P&G's Moments of Truth

Fellow Shareholders:P&G touches the lives of consumers around the world every day. Thirty million times a day, in more than 160 countries, P&G brands face their first moment of truth, when consumers stand in front of a store shelf -- at a Wal-Mart store in West Virginia, a Carrefour store in France, a bodega in Mexico, a corner market in Egypt or a tiny "sari sari" store in the Philippines -- and decide whether to buy a P&G brand, or a competing product.A lot happens in that moment, as consumers assess the performance, quality and value P&G brands offer relative to other products on the shelf. When we strike the right balance between brand promise and store price, we win that first moment of truth.Winning the first moment of truth is only half the battle. Soon after, P&G brands face a second moment of truth. Nearly two billion times a day, P&G products are put to the test when consumers use Tide to clean their clothes, Pampers to care for their babies, Pantene to care for their hair, Olay to improve the condition of their skin, Crest to brighten their smile. Every one of P&G's brands is put to this test.In every one of those nearly two billion experiences, consumers decide whether P&G brands live up to their promises. When we get this right -- when we deliver the benefits promised, when we provide a delightful and memorable usage experience, when we make everyday life a little bit better, a little more convenient, a little bit healthier and more beautiful -- then we begin to earn the trust on which great brands are built.At P&G, we've been competing for and winning these moments of truth for 165 years. As a result, we've built one of the largest and strongest portfolios of leading brands in the world.We have made substantial progress over the past two years in strengthening P&G's business. We're back in the lead. We're committed to continuing this progress and to ensuring we squarely face changing marketplace realities -- to get out in front and to stay in front of change.Success DriversThere are six drivers of P&G's success: consumer focus, strategic choices, operational excellence, financial discipline, organizational structure and brand building capability.Consumer focus. The consumer is boss and we put the consumer at the heart of all we do. First and foremost, this means getting the consumer value equation right on all our brands.It also means delivering superior, consumer-meaningful innovation. Competitive pressures make this a continuing challenge, but we are working hard in every part of our business to deliver a continual stream of innovation that meets consumer needs in ways that reset performance expectations and represent superior value.We are also making sure that P&G business leaders -- including me -- get out of the office and into stores and homes to talk directly with people who buy and use our products. No other real-world experience clarifies the choices we must make as much as these conversations with consumers.Organizational structure. P&G's unique operating structure is creating meaningful competitive advantage. In 1999, we reorganized the Company by consolidating categories and brands into Global Business Units (GBUs), aggregating country and regional go-to-market capabilities into Market Development Organizations (MDOs) and providing single-source business services through a Global Business Services organization (GBS). It has taken sometime to implement, but we're now reaping real advantage from consumer and market responsiveness and the substantial synergies made possible by the new structure.The success of Pampers Baby Stages of Development initiative in the United Kingdom is one good example. The business unit focused on delivering superior product, packaging and advertising; the MDO delivered an outstanding trial plan, superior in-store fundamentals and strong External Relations support. By "dividing and conquering" against a common business strategy and plan, we achieved more, faster. Since the launch, Pampers' U.K. market share is back to 51%, 16 points ahead of the #2 brand.Brand building. Branding is more important than ever -- and big, leading brands are more valuable than ever. In a sea of choices where confusion reigns, consumers value the reliable promise of their favorite brands. This plays to our strength: branding is in P&G's DNA. P&G has 12 billion-dollar brands in its portfolio today -- and more are expected to come. These brands represent more than half of the Company's sales and profits. Equally important, these brands account for the majority of P&G's consumer interactions -- the millions of "moments of truth" we face and win every day. Equally important, these brands account for the majority of P&G's consumer interactions -- the millions of "moments of truth" we face and win every day.Changing Consumer ExpectationsWhile we've made steady progress, we know we're in a fast-moving, global marketplace in which the magnitude, pace and scope of change are accelerating. To keep P&G in the lead, it is essential that we anticipate change and get in front of it. We're doing that with a focus on three "new realities" that are shaping the future marketplace.First is the changing expectations of consumers. Our business has always been about consumer value and in today's demanding economic environment, value is more important than ever. The key to winning in this environment is to reset expectations for performance and price.Olay Total Effects is a good illustration. In global research, women identified seven distinct signs of aging that affect the condition of their