosting topline growth again, insisted Schmitz. And the only way to do that is by launching truly innovative products.