P&G Has Positive Outlook On RFID Initiative, Seeks Supply Chain Efficiency

Procter & Gamble's implementation of a radio frequency identification system may compensate for shortcomings in its supply chain, CEO A.G. Lafley said Oct. 27.

"We're all hoping that RFID will help" alleviate inventory shortages, Lafley noted during P&G's third quarter earnings call, acknowledging the company has "a supply chain system that just isn't perfect."

The exec conceded that many of the firm's "best selling brands and best selling SKUs are often out of stock, and a lot of the retailers do not have the labor or systems ability to stay in stock 24-7."

Wal-Mart announced in June that it would require its top suppliers, including Procter & Gamble and Pfizer, to utilize RFID by January 2005. The system uses radio waves to identify items in cases and pallets, and unlike bar codes, can be scanned out of line of sight. RFID is anticipated to help increase inventory visibility and boost productivity, according to analysts.

Despite initial up-front costs for implementation, P&G notes it expects the endeavor to be cost-neutral in the long term, once the firm realizes savings from supply chain efficiencies. An August report by AMR Research estimated the costs of RFID implementation at $13 mil.-$23 mil. per company, assuming a rate of 50 mil. cases per year shipped.

While Wal-Mart has spearheaded the efforts to adopt RFID, P&G says it will eventually extend the technology to products carried by other retailers. Wal-Mart has not given specific instructions as to how firms should carry out the RFID mandate, P&G notes. However, a more detailed plan likely will be laid out for suppliers during a Nov. 4 meeting at Wal-Mart headquarters in Bentonville, Ala.

"I think [RFID] will help, but I don't think it's a magic bullet because a lot of this system relies on everyday people systems...that make sure the physical goods are where they are supposed to be in the supply chain at any given moment," Lafley stated. "There's a lot of room to improve the out-of-stock position at retailers, not just in the U.S., but around the world."

For P&G's part, "we work very hard on launch items to make sure that we have enough inventory," according to Lafley. "We've been erring on the side of [having] a little bit more inventory on to make sure that we have a smooth retail execution of a new item" that may experience rapid success, such as Olay Regenerist . However, P&G is working "to take inventory out of the system," according to Lafley.

The exec also commented on P&G initiatives in hair care in light of competitive launches by Unilever ( Dove ) and L'Oréal ( Garnier Fructis ) in the past year. "We have lost a little bit of dollar share" in hair care brands, Lafley acknowledged, mostly on brands like Clairol Herbal Essences , which competed with new products similarly positioned, such as Fructis.

P&G will continue to pursue "aggressive" goals in hair care marketing. "We're still filling out our shampoo and conditioner portfolio," he noted. While the U.S. portfolio is fairly comprehensive, "we'll be filling that out in the rest of the world, starting with Western Europe."

The firm's acquisition of European hair care company Wella will bolster that strategy, the exec noted. The German marketer, which brings large professional and hair color businesses, is expected to add 6%-7% in sales growth in fiscal 2003, P&G said. The company completed the acquisition of Wella in September (¹ (Also see "P&G Closes Wella Deal, Will Purchase Additional Shares Sept. 10" - HBW Insight, 8 Sep, 2003.), p. 4). The firm is "in the fifth or sixth week of working on collaboration plans" with Wella, but will be "ready to go" by year-end, Lafley stated.

Commenting generally on potential acquisitions, Lafley noted that in "the bigger picture...if you want to step back and think about P&G's strategy, I think we've mentioned on a number of occasions that we are interested in the faster growing personal care, beauty care and health care industries. We are and intend to continue to be disciplined acquirers."

Including Wella, P&G beauty care volume increased 21% in the third quarter. Excluding the impact of Wella and other acquisitions and divestitures, volume was up 8%.

Net sales grew 20% to $3.75 bil., with a positive foreign currency impact comprising 3%. Organic sales were up 6%, boosted by Pantene , Head & Shoulders and Olay. Net earnings gained 12% to $616 mil.

Continued success of Crest Whitestrips and Night Effects helped drive net health care sales 23% to $1.73 bil. Volume also grew 23%, and net earnings jumped 41% to $276 mil. Overall unit volume increased 12% including the impact of Wella. Total net sales were up 13% to $12.2 bil. Net earnings advanced 20% to $1.76 bil. For fiscal 2003, P&G anticipates total sales to grow 13%-16%, with organic sales up 5%-7%.