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JANUARY 16, 2007

JAMES SEBENIUS ELLEN KNEBEL

Lou Pritchett: Negotiating the P&G Relationship with Wal-Mart

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As recently as 1985, Wal-Mart had never been contacted by a P&G corporate officer. . . . [T]hree generations of managers had grown up in an environment in which the concept of top management having anything to do with customers was totally foreign. — Lou Pritchett, former Vice President for Sales, Procter & Gamble In the 1980s Lou Pritchett, Vice President for Sales and Customer Development, Procter and Gamble (P&G), inaugurated a number of complex negotiations with Wal-Mart founder, Sam Walton. These interactions precipitated one of the most “adventuresome partnership[s] between two corporate titans” and would challenge the status quo operating and partnership models of the day.1

Pritchett’s Background

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Born in 1931 in Memphis, Tennessee, “Pritchett worked his way through Memphis State College by selling shoes in Bond’s Department Store downtown. He also became active in the Boy Scouts,” attaining the rank of Eagle Scout.2

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From section salesman in Tupelo Mississippi, the position he took when he joined P&G in September 1953, Pritchett rose to become President of the company in the Philippines and Vice President for Sales variously for the United States and North America, Europe, Asia, South America, Australia, India, and the Middle East. It was while he was Vice President for Sales that he met Sam Walton. It was his global experience with customers and suppliers, Pritchett recalled, that helped to bring about the legendary multi-billion dollar partnership with Wal-Mart.3

The Market Context in the 1980s The Business Approach

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By the mid 1980s, P&G was “a $40 billion global empire”  and considered to be “one of the most successful companies of the 20th century.”4 “P&G’s success,” explained Pritchett, “was largely based on a ‘push-pull’ strategy.... Decades of success resulted in the codification of the way P&G went to market and managed brands. Historically we would bring extensive, comprehensive research on ________________________________________________________________________________________________________________ Professor James Sebenius and Research Associate Ellen Knebel prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2007 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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Lou Pritchett: Negotiating the P&G Relationship with Wal-Mart

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consumers to retailers and use it to argue for more volume, more newspaper ads, and more shelf space.”5 At this time, according to Pritchett:

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Sales reps lived and died on the number of cases of product we could sell to the retail customer. Our goal was to ensure that the retailer had more of our product than of our competitors’, both in his storeroom and displayed in the selling area. We believed that if we tied up the retailer’s cash, we would prevent him from buying competitive brands. There has always been a certain selfishness in the selling game and it manifested itself in the consumer products business, particularly in the soft drink and soap categories. What it amounted to was: “If I can swap more of my product for more of your dollars, I will ‘control’ the store.”… [K]nown as [the] “load ‘em and leave ‘em,” [strategy], it was exactly opposite to partnering.6 

The industry wisdom was that a “loaded customer is a loyal customer.” All manufacturers followed this “push–pull” strategy. Their sales reps would “push” the product into the distribution channel and then radio and television commercials would influence the end-using consumer to “pull” it out of the stores.7

Changing Market Dynamics

When he was named Vice President for Sales, Pritchett decided to call on the presidents of major retailers to discover first hand how they felt about P&G. Pritchett drew on his early years at P&G and international management experience with P&G in the Philippines. This experience convinced him that P&G’s internal “load ‘em and leave ‘em” strategy needed to be replaced with retailer-supplier partnerships. Pritchett recalled:

