Can The Procter & Gamble China Model Work In The E-Commerce Era?

Don’t get me wrong, Procter & Gamble is one of the world’s greatest personal care companies and of course the company is doing fine in China. In fact, we see indications that the COVID-19 shock has allowed P&G to strengthen its position in China—provider as it is for a range of leading personal care and household products.

My guess is that 2020 could be P&G’s best year ever in China. But can the P&G model compete in an e-commerce world?

Here’s what I mean: P&G’s genius is all about scale and scope. They find the middle of the bell curve of consumer demand and they take advantage of that position through scale. No one can match their volume and distribution acumen. So they dominate shelf space, chain relationships and replenishment cycles—and that volume gives them considerable unit cost advantages as well. P&G is King Kong.

But did e-commerce defeat that model?

• Scale no longer means scope. In e-commerce, a $20 million toothpaste brand can have as much “shelf space” as a $1 billion brand. So the incumbent’s defensive power is diminished. Indeed, the $20 million dollar brand might be more experimental in new product launches and perhaps more audacious in its advertising.
• In China more than the U.S., a brand is a statement of individuality, so the incumbent brand can be less appealing. It’s your dad’s brand. Is there more social currency in telling your friends “we use P&G brands” or is there more social currency in relating “we used to use P&G brands.”
• Local competitors will start chewing away from below. The value consumer is up for grabs. The local brand will tend to have a lower cost structure than P&G. And Chinese companies tend to be less sensitive to ROI than U.S. brands. This might be a long-term financial weakness, but it is a short-term benefit to market share. There should be no surprise that the China market has some 1,000 toothpaste and dental care brands. The top two brands in China, Yunnan Baiyao and Saky, are both Chinese, with 11% and 10% market share, respectively. Crest comes in fourth with 6% and Colgate is in seventh place with 4%.
• The mega-brands have to play defense. They have to be everything to everybody. The insurgent brands and the niche brands can play to a narrow appeal. Nothing wrong with a strategy to go from 1% to 2% market share, if the market is China.

In other words, the question is whether P&G’s model can work in the era of e-commerce? The middle of the bell curve might not be where you want to be. Better to have a highly-defined position in the market than to try to meet every consumer’s needs.