Transcript: Procter & Gamble CEO Bob McDonald at Brainstorm Green by Fortune Editors @FortuneMagazine April 30, 2013, 1:03 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Below is an unedited transcript: ANDY SERWER: Tony had some great shoes. Did you guys talk about those at all? Anyway, we want to turn to a really interesting part of the program, one of my favorites. Last year we initiated something called the Town Hall Session, where a CEO of a top Fortune 500 company comes out here, has the floor, and also answers your questions. We had Alan Mulally last year. This year I’m very pleased to welcome the CEO of the largest consumer products company in the world, Bob McDonald, the CEO of Procter & Gamble. He’ll be out here in one second. I just want to just tell you a little bit about him, in case you don’t know. He went to West Point. He loves process and efficiency. Joined the company in 1980, worked his way through the ranks. Had some big shoes to fill when he succeeded A.G. Lafley in 2009, which is a tough time to become a CEO of a big company. And he focuses on 40/20/10, 40 most profitable businesses, 20 largest innovations, and 10 most important developing markets. Some tough environmental factors for P&G, rising commodity prices and slower growth in some developed markets, but P&G has kind of been hitting on all cylinders lately, which may surprise people a little bit because Bob has come under some criticism in some quarters, and yet the stock has recently hit an all-time high. So, maybe he’ll get into that in a little bit. Anyway, so listen, he’s all yours, and you can ask him what it takes to keep P&G on top. So, please join me in welcoming P&G’s CEO Bob McDonald. Bob. (Applause.) BOB MCDONALD: Good afternoon. I thought I would talk first a little bit about our company and how we approach sustainability, and then look forward to taking your questions. The Procter & Gamble Company celebrated its 175th anniversary last year. Over those 175 years, we’ve worked against a singular purpose, and that is to improve the lives of the world’s consumers. We are about an $84 billion company. We operate in almost every country in the world. We have about 140 factories worldwide. And we have 25 brands that each have over a billion dollars in sales every year. With the purpose of touching and improving lives, you can’t help but care for the environment. We believe that taking care of the environment goes hand in hand with everything we do in improving lives. And that’s one of the reasons that we’ve been a company, a successful company, for 175 years is that we always care for the environment as we create new products and new operations. We have an environmental vision that’s very simple. There are four parts to it. We want to power our plants with 100 percent renewable energy. We just opened a new plant in China which is powered with 100 percent renewable energy. Second, we want to use 100 percent renewable materials in our products. Third, we want to have zero consumer waste go to landfills. And, last, we want to design products that are better for the environment. When we think about the environment, there are two aspects that we think about. One is the innovation required. And the second is the productivity required. Relative to the innovation, we spend over $2 billion a year on research and development. We have more Ph.D.s than most U.S. universities combined. We spend $450 million a year on consumer knowledge, which helps give us the insight to create those new products. I wanted to briefly introduce you to four new products, and talk about the environmental aspects of these products. The first is Tide Cold Water. You know Tide is the leading laundry detergent in the United States. It has about a 40 percent plus value share. We worked with our scientists and with suppliers to develop a version of Tide called Tide Cold Water that provides the same superior cleaning of Tide, but in cold water. And what we would like to do is get every household to turn down the temperature on their washing machine and wash in cold water. If we do that, that would result in 33 million megawatt hours or about 4 percent, 4 percent, of the U.S. energy usage, if we could get that done, just by those people who use liquid laundry detergent. The second product is one that’s near and dear to my heart. It’s called Downy single rinse. We developed and introduced it in the Philippines. I lived in the Philippines from 1991 to 1995. During the time I lived there, running water would run by our street, by the house on our street about a half-hour each day. As most of you know, water is very expensive in many parts of the world, and very scarce. So everyone would have a high horse power pump on their street in order to pump the water into a tank that they had on their property, because you could never guarantee that the water would run every evening. And oftentimes, if you were