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Case Study: Tide Basic

In May 2009, Procter & Gamble Co., under assault by penny-pinching consumers, is considering rolling out a

version of Tide detergent that the company freely admits isn't "new and improved." The proposed product, Tide Basic, lacks some of the cleaning capabilities of the iconic brand -- and costs about 20% less. Its very existence is one of the most telling signs to date of how the sour U.S. economy in 2009 is forcing mass marketers to shift course. On Wednesday, the company reported an 18% plunge in fiscal fourth-quarter profits as sales of its premium-priced brands shrank amid tightened consumer budgets.

The decision to develop Tide Basic didn't come easily. For decades, P&G had held fast to a strategy of promoting new features to convince shoppers to pay a premium for detergent, shampoo and other household staples. Then, as cheaper store brands gained traction in the aisles, P&G began offering lower- priced versions of some products -- Charmin toilet paper, Bounty paper towels -- to suit leaner budgets.

P&G agonized over whether to go down a similar path with Tide, its top-selling brand in the U.S. A more "basic" version would balance Tide's premium prices. It could also help expand its market share, which while dominant, has been slipping. For the four weeks ended July 12, Tide held 41.4% of the liquid laundry- detergent category and 44% of the powder detergent category, both down from a year ago, according to estimates by Information Resources Inc. Figures don't include data from Wal-Mart Stores Inc.

Executives feared that a cheaper version might cannibalize sales of regular Tide, which accounts for more than $3 billion of P&G's $79 billion in annual revenues. Marketers at the company have been so loath to sully their prized soap brand that they've wrestled with the matter at least eight times in the past three decades.

Last November, two managers at P&G's Cincinnati headquarters walked into a roomful of executives to gently suggest another try. "Just listen and keep an open mind," Suzanne Watson, an associate marketing director, told them.

There was good reason to pay attention. Many people for the first time are clipping coupons, trying cheaper brands and buckling down in ways they never had to before. Economists aren't sure how long the trend will last. But a recent report from IRI identified a new class of fiscally cautious consumers. Some 52% of respondents said that in the coming year they plan to buy store brands to save money; 47% plan to eat at restaurants less frequently; and 48% plan to use home beauty treatments rather than visit a salon.

In Houston, Jaime Ball, a marketing director for a local apparel maker, says she hasn't really felt the effects of the recession but has started trimming her spending anyway, cutting down on trips to the mall and resisting impulse buys.

After years of spending $17 on bottles of Matrix shampoo and conditioner, 28-year-old Ms. Ball recently bought $5 Pantene instead. "Buying the more expensive stuff just isn't as exciting to me -- it's not as important," she says. "I don't know that you can even tell the difference."

Her quandary cuts to the heart of P&G's current dilemma. The 172-year-old company built its fortunes after World War II on Americans' growing affluence and inclination to equate "better" with a higher price. P&G flooded radio and television with ads promising its products delivered superior performance in everything from teeth cleaning to floor shining. In return, P&G got a superior price.

The approach made household staples out of Mr. Clean cleaning liquid, Crest toothpaste and Tide laundry detergent. P&G sold lower-end brands but gave them scant advertising.

Now P&G's model is under attack as retailers like Wal-Mart, Target Corp. and supermarket chains nationwide improve the quality and selection of their own brands, tempting penny-pinching consumers to forgo P&G's pricier products and eroding the giant's dominant market-share positions.

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P&G reported that profits for the quarter ended June 30 fell to $2.47 billion, or 80 cents a share, from $3.02 billion, or 92 cents, the year before. Sales fell 11% to $18.7 billion. Company executives blamed the drop partly on wider price gaps between its brands and less expensive items. During the period, the company said it lost market share in its fabric-care, batteries, and snacks units. In 4 p.m. composite trading on the New York Stock Exchange Wednesday, P&G shares fell 2.79% to $53.91.