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In my first managerial job, in 1955, I developed a special relationship with Malone & Hyde, the largest Southern wholesaler. I convinced the buyer to let me come in every week, count inventory, and write my own orders. I asked, “Why don’t you let me be a part of your company?” I was convinced that if we could build a relationship on trust I would never violate that trust and as a result the customer would get a P&G expert working on his business at no cost to him. This was my first taste of partnering. In 1981, I became president of P&G’s Philippine operations. Studies showed that Philippine consumers preferred P&G toilet soaps Camay and Safeguard 70 to 30 over competing brands. Yet these two brands ranked last in the market. I discovered that the “load ‘em and leave ‘em” strategy was alive and well in the Philippines. Being volume driven, our sales reps had loaded up to 30 weeks’ inventory in the supply chain. Since the Philippines is just a few degrees north of the equator, and few buildings were air conditioned, temperatures of 140 degrees weren’t unusual in warehouses. Sitting in warehouses for 30 weeks in this heat, our toilet soaps lost their properties. Not only did they lose their lather, the coconut oil and fat ingredients lost their perfume and began to smell like rancid tallow. I called an immediate moratorium on selling to reduce retail inventories. Although we missed our sales targets by over 40 percent the first year, retail inventories fell to an acceptable four weeks. Eighteen months later, Safeguard and Camay were the top two selling toilet soaps in the Philippines. Volume and profits rose to record levels, substantially higher dividends were paid to the parent company, working capital was reduced by 70 percent, receivables were reduced by 33 percent, and company morale soared. These experiences prepared me for my next post.8

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Overcoming the Supplier-Retailer Barrier

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Lou Pritchett: Negotiating the P&G Relationship with Wal-Mart

When Pritchett first considered approaching Walton, the prevailing sentiment in the consumer products industry was that suppliers had market power and no one retailer controlled the market. Pritchett recalled, “I could find no record of where a P&G corporate officer had ever contacted WalMart’s top executives.” As one of the world’s largest suppliers of consumer products in the industry, P&G “had considerable market clout” at this point in time. Wal-Mart, Pritchett explained, “was looking for their first big deal with a big company so that they could leverage this to create other deals in the market.”

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Just prior to the time when Walton and Pritchett first met, Pritchett explained, “I had just come back from a meeting with the president of K-mart a day or so before to try to sell my ‘partnering’ idea to them.” “K-Mart was the big national retailer in the United States while Wal-Mart was still in its infancy and only operating in a few states. The president of K-Mart heard me out, but there was no interest. Back at P&G Pritchett announced his proposal to try to work more closely with Wal-Mart. “P&G management,” he recalled, “was dubious: their attitude was that ‘retailers just wanted in deeper into our pockets.” At the time, large suppliers simply “pushed” products to the retailers, with negotiations centering around the supplier possibly offering a price discount to get the retailer to purchase more. The relationship was certainly not about partnering with the retailer. The proposition of partnering was simply looked at by the supplier as a tactic for the retailer to try to negotiate lower prices that they would have to pay to the supplier. The supplier did not see any direct benefit to a relationship with Wal-Mart.

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Internal and External Negotiations First Moves

Pritchett decided that his first move was to contact Sam Walton.

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I phoned a lifelong friend, George Billingsley, who, being very close to Sam Walton, arranged for Sam and me to get together on a two-day canoe trip in northeast Arkansas. Sam accepted [the]…invitation and during our time together on the river it became evident to both of us that the entire relationship between vendor[supplier] and retailer was at issue. Although both focused on the end-user, the customer, each did it independently of the other. There was no sharing of information; there was no planning together; there was no systems coordination or compatibility. There simply were two entities going their own ways, burdened by but oblivious to the excess cost created by this obsolete system.9

“Your products are very important to my stores,” Pritchett recalled Walton telling him,

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. . . but in total, your brands are just a small portion of what I sell. And yet, every month, your sales people call on me and want me to change my product mix to conform to your sales plan. You’ve got a formula for making Tide, so many tons of chemical A, and so many tons of chemical B, and so many tons of chemical C, whatever. Suppose a chemical salesman called on you every 30 days and said, “I’ve got $200 a ton off chemical A this month. Why don’t you change your Tide formula? Why don’t you put more chemical A in the product this month?”10

Pritchett recalled,   3 This document is authorized for use only by victor jordan until September 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860.

