By implementing a plan for direct selling to retailers, Procter & Gamble assumed control of its distribution function from jobbers, enabling steady production, quick assessment of marketing efforts, guaranteed employment, and increased market presence.
Facing industrywide marketing pressures, Procter & Gamble initiated direct selling to retailers in the early 1920’s. This change enabled the company to exert greater control over wholesale grocers, whose actions previously had made it difficult for Procter & Gamble to rationalize production and labor costs. By implementing direct sales, the company stabilized its distribution methods to meet a steady consumer demand rather than satisfying the sporadic purchasing cycles of wholesalers.
Focusing on the retail grocer,
Procter & Gamble’s direct selling strategy was primarily a response to the practices of wholesale grocers. Their large-scale speculative purchasing of consumer goods such as soaps and shortenings wreaked havoc with production schedules. Peak order periods strained the company’s factories and forced it to maintain excess capacity as well as to pay workers expensive overtime rates. Between the peaks, capital equipment lay idle and employees faced layoffs. Procter & Gamble had no control over when large orders would come in, and these orders were difficult to predict.
Company president William Cooper Procter had long recognized that consumer demand for his company’s products remained steady throughout the year. He hoped to devise a means to link production with true demand, as the sporadic purchasing patterns of wholesale grocers infuriated him. Wholesalers often bunched their orders in anticipation of a price change or to entice the company to lower prices. Procter & Gamble first attempted to deal with this issue in 1913, and its experience served as a precursor to the direct selling plan.
To achieve fair competition among retailers, the company stipulated in its contracts with wholesalers that they sell the company’s goods to retailers at the list price. If management suspected a wholesale firm of price cutting, it refused to deal with the alleged offender. The Supreme Court in 1913 declared such a contractual arrangement to be an unconstitutional restraint of trade. In response, many wholesaler grocers, led primarily by New York City firms, initiated a price war. When some wholesalers appealed to Procter & Gamble for discounts, the company refused. The company decided in March, 1913, to try direct selling to retailers in the New York City area.
To its delight, the company found that retail orders varied little from week to week, giving production managers greater flexibility in scheduling labor and raw material purchases. Additionally, direct selling provided company salespeople with valuable firsthand contact with those most familiar with the buying habits of the company’s ultimate consumers. Point-of-sale contact enabled salespeople to assist retailers with the display of goods and also provided a forum for a crucial exchange of information about the most effective means of selling Procter & Gamble’s products. Management realized that this information was crucial in assessing the impact of advertising and arranged for the systematic collection and analysis of “consumer perceptions.”
Although the benefits of direct selling in the New York City area seemed clear, implementing direct sales nationwide proved too great a challenge in 1913. Such a move would require a complete overhaul of the sales function, including a massive expansion of the sales force, new training programs, and a system of regional warehouses to accommodate the new distribution system. The outbreak of World War I also delayed efforts, forcing Procter & Gamble to focus on supply and production problems instead.
After the war, however, the company moved quickly. Procter assigned the task of devising and implementing a nationwide plan to Richard R. Deupree, the general sales manager. In 1919, Deupree reorganized the sales department, expanding the sales force from 150 to more than 800 employees. He also implemented a new training program tailored to the demands of retail sales and service. Formal notice of the nationwide direct sales plan was dispatched to the trade in July, 1920. Company vice president John J. Burchenal was in charge of coordinating production for the plan, and advertising manager Ralph F. Rogan was responsible for devising promotional strategies for direct retail sales.
The company expected, and found, significant resistance from wholesalers. They correctly interpreted Procter & Gamble’s direct selling plan as a serious challenge to their economic power. After canceling long-standing orders with the company, wholesale grocers, through their trade association, launched a campaign in the press to rally the industry against Procter & Gamble. Many retail grocers also protested. Accustomed to dealing with wholesalers, they resented company salespeople and resisted the policy of requiring individual stores to purchase larger orders than they had through wholesalers, a necessary step to make direct selling economically feasible.
Although initial opposition caused Procter & Gamble great concern, by March, 1921, more than 75 percent of the nation’s grocers had agreed to purchase the company’s products on a direct basis. Many wholesalers, responding to a new pricing structure and unwilling to abandon a popular product line, also returned to the fold. Procter & Gamble remained flexible in implementation of the plan and returned to jobbing arrangements through wholesalers in remote locations where direct selling proved uneconomical. The overall success of the move enabled the company to reduce the cost of selling its products by half during the first five years of the direct selling plan.
For Procter & Gamble, marketing expertise was the most significant and enduring benefit of direct selling. By cutting out intermediaries, the company moved closer to its customers and developed formal procedures to assess the effectiveness of its marketing and service functions. Close contact with retailers forced the company to understand the needs and desires of its customers as well as to establish a pattern of mutual cooperation between the company and retail grocers. Salespeople were instructed to value the opinions of retailers regarding company products and to be flexible in devising marketing strategies tailored to the differing economic environments of retail grocers. Point-of-sale contact placed the company in a position to gain valuable insight into consumer preferences, and Procter & Gamble exploited that opportunity through a variety of marketing and advertising plans.