In response, P&G is trying to stretch its premium brand names across a wider range of prices. In a single store, shoppers can choose from what P&G executives call a "portfolio," including Olay skin creams that run from $7 to a kit for $68 and versions of Crest toothpaste that range from $2.25 to $4.25. Pampers Baby Dry diapers sell for about 20% less than Pampers Cruisers.

"Every one of our businesses needs a portfolio strategy," says Robert McDonald, a veteran of the Tide business who became chief executive in July. "Before I do anything else, I want to invest in getting our portfolio bigger and broader."

For P&G, Tide Basic is one of the company's most daring marketing moves to date. "This product brings the enormous risk of tarnishing years of brand loyalty and emotional connections because shoppers start asking, 'Why have I been spending all this money all along?'" says Eli Portnoy, chief brand strategist with Portnoy Group, a Los Angeles consulting firm. "With Tide Basic, you make price the marketing story, and Tide was never about price."

P&G introduced Tide powder in 1946, just as the spread of automatic washing machines revolutionized the way Americans did laundry. The company heralded Tide as the first heavy-duty synthetic detergent, a technological breakthrough superior to all other soap.

Tide quickly became the No. 1 detergent in the U.S. and its profits fueled P&G's creation of other major brands, including Mr. Clean, Cascade dish detergent and Crest.

For ambitious P&G employees, the Tide business became a coveted stopover on the way up the corporate ladder. P&G Chairman A.G. Lafley worked on the brand, as did Mr. McDonald, the chief executive.

But last fall as the impact of the housing bubble rippled through the economy, the famous detergent started showing cracks. P&G forecast in October that the coming months would bring lower overall sales growth and profits. In the three months leading to November, Tide's unit sales posted year-over-year declines as private-label and other bargain detergents sales rose, stealing market share from P&G.

The erosion helped revive the question of whether P&G should again attempt a cut-rate Tide. Ms. Watson, the associate marketing manager, teamed up with Mark Christenson, a Tide brand manager, to try again.

Their first chore was to win support from P&G's Laundry Leadership Team, a council of a dozen executives that oversees the company's $6 billion North American detergent business. Beginning at 10 a.m. every Thursday, the team bears down on strategic issues for seven hours straight. P&G's cafeteria delivers lunch.

At the group's Nov. 6 meeting, Ms. Watson and Mr. Christenson pitched their plan, highlighting P&G's successful launch in 2005 of cheaper Charmin and Bounty paper towels. The basic versions gradually drew new users while fighting off cheaper private-label products.

"Before we shut this idea down, let's take some baby steps; we just want to test this," Ms. Watson said.

The managers supported the idea but had concerns. Decades of marketing and sales of hundreds of millions of bottles and boxes of detergent had made Tide synonymous with one color, orange. Members of the laundry team were apprehensive over whether a less expensive version should be encased in orange, too.

The council also cautioned Ms. Watson and Mr. Christenson about costs. The pair couldn't buy new materials for the detergent and instead had to use the company's existing fragrances, whitening agents, stain-fighting enzymes and other technologies.

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The decision to go with a test fell to Alex Tosolini, a P&G vice president responsible for its North American fabric-care business, which includes detergents.

"The first question was powder versus liquid," says Mr. Tosolini. About 75% of Tide's detergent dollar sales are in liquid, though category-wide sales of powder detergent, which is slightly less expensive, have been increasing during the recession, he says.

Testing powder also carried less risk. "Given the importance of Tide, it's better to learn first on a smaller segment of the business," Mr. Tosolini said.

In a subsequent meeting with Tide marketers, the packaging discussion focused on whether to abandon Tide's trademark orange. Shoppers on average spend 45 to 60 seconds in the laundry aisle, devoting just seven seconds to choosing a product, making color a crucial guide for finding the right product, P&G research found.

The group considered yellow and blue, the other colors of Tide's famous bull's eye. A handful of other laundry brands used blue but few had yellow. "People kept insisting, 'Tide isn't yellow,'" says Mr. Tosolini. "But then we thought maybe it could discourage current Tide users, which is what we wanted."