without water, you ended up bathing in a swimming pool. Filipinos love clean clothes, and they wash their clothes by hand. They tend to soap their clothes quite amply, and then it usually takes about four bucket loads of water in order to get the soap out of their clothes in the cleaning process. In developing Downy Single Rinse, we added some cationic surfactant to help sequester the suds and allow people to rinse with just one bucket of water. Because we’ve done that, we’ve been able to save 24 billion liters of water since this product was first introduced. And we basically sell the product by saying you get a little bit of softness, you get a little bit of freshness, and the product is free because of all the money you’re saving in water. A third is a recent innovation, it’s Tide Pods, it’s our most recent innovation in the laundry category. Right now, it looks like it will be about a half a billion dollar business by the time that we get to the end of our fiscal year in June. It’s about 7 percent of the laundry category. And this is a single use unit dose of product, just the right amount that you need to get your clothes clean, and it cleans equal to or better than six of the competitive products used simultaneously. It’s the most concentrated form of laundry detergent you can buy. And because of that concentration, it’s better for retailers because they need less shelf space. It’s better in transportation because trucks don’t have to haul as much water around the country. It’s better for consumers in how they need to store it. And we know that if we can continue to sell Tide Pods, and get the share of this product up, that we can reduce 20,000 truck trips per year, which is about a third of all the truck trips per year, which is about a third of all the truck trips for laundry detergent. So, this is better for the environment not only in the truck trips and the CO2 emissions, but also in providing less effluent into the environment. The last example is Pantene. Many of our products are sold in bottles, and this bottle was made with carbon that we harvested from plants rather than carbon that comes from petroleum. The only way you could tell that this bottle was made from plants is by carbon dating the plastic and the carbon in the plastic, and that’s one of the things that helps you tell that it’s a plant-based bottle rather than a petroleum-based bottle. Relative to productivity, we’re working very, very steadily to try to improve the productivity of our operations in order to improve the environment. A few weeks ago we announced that 45 of our manufacturing sites already have achieved a zero waste profile, meaning nothing leaves the plant and goes to the waste. Since we made that announcement two or three weeks ago, we’ve added three more. So, we now have 48 of our plants, and as I said one of our sustainability visions is to have nothing go to landfill. Now, already 96 percent of what enters our plants leaves our plants in the product. There is another 3 percent that we recycle. So, there’s 1 percent that we have to deal with where we have to create another use. And sometimes we take diaper scraps to make parking barriers. In Mexico we create roof tiles from some of our paper refuse. And so we find another value stream for that and by doing that, that actually saves us about $1 billion a year. So, we’re working very hard on all of our other plants to achieve the same savings and also the same no waste to the landfill profile. So, we think that this is everybody’s job. One of the things we’ve also done is we’ve created a supplier scorecard where we work with our suppliers very diligently to make sure that our suppliers are working against the same sustainability vision that we are. We’ve shared this with the industry, through something we call the consumer good forum, and we’re working very diligently with all of our suppliers to make sure they’re working against the same goals we are. So, innovation, productivity, these are things that we’re doing. Sustainability is part of our purpose. We don’t have a hope of touching and improving lives, and achieving our purpose if we don’t take care of the environment through sustainability at the same time. I think with that I’ll stop and I’d be happy to take any questions or comments that you have. If you would, please stand. We’ll bring you a microphone, and if you don’t mind saying your name, and we’ll get started. Please. QUESTION: Melissa Pasquale, I’m with Harvard Business School. BOB MCDONALD: Hi, Melissa. QUESTION: Hi. I think you guys have some great technology and great scientists. Have done some research at P&G PG , and I buy Tide Cold Water. And I hear about it at a lot of conferences and among sustainability circles. But, I was just wondering, are you marketing the sustainability benefits of products like this to the average consumer? I mean, I actually wash my hair with Pantene, and I had no