Global Pricing Decisions II Proctor

Global Pricing Decisions II Proctor & Gamble: Always Russia

Procter & Gamble Russia

Always, the world's leader in terms of feminine protection disposable pads, entered the Russian market in October 1995 and by the end of 1997 it succeeded in achieving leadership. Despite its impressive success, a major problem appeared in 1998. Because of the premium price at which the product was being sold on the Russian market (a price that was much higher that in other neighbor countries), wholesalers fuelling especially the open-street markets preferred to go to P&G in other Eastern countries (e.g. Poland) in order to buy cheaper pads. The problem was clearly revealed by statistics. In March-April 1998, regular pads experienced a 40% decrease compared with the previous year while the Ultra pads maintained their level from the supply constraint period. At the same time, audit data emphasized a significant increase in market share. Consequently, the emergence of the parallel import problem became obvious because of the paradox above which showed an increase in market share although shipments were experiencing sharp falls. The only explanation for this contradiction was the fact that a part of the Russian market had been fed by wholesalers who had brought merchandise from other sources than P&G Russia. Moreover, surveys clearly highlighted that the P&G products (and particularly Always) existing on open markets had been brought from other countries in the region.

To conclude with, I'd say that the major problem that P&G Russia is facing refers to the price discrepancy which makes wholesalers prefer P&G sources in neighbor countries to P&G Russia, thus generating serious decrease in the sales volume of the latter.

Situation analysis

In order to have a snapshot of P&G's position on the Russian market, a SWOT analysis may be considered extremely useful.

The major strengths that the company boasts comprise:

a) the leadership position that Always holds on the Russian market b) P&G's assault over the Russian market due to bringing its bets products and technologies c) continuous investments in market research for knowing and anticipating the consumers' requirements in order to perfectly and timely adapt to them d) the huge investments in distribution allowing P&G to create its own network reaching even far cities like Murmansk; thus, while other competitors preferred to delay their entrance on the market, P&G used the McVan method and made distributors promise exclusivity to the American company in exchange for training and resources; in less than two years, P&G extended its network to over 100 cities (which is a major plus because 70% of Russia's population lives in the urban areas) reaching over 85,000 stores e) the excellent image that the brand has in the eyes of consumers - a survey emphasized that 78% of the interviewees considered the brand to be "good value for money," a score that wasn't met by any other competitor f) the high price that P&G affords to establish due to the Russians' perspective on price as a sort of surrogate indicator to quality g) P&G's influence on the Russian's behavior due to the impressive budget spent on TV advertising campaigns (P&G was the largest advertiser in 1997) - this is a major achievement if we consider that in 1998, 96% of the households had a TV set j) the in-house development of a sampling system reaching women between 18 and 49 (the P&G samples arrived at 50% of the target covered).

The most important weaknesses that P&G displays consist of:

a) the company's inability to reach the pharmacy channel playing a significant role in the two major urban areas: Moscow and St. Petersburg; this explains the second position that Always holds within the two cities due to a market share of only 13.5% b) supplying open-street markets (accounting for almost half of the sales in many cities) through wholesalers; this form of distribution is extremely fragile because of its temporary character and because of the company's impossibility to supervise key aspects like: price, expiry dates, product presentation; therefore, such distribution system may negatively impact on P&G's image because of various actions that open-street vendors may take regardless of the company's general policy c) the way of measuring the audience for P&G advertisements which implies filling in diaries instead of attaching people meters to TV sets; thus, the results might be inaccurate as surveys have showed that commuting from books to electronic devices generates a 33% decrease in the reported rating d) not being able to check if the advertising bought at TV channels broadcasting in distant regions is really inserted during the TV programs and hours established with the respective TV post.

Opportunities:

a) the fast growth specific to the Russian market - if only 53% of women reported using regular pads in 1996, a year later, the percentage of women stating the same thing increased to 78% (i.e. A 47% increase) b) the negative perception of tampons allowing a generous market share for pads - if in 1996, 37% of women reported using tampons on a regular basis, in 1997, only 20% of them continued to use such products c) the Russian women's tendency to move from traditional pads to the more sophisticated ones using Ultra technology and having wings (Plus) - in 1997, Always Plus registered a 5.2% unit share compared with Always Classic which reported a 2.9% unit share for the same year while Always Ultra reported a unit share five times higher that the one in the previous year.

Threats:

a) the high uncertainty of the Russian market due to unpredictable political, economic or social maneuvers b) the low level of income reaching a monthly average of $220 per household c) the unfair distribution of income between Moscow and the regions, negatively impacting on P&G sales as the adherence on the Russian capital's market is more fragile because of not reaching the pharmaceutical channel d) the irregular payment that Russian employees receive makes them give up brand preferences and choose cheaper products fitting their income level e) the considerable growth (88%) that the Polish brand, Bella, achieved in 1997 f) parallel imports which consist of fuelling the Russian market with products bought at lower prices in neighbor countries.

Identifying, evaluating, and choosing alternatives

In order to ban parallel imports, P&G Russia may consider the following alternatives:

1) reducing prices for the Always pads offered on the Russian market in order to line up this outlet to the neighboring ones

2) offering major discounts to wholesalers who buy large quantities of merchandise

3) compelling the P&G warehouses from the neighbor countries to sell products only to wholesalers from the respective countries.

The first alternative will contradict the general policy that has been applied to the Russian market so far. Thus, the corporate image might receive a major shock because Always will not be perceived as a premium brand anymore. Being given Russians' skepticism to sudden maneuvers, most consumers will probably think that the price decrease is a result of lower quality or less sophisticated technologies. Certainly, the company could try to prevent such negative consequences by organizing an advertising campaign emphasizing that the lower price is a reward for the consumers' loyalty to the brand or is the natural result of more advanced technologies that allowed the company to reduce its costs. Still, considering the rational profile of Russians and their negative experiences from the Soviet Era, the campaign above will probably have poor results.