skin. Many products addressed one or two of these signs, but no single product fought all seven. Further, the products that performed best in this category were high-end department store brands priced at $60 or $70 a bottle.With Olay Total Effects, we created a single product for all seven signs of aging based on technology that rivals or exceeds the best department store skin care brands -- and offered it at a fraction of the department store price but at the top end of mass skin care pricing. Olay Total Effects is now the No. 1 anti-aging moisturizer in the U.S., U.K., China, Canada and Australia -- growing our total Olay Skin Care franchise by nearly 20%.The difficulty of meeting this performance/value challenge in developing markets -- such asChina or Eastern Europe -- is even greater. Consumers in these markets have similar performance expectations, but far less purchasing power. To succeed in these markets, it's often necessary to rethink the fundamentals -- everything from manufacturing to product and packaging to marketing and distribution. We have experience winning in developing markets with a range of creative solutions: single-use Pantene sachets in China and van-based distribution in Poland, for example. And we continue to develop other approaches. This will be an area of increasing importance for P&G.Retailers as Partners and CompetitorsThe second "new reality" is the changing nature of retailing. Increasingly, we have a dual relationship with retail customers: we are strong partners and sometimes competitors.In concept, the need for tighter relationships between manufacturers and retailers is obvious: we both serve the same consumer, we both want to build consumer loyalty to our brands, we're both trying to grow sales faster and more profitably. But, in practice, retailers and manufacturers can work at cross purposes. Energy, resources and time that could be devoted to creating a delightful "first moment of truth" shopping experience can be spent in unproductive discussions over shelf space, pricing, discounts and terms.Together with retail partners, we are working hard to change this practice. For example, we know consumers are often frustrated when buying hair care products. They find it hard to locate everything they want and are often left confused and searching for product information. We're working with more than 30 retailers to enhance the performance of their hair care departments. We've simplified the shopping experience, provided more consumer education and made it easier for consumers to find and ultimately use the products that best meet their needs. Shoppers are spending half the time finding products and more time in the aisle browsing and discovering products -- all of which leads to increased volume, sales and profits for P&G and our retail partners. These changes are delivering department growth ranges between 10% and 44% for retailers and P&G.Retailers are sometimes competitors as well as partners. Their own brands are growing as the retailers, themselves, grow. Private labels or store brands strive to match innovation quickly and try to present a compelling value alternative in many categories. This is healthy, in my opinion. It requires that we continue to lead innovation and to price P&G products competitively. Further, the growing strength of store brands underscores the importance of always being the No. 1 or No. 2 brand in any category. Brands that can't maintain this leadership stature will find it difficult to compete effectively with the best store brands. Based on our internal global share measures, we have the No 1 or No. 2 brand in 17 of our 19 key global categories -- categories that account for about 70% of sales and earnings. P&G is in a strong position, and ready to become an even better retail partner.The New "Interconnected" OrganizationThe third "new" reality is the emerging importance of operating as an interconnected company. A recent report by industry consultant Booz Allen Hamilton noted "'Vertical' thinking (i.e., own or control every link in the supply chain) has given way to 'virtual' thinking (i.e., create a flexible web of supply relationships and focus exclusively on what one does best)."At P&G, we see this as an enormous opportunity -- in part, because that's where the marketplace is headed and, even more so, because P&G has a strong history of developing partnerships that bring out the best in us and our partners. We've done it for years with advertising agencies, customers, joint venture partners and technology suppliers.When Dr. John's, the maker of SpinBrush toothbrushes, approached us about licensing the Crest name, we recognized the opportunity. Within five months of that first contact, we bought the company and then brought Crest's new, powered SpinBrush to market in record time. Crest SpinBrush, now in 20 markets, has a 50% volume share of the growing powered brush category in the U.S. and has quadrupled the sales of the original Dr. John's product.When we developed the bisphosphonate technology in Actonel, we increased marketing capability by partnering with Aventis, whose field sales force had broad access to and credibility with doctors. The partnership worked well, and today Actonel is a nearly $400 million brand and growing.Our vision is that P&G will be the best company in the world at spotting, developing and leveraging partnerships in every area of the business. In fact, I want P&G to be a magnet for best-in-class partners who want to build significant new business together.

P&G's Moments of Truth

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