A Healthy Gamble

The

only time he loses sleep, says A.G. Lafley, is when he thinks a competitor might beat him to a hot new product. And Lafley is sleeping pretty well these days. The soft-spoken, silver-thatched CEO is leading consumer-products giant Procter & Gamble from one hit to another. Crest's battery-powered SpinBrush for dental care and its Whitestrips for tooth brightening have helped Crest global sales grow 50% in the past two years — a surge unheard of for such a big, mature brand. That kind of innovation has sent P&G's profits into double-digit growth and made the company the best performer on the Dow Jones this year, rising 14%, to nearly $90 a share.

Things looked very different little more than two years ago, when Lafley, 55, took over P&G, based in Cincinnati, Ohio. His gruff predecessor, Durk Jager, had launched a crash course to shake up the notoriously insular, slow-footed company but was forced out after just 17 months of expensive product launches that left consumers yawning. P&G had repeatedly failed to deliver expected earnings, and its stock tumbled 50% in six months. With most of the company's resources and best people focused on developing the next blockbuster new product, sales for the established brands were stagnating, market share was eroding, and morale was sliding. An overly aggressive, ill-timed restructuring program left a good number of P&G's 110,000 employees in new jobs, disoriented and distracted.

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Under Lafley, P&G has stopped swinging for the fences and is once again playing small ball, dreaming up countless "new and improved" versions of its classic brands like Tide, Charmin and Folgers, and developing line extensions like Pampers baby clothes and the forthcoming Old Spice body spray. "We had gotten into a mind-set where innovation had to flow into new categories and new brands exclusively, and all I did was open people's minds to [the possibility] that it could also flow through our established brands," Lafley says in his typically self-effacing style.

Yet if the core brands are the foundation of P&G's makeover, its faster-growing, more lucrative beauty and health-care businesses — once considered the company's poor stepchildren — are providing the shine. That's why Lafley last year made P&G's biggest acquisition ever, paying $5 billion for Clairol's hair-care business. The beauty and health-care sectors together account for about a third of P&G's $40 billion in annual sales and could reach 40% within the decade. Most of Procter's next generation of billion-dollar brands will probably come out of this area, which includes Olay skin care, Cover Girl cosmetics, Clairol Herbal Essences shampoo and Actonel osteoporosis prescription medication. Two of the most recent ones to join the elite club are Crest and Iams, the high-end pet food that P&G acquired in 1999 and has since turned into a mass-market brand. Driven by aging baby boomers and image-conscious youngsters, demand for skin-care products, cosmetics, shampoos and all manner of over-the-counter and prescription remedies is growing at about 4% to 6% a year — far faster than for commodities like laundry detergents and diapers. Hair coloring, in particular, a big business for Clairol, is becoming increasingly popular among teenagers, both girls and boys. Bruce Byrnes, president of global beauty and health care at P&G, says his are "arguably the most global of all products."

Consumers tend to be less price sensitive when buying health and beauty products and less attracted to private-label store brands than when they're shopping for, say, dishwashing liquid. And with many beauty products, "people are always willing to try something new," says Marc Pritchard, vice president of P&G's suddenly hot cosmetics division. Its Cover Girl and Max Factor lines are enjoying banner sales with the introduction of their Outlast and Lipfinity long-lasting lipsticks. Of course, the success of cosmetics and other beauty products depends much more on fashion and sex appeal than do sales of toilet paper. As AllianceBernstein analyst Jim Gingrich notes, "P&G still has things to learn about how to market products where benefits are more intangible."

But it is getting better. To help seed demand for Actonel, for instance, the company set up bone-density screenings in chains like Wal-Mart. Pantene, a billion-dollar brand that had reached a plateau, has practically reinvented its marketing pitch and as a result is growing by double digits. Instead of targeting customers with normal, dry or oily hair, P&G has reclassified each kind of the shampoo based on the style consumers are looking for, from straight to curly to thicker. Olay, which has shed its greasy "Oil of" moniker, created early buzz about its Daily Facials cleansing cloths by handing out samples at subway and bus stations and airports filled with sweaty commuters. The cosmetics division helped build demand by rolling out Tiny Tries, which are small, low-risk samples that cost its loyal teenage customers just over $1.