Exposed to a wealth of new information about perceptions of its products on the retail level, Procter & Gamble created a formal research department in 1922 in an attempt to understand and predict market behavior. Given that the basic intention of the direct selling plan had been to align production with consumer demand, an accurate assessment of the external influences on demand was essential. The company used economic forecasting for such factors as the market potential of each product line, the effects of industry competition, and the impact of advertising and promotion. Research on general and local business conditions aided the company in estimating demand and scheduling production.
Additionally, Procter & Gamble began to analyze marketing effectiveness and market potential for each product line. This foreshadowed the implementation of brand management, a concept that treated each product as produced by an individual company within the company. Eventually, each product would compete against all others for corporate resources and consumer loyalty.
The production stability gained as a result of the direct selling plan enabled Procter & Gamble to achieve many economies. With a better understanding of consumer demand, the company exercised greater control over manufacturing costs. Systematic scheduling of raw material purchases, labor requirements, warehouse facilities, and transportation resulted in significant savings. The peaks and troughs of producing for the wholesale trade would never again plague the firm.
Procter & Gamble’s confidence in the continued success of direct selling was best reflected in the guarantee of full-time employment to its fifty-five hundred factory employees in 1923, an unprecedented move for a manufacturer of its size. The stabilization of production enabled such a guarantee. It further benefited the company by reducing turnover and increasing production efficiency. Procter & Gamble also received much favorable publicity that in turn increased its reputation among American consumers.
The successful implementation of direct selling and the numerous benefits it provided to the company did not go unnoticed by other firms in the consumer-products industry. By 1939, more than 90 percent of soap produced in the United States was distributed directly to retailers as competitors copied Procter & Gamble.
Gaining control over the channels of distribution was an important trend in American business during the late nineteenth and early twentieth centuries. Firms such as Procter & Gamble mastered continuous-process production technology, which enabled them to produce vast quantities of goods at lower costs. This, in turn, forced firms to devise new techniques for mass distribution. Gradually, they seized control of the distribution function from wholesalers and took responsibility for marketing their products.
Sales departments in competing firms grew larger as they assumed responsibility for implementing new methods of distribution. Influencing demand through promotion and advertising, then assessing and predicting the impact of their efforts through research and analysis, became key functions of sales departments. Procter & Gamble itself became one of the largest corporate advertisers in terms of dollars spent.
Greater control over marketing also enabled firms to rely on their sales departments to coordinate the flow of goods from production facilities to the ultimate consumers. As Procter & Gamble found, this eliminated the instability involved in producing for wholesalers and resulted in significant savings in all phases of the manufacturing and distribution process.
As Procter & Gamble’s primary competitors in the consumer-products industry adopted direct selling plans, they also developed sophisticated marketing techniques and support functions. With the pathway to the consumer more clearly defined, competitive battle lines were drawn. Because demand for most mass-produced consumer goods was inelastic, or unresponsive to price, firms sought to increase market share not by reducing prices but by increasing advertising. Over the years, they became more sophisticated in their techniques and made the industry one of the most effective and influential users of marketing and promotional strategies in the United States and around the world.
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Applegate, Edd. Personalities and Products: A Historical Perspective on Advertising in America. Westport, Conn.: Greenwood Press, 1998. Brief examination of the contributions of individuals and companies to the ways products are marketed in the United States. Chapter 7 is devoted to the tactics used by Procter & Gamble in advertising Ivory soap. Includes bibliography and index. -
Deupree, Richard R. William Cooper Procter (1862-1934): Industrial Statesman. New York: Newcomen Society, 1951. Pamphlet is a transcription of a speech by Procter & Gamble chairman Deupree. Provides personal recollections about Procter and remembrances of important events in the company’s history. -
Editors of Advertising Age. Procter & Gamble: The House That Ivory Built. Lincolnwood, Ill.: NTC Business Books, 1988. Corporate history written outside the company. More extensive than the other corporate histories cited here. -
Grossman, Louis, and Marianne M. Jennings. Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each with a Century of Dividends. Westport, Conn.: Quorum Books, 2002. In-depth study examines the histories and characteristics of fifteen successful industrial companies, including Procter & Gamble. Features appendixes containing financial data and index. -
Lief, Alfred. “It Floats”: The Story of Procter & Gamble. New York: Rinehart, 1958. Well-organized and well-written company-sponsored history provides useful information on Procter & Gamble’s corporate strategy and influences on the firm’s decision makers. A good starting point for historical research on the company. -
Procter & Gamble Company. Into a Second Century with Procter & Gamble. Cincinnati, Ohio: Author, 1944. Brief corporate history produced by the company. -
Schisgall, Oscar. Eyes on Tomorrow: The Evolution of Procter & Gamble. Chicago: J. G. Ferguson, 1981. Company-sponsored history provides an informal but useful chronicle of Procter & Gamble’s growth. Makes extensive use of anecdotes and remembrances to personalize corporate development. Especially informative on the post-World War II era.
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