Procter & Gamble's China Problem: The Return of SK II

| About: The Procter (PG)
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As Ezra Marbach pointed out last week, Procter and Gamble’s (NYSE:PG) senior management downplayed the effect on its earnings from cosmetic line SK II’s implosion in the China market. China International Business estimates that SK II in China accounts for 7% of its total global sales.


It is also P&G’s fastest growing market and among the top 5 markets in value worldwide. Clearly, China is a market that FMCG companies like P&G or Estee Lauder (NYSE:EL) cannot approach lightly as China’s aspiration classes allocate more and more disposable income for products and services.

The lack of concern outlined in the recent earnings call makes me wonder if P&G understands the extent of the problem they have in China right now. With the speed that consumers can now band together by using blogs and BBS on portals like Sohu (NASDAQ:SOHU) or (NASDAQ:TOMO), MNCs in China cannot underestimate the harm PR missteps can have on their bottom-lines. I wrote how blogs and BBS damaged Dell’s (DELL) brand value in China, but at least Dell has been trying to rebuild its image by pumping up customer service initiatives.

With the lack of concern coming from Ohio, will P&G be able to implement the proper PR and strategies to regain the trust of Chinese consumers? Particularly worrisome, will consumer angst and ire spill over into P&G’s other blockbuster product lines like Olay and Head & Shoulders that thus far have been relatively insulated from the furor?

On an online survey run by Sina (NASDAQ:SINA) in which approximately 20,000 people voted, over 80% of respondents feel P&G is lying in its public apology for the SKII debacle. Most importantly, nearly 96% of them say they will not buy any SKII products anymore.

One blogger blogged, ““I never thought SKII is good -- you may get a freak baby”. Another blogged, “They are so bad; we should ban them from selling in China”.

What happened that caused one of the most trusted brands in China to inflame public opinion and cause P&G to pull all SK II products in China from retail locations on September 22nd, closing 96 sales counters?

Chinese consumers typically place a great deal of trust in foreign products, and P&G has for many years enjoyed a sterling reputation in China – amongst the highest of all foreign brands for quality in China according to surveys conducted by my firm.

The initial recall stemmed from pressure from the government and consumers relating to studies that showed some SK II products contained traces of neodymium and chromium, substances that above trace levels may pose health risks such as eczema and allergic dermatitis. The scandal might have only been a minor speed bump a few years ago, pre-Web 2.0 and if P&G had reacted appropriately in the immediate aftermath.

Initially, P&G offered refunds to consumers worried about the harmful effects of the skin creams. However, in order to receive a refund, consumers had to sign a waiver stating that they recognized the products presented no harmful effects. They also were not given a refund immediately even if they had to return their unused product.

Consumers were outraged, posted on blogs and BBS and became physical in stores. To further complicate SK II’s situation this is not the first time that the brand has made a misstep in China. In 2005 SK II ran afoul of Chinese consumers when a woman purchased an anti wrinkle cream only to find that she had a strong allergic reaction. SKII and Procter and Gamble were taken to court and eventually settled for a sum of approximately $24,000 USD.

The real issue in all of this was not the bad ingredients – it was P&G’s lawyerly response to the situation that made consumers lose trust in SKII. P&G’s response that ignited the real anger, which could indeed harm P&G’s bottom-line. In my firm’s interviews, respondents were angrier with P&G’s response than with the ingredient issue. P&G should have learned from Yum Brands (NYSE:YUM) who acted immediately last year when concerns arose about Red Sudan found in their products.

Going forward, companies need to understand the role blogs and BBS as well as nationalism plays in China. Companies can be more proactive in harnessing the power of blogs for their benefit like Pepsi (NYSE:PEP) and Nike (NYSE:NKE) have innovatively for their benefit. They should also be honest and quick in acknowledging any mistakes and go out of their way to show contrition as Yum did. It is true, bad news spreads faster than good news and, with RSS feeds, bad news literally spreads at the speed of light.
In this whole debacle, the one thing that can save P&G in China is that many consumers do not realize that SKII (originally a Japanese brand) is part of the P&G group of companies. As one consumers posted, “I hate Japanese brand, we should tell more people about SKII scandal”.

P&G has announced that it will bring SK II back into China this month. It will be interesting to see how consumers react.

CMR analysts Ben Cavender and Allen Lee contributed to this article.