Lou Pritchett: Negotiating the P&G Relationship with Wal-Mart

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This was a powerful, fresh insight for me as to how retailers felt when we called on them twelve times a year asking them to change their product mix to sell more of our brands. Sam said, “Your guys are always trying to sell me more Tide. I really don’t care if I sell Tide or Fab. I just want to sell what the consumer wants. Your efforts should be to help me sell more of the detergent category, to help me bring more customers into the store, and to help me increase total revenue per check out transaction.” I am not criticizing my old alma mater; this is the way all manufacturers sold to retailers.11

Pritchett knew at that moment that to ensure P&G’s continued success with its customer would require a series of both internal and external negotiations. He reflected,

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It was on the river, that we both came to realize that our two very large, very complex, very sophisticated companies were communicating with each other by “slipping notes under the door”; we were each going our separate ways and doing nothing to add value to the process. The only contact between these two multi-billion dollar systems was a sales rep from P&G and a buyer from Wal-Mart, neither equipped to represent the total corporate system, each influenced by conflicting reward and recognition systems. We realized that we had several choices ranging from adversarial, where we currently were, to partnership, the ultimate! Sam and I agreed that in order for both companies to not only survive into the 1990s, but to prosper, we had to move…from the short-term, adversarial, confrontational win-lose relationship that had been the hallmark of the past 20 years to a partnership built on trust and committed to a shared vision. We had to work collaboratively to meet the consumers’ needs while in the process drive excess cost out of the system. We had to learn to work on the system instead of simply working in the system. Indeed, we had to change the system, together. 

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“By the end of that white water ride,” recalled Pritchett, “[we] had agreed to change the way America did business.”12 But he also knew that it would also take a series of internal negotiations to make the agreements reached on the river a reality.

Mapping the Internal Strategy

When the rate of external change exceeds the rate of internal change, disaster is imminent! — Lou Pritchett

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Prichett recalled becoming convinced on the canoe ride with Walton “that volume follows consumption and that our volume-driven strategy was not necessarily the best approach.”13 But to set the process in motion, Pritchett knew, would require several rounds of internal negotiations. “There was a strong resistance inside P&G,” he recalled.

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Some of the vice presidents didn’t want P&G brands to sell in big box [discount] stores [like Wal-Mart] because there was a lack of understanding and lack of knowledge on our side about who their customers were. I took photos of the cars in the parking lots of these newly formatted stores; there were luxury cars like Mercedes and Cadillac in the photos as well as the other brands. I showed the pictures to the vice presidents. I was attempting to provide a sense of the range of customers that these new discounters were serving.14

Pritchett was intrigued with Walton’s ideas for addressing the issues with P&G’s and Wal-Mart’s external strategies. “I’m absolutely convinced,” Walton had insisted, Pritchett recalled,

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Lou Pritchett: Negotiating the P&G Relationship with Wal-Mart

. . . that with this dual system that we’ve got, this almost adversarial system where we’ve created our independent system and you’ve created yours, we’re not planning together; we’re barely talking to each other. Both of us focus on end-user, the consumer, but we do it independently, without consulting each other. What we need to do is revolutionize the way we do business…away from the “you-ship-product-and-we-do-whatever-we-do-with-it” mentality. We need to become partners. “We realized,” reflected Pritchett,

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. . . there was no sharing of information, no joint planning, no systems of coordination. . . . The only contact between our two multi-billion dollar systems were six to eight sales representatives from P&G and buyers from Wal-Mart. These were well-trained, honest, intelligent, dedicated people, but none were equipped to represent the total corporate systems. Additionally, both our sales reps and Wal-Mart’s buyers were influenced by conflicting internal reward and recognition systems. Sam and I had an idea of what we wanted the new relationship to look like, but we had no idea of how to make it work.15