As the meeting extended past dinner, Mr. Christenson and Ms. Watson suggested naming the product "Tide Basic," mirroring the success of Charmin Basic and Bounty Basic.

Again, red flags flared. The name raised concerns that "basic" contradicted Tide's high-end image. Huddled over a thesaurus, the marketers found about 25 alternatives, including Just Tide, Simply Tide and Tide

Essential. Tide Basico, inspired by a P&G detergent in Spain, might appeal to Hispanics in the U.S. They wrote down all suggestions, including Tidey Up.

Preliminary tests with consumers, held soon after the meeting, included Tide Simply Clean, Tide Basico and Tide Basic. Tests also judged yellow versus orange package mock-ups. Tide Basic, in yellow, won with

consumers, who didn't see Tide Basic as an oxymoron. By January, Tide Basic was officially a go for further development and testing.

P&G scientists had long focused on concocting "new and improved" formulas, but in recent years had become better at developing low-priced goods for the company's expansion into developing countries. "Now,

some of the biggest innovations in our company are geared toward making products more affordable," says P&G Chief Technology Officer Bruce Brown.

With Tide Basic, that meant reducing features like anti-pilling and color-preservation technologies embedded in regular Tide.

In early March 2009, Ms. Watson and Mr. Christenson met to finalize their presentation to senior leadership on their recommendation on whether or not to introduce Tide Basic in test markets, as a prelude to making a determination to launch nationally in the US. While their research had identified the best packaging and

product strategies that would support the launch of a Tide Basic brand, they had to show that a national launch, which in the long run would include both the powdered and liquid forms of detergent, would be profitable to justify a test market. To this end, their market research department and accounting department had provided important information to enable such an analysis.

Their market research department estimated that the total annual US market for detergents including both liquid and powdered forms amounted to 380 million equivalent units. (An equivalent unit was a standardized measure used by industry to standardize volume measurement across different package sizes and product forms.) Tide had approximately a 42% market share of the combined liquid and powdered detergent markets.

The accounting department noted that the current wholesale price at which P&G sells Tide to its retail customers is $12 per equivalent unit. The Tide brand group expected that Tide Basic would sell to retailers at a lower price of $10 per equivalent unit. Variable costs for both products would be 40% of the wholesale price.

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Given the positioning of Tide Basic as a lower-priced brand, the Tide brand group planned a limited advertising campaign in comparison to what they do to launch their premium offerings. Much of their advertising and promotion budget will be directed to offering incentives to retailers to carry the product, obtain preferred shelf positions adjacent to lower-priced and private label detergent brands, and to feature the brand in their weekly advertising flyer. In all, Year 1 expenditures to launch Tide Basic was expected to be $100 Million. Given that Tide Basic was an incremental and not a breakthrough product, Ms. Watson and

Mr. Christenson knew that senior management expected to recoup its Year 1 launch expenditures within the same year through the profit from selling the new product.

To facilitate their evaluation of the financial viability of launching Tide Basic nationally, Ms. Watson and Mr. Christenson considered doing a breakeven analysis, which they felt would be an intuitive way to present the

results to senior management. A complication in performing the breakeven analysis is that they needed an estimate of how much Tide Basic would cannibalize sales of their existing higher-priced Tide products. They knew that they had designed Tide Basic with distinctive packaging and planned separate placement in the store to minimize cannibalization. However, they also knew that some cannibalization would be difficult to avoid. Their market research department had conducted some simulated store experiments and concluded that Tide Basic may cannibalize 5% of the sale of regular Tide products. Some in the Tide brand group worried that this estimate however may not consider the full value of any potential adverse effects on Tide’s brand image.

Ms. Watson and Mr. Christenson worked on refining their slide presentation to senior management. They wondered whether they should recommend launching Tide Basic based on all that they have learnt through their research. They knew any decision had to make sense for the Tide brand portfolio and should also be financially acceptable.

(This mini-case is based on an article that appeared in the Wall Street Journal in 2009)