First Steps Toward Trust and a Common Vision

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Pritchett observed that it took trust as well as negotiation to move both sides away from the focus on their respective positions and toward their potential common interest. He worked with Walton to create a draft joint vision for moving forward together as two companies that he would present at a joint Wal-Mart-P&G management discussion session. Pritchett and Walton each went back to their respective organizations. Pritchett negotiated with the head officers of each of the ten P&G main divisions to get them to travel to Bentonville to meet with Wal-Mart’s top executives in a three day meeting. Pritchett recalled, “Walton and I had earlier agreed,” that we had to start working on the system as opposed to working in it.” The outcome of this meeting was to create a joint working group, a multi-functional team representing most major departments in both companies. The team negotiated to put in place an “I for an I” inventory management system, Pritchett recalled:

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The partnering team created a concept called “I for an I,” which meant substitute information for inventory. Through electronic data interchange . . . P&G began directly monitoring Wal-Mart’s sales and inventory and using the data to make its own production and shipping schedules. The order, shipping, and billing processes were restructured . . . dramatically reducing costs and virtually eliminating stock outs. Today if you go into a WalMart and buy a tube of Crest, the inventory people at both Wal-Mart and P&G know it instantly and a replacement is on the way.

The team also had to confront radically different pricing philosophies. The concept of everyday low prices (EDLP) was pioneered by Wal-Mart. However, P&G pursued a “High-Low” (HL) merchandising strategy that was in direct contrast to EDLP. Recalled Pritchett:

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EDLP is a unique strategy created by Wal-Mart once they had the power vis-à-vis the manufacturer to pull it off. Historically, the U.S. consumer products business was conducted by the manufacturers running monthly specials (e.g.: 10 cents off a package; $1.00 per case allowance for newspaper feature and in-store display; and so forth) to create short-term volume to meet their monthly volume goals. For the period 1950-1980 you could “set your calendar” by observing all the manufacturers going to the retail trade and “selling” their monthly specials. As a result of this, the retailers would feature various “on deal” brands as 5 This document is authorized for use only by victor jordan until September 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860.

Lou Pritchett: Negotiating the P&G Relationship with Wal-Mart

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weekend specials (newspaper ads broke on Thursday and the specials were good from Thursday through Sunday). Then the cycle would be repeated for a different set of brands the following week. This was called “High-Low” (HL) merchandising. Wal-Mart concluded that this strategy of asking consumers to pay full price Monday through Wednesday and then deal price on the weekend was not sound. Additionally, Wal-Mart figured out that these pricing swings, as you can imagine, caused tremendous costs throughout the system. Wal-Mart introduced EDLP and boldly announced to the manufacturers that they would only buy brands that were discounted in their base price and available 100% of the time and that they would no longer buy “monthly specials.”

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“I was in favor of the EDLP strategy back in 1988,” Pritchett recalled, “but was unable to convince the division vice-presidents. I even wrote a memo that we at least ‘test’ EDLP versus HL in different parts of the United States, but again was told [in so many ways no]. This is a classic case of old paradigms being almost impossible to break.” Pritchett persevered, however, driven by the knowledge that market research and hard data were the coin of the realm within P&G. Eventually, he persuaded his colleagues to take a risk. He proposed that a test of one integrated P&G sales team selling to one customer together with the ‘just-in-time’ inventory approach to selling to retailers.” Under Pritchett’s supervision, P&G employee Tom Muccio helped to design and run tests with Wal-Mart in Bentonville. Simultaneously, regional director Wayne Galloway ran integrated sales force tests in the Florida market with other key customers. Pritchett observed that

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[Both individuals] were given corporate responsibility, previously unheard of in P&G’s existing divisional approach. But many ties to the old divisional approach remained. The purpose of the tests was twofold, first, to learn if a one-company approach with customers could create better results, potentially at lower sales expense, and second, to see what internal changes would be required to enable the concept. Aspects of the tests included the multifunctional customer team idea, one representative calling on stores in the Florida test versus the previous model of using multiple representatives, and technology to support headquarters and in-store efforts.

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The tests, “conducted in the absence of most required internal changes as well as in the absence of broad commitment by P&G,” would enable Pritchett and his team to collect quantitative data and conduct market observations and research on the success or failure of the approaches. If the approach was successful, they could bring data to the negotiating table with P&G internally, and other retailers externally; if unsuccessful, they could refute Wal-Mart’s preferred approach at that negotiating table.

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However, the tests revealed that both P&G and its customers (including Wal-Mart) could greatly benefit from the integrated P&G sales team and just-in-time inventory approaches. The results were significant. Pritchett and his team took the data into P&G internal negotiations to demonstrate to…management the value of the integrated/just-in-time approach. In these internal negotiations…[they] worked to address, point by point, the procedural learning and cost savings of changing P&G’s approach in the context of corporate culture, technological integration, communications, responsibility, authority, and a one-company approach to selling. This was in many ways the toughest sale: the complete re-design of P&G internally to be able to properly execute the vision.

The tests provided Pritchett and the P&G team the insights required to see the potential internal cost savings and offer operational cost savings to Wal-Mart and…other retail customers. For example, instead of the historical high-low merchandising approach, it was possible to illustrate with data projected from the tests the dollars that could be saved in operational efficiency. It was also clear that the “Top-To-Top” customer team approach would lead to benefits well beyond operational cost 6 This document is authorized for use only by victor jordan until September 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860.

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savings. . . . [T]his new ground of cooperative versus adversarial customer/supplier relationships was essential, given the power shifts in the consolidating industry. Wal-mart was a pioneer in a new form of retailing, and P&G became a pioneer in a new form of customer selling, broadly known today as customer relationship management (CRM).

Negotiation Principles

Pritchett recounted key lessons learned from the negotiations that helped P&G and Wal-Mart forge a more integrated buyer-seller partnership.

“First, stop viewing the future solely as an extension of the past and start working together with customers and suppliers towards inventing the future. Accept the fact that the status quo is no longer the best way forward.”

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“Second, challenge the conventional thinking…that a successful strategy consists solely of beating the competition in product development and selling, and realize that as important as these are they should come second to satisfying the customer needs.”

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“Third, start using information technology to manage the business, not just audit it. Accept the fact that unlike in the 20th century, success in the 21st century will depend upon access to information, not access to capital.”

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“Fourth, stop creating internal functional fiefdoms, each preoccupied with its own craft, and start horizontally integrating people into high performance work teams capable of working multi-functionally with customers.”

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“It’s not who’s right, it’s what’s right. You have to be issue focused, not position focused.”16

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“Never sacrifice yourself on the field of battle; rather live to fight another day.”

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Lou Pritchett: Negotiating the P&G Relationship with Wal-Mart

Endnotes 1

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L. Pritchett, “Stop Paddling and Start Rocking the Boat,” Pritchett Enterprises, first published by Harper Collins, 1995, http://www.loupritchett.com/htm/about.htm. 2

K. Perkins, “Rocking the Boat, Making Waves in the Calm Waters of Business,” Hilton Head Monthly, November, 1997, pp. 36–38. 3

Pritchett, “Stop Paddling and Start Rocking the Boat.”

4

L. Pritchett. “Load ‘em and Leave ‘em,” first published in J. Harris, The Learning Paradox: Gaining Success and Security in a World of Change, Second Edition, 2001, Capstone Publishers, Toronto, Canada. Ibid.

6

Ibid.

7

Ibid.

8

Pritchett, “Load ‘em and Leave ‘em.”

9

Pritchett, “Load’ em and Leave ‘em.”

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5

Ibid.

11

Ibid.

12

Pritchett, “Stop Paddling and Start Rocking the Boat.”

13

Ibid.

14

Ibid.

15

Ibid.

16

Ibid.

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8 This document is authorized for use only by victor jordan until September 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860.