idea about the bottles. I saw the Pods in the store last week and I thought, what’s that, and why would I buy it. So, I was wondering if you could talk a little bit about getting the message out to people who aren’t in this room. BOB MCDONALD: Yes, it’s a great question, Melissa. Great question. As you probably know, we are the world’s largest advertiser. We spend over $9, $10 billion a year on advertising. On any given day about 4.6 billion people in the world use our products. And we do want to get these messages to all of them. The challenge is doing exactly that. And in the case of Tide Cold Water, one of the things that we’ve tried to do is get utilities, for example, to put Tide Cold Water coupons, or Tide Cold Water awareness building mechanisms in their bills when they either send them out using the Internet, or send them out in mail. That’s one of the ways. In the case of Pantene, we had a whole digital effort that was online around the bottle. So, yes, we’re working hard to do that, but I admit, we have a lot of work to do, because we’ve got to reach 4.6 billion people to tell them about the environmental aspects of these products. Tide Pods is starting to catch on. Right now Tide Pods is about 7 percent of the laundry category. If you look at the dishwashing category I think it could be as big as 30 percent. And if it’s 30 percent, that would be huge for the environment, because it is the most concentrated form of detergent you can buy. And when you think about, if you’re buying that bottle of liquid laundry detergent, you’re buying a lot of water and this is all actives, which means it’s cleaning your clothes better. But, thanks for the comment, Melissa. More work to do. QUESTION: Hi, I’m Namrita Kapur of Environmental Defense Fund. Building on that last question, one of the challenges beyond creating the product is getting people to actually use the product in the right way. BOB MCDONALD: Yes, of course. QUESTION: So, I was hoping you’d talk a little bit more about that in terms of sort of the behavioral change piece of it and do you see a role in that at all? For example, if the default on machines was cold water that would probably go a long way towards the type of change you want to see. BOB MCDONALD: Absolutely, and that’s a great point. And I didn’t mention it when Melissa asked her question. But, we have partnerships with all the machine manufacturers and we’re actually working with them to put a Tide Cold Water button on the machine, of course a Tide Cold Water button on the machine. But, those are the kinds of things that we do. And we have, without divulging upcoming innovations we have several innovations like this where partnering with the appliance manufacturer becomes critical to changing the behavior. But, behavior change is very difficult. Remember, earlier I said, we spend $450 million a year understanding consumer behavior. Changing consumer behavior is very difficult. When I was working in Canada in 1989, I came up with what I thought was a great idea called Enviropacks. Enviropacks were taking all of our liquids that were being marketed in bottles and putting them in plastic film, in order to save the weight of the bottle, 20 percent of the waste. And I talked to a lot of consumers in Canada at the time and they told me they would buy these. They told me they would go ahead and refill the bottle they already had, which means they wouldn’t have to buy a bottle. And then we introduced them. We had a big opening event at the Sky Dome, which is now called the Roger’s Center, I think. We showed all the bottles that wouldn’t go to landfills. And unfortunately the idea didn’t work. We lost some money on it. We had to withdraw it from the marketplace. And what I discovered was is when I’m talking to consumers in a focus group they’ll say what is expected by the people around them. But, then when they get home and they have to actually do the behavior, it’s very difficult to get them to change. So, we worked very, very hard to try to figure out, what is that impetus that can get the person to change. What we know from our work is, 85 percent of consumers will not accept a tradeoff for the environment. And so what we’ve got to do is create products and services that do not involve tradeoffs. Tide Cold Water does not involve a tradeoff. You still get superior Tide cleaning. Tide Pods does not involve a tradeoff. You still get superior Tide cleaning. Thank you. QUESTION: Hi, my name is Leah Seligmann. I’m with NRG Energy. And thank you so much for your comments today. They’re fantastic. One of the things that we come up against at NRG is this idea that people think that renewable energy is something out in the future, that you can’t get affordable, reliable, renewable energy. And I’d love to hear what you guys have done in your plant in China and how you’ve overcome that to be able to really supply 24-7 renewable energy. BOB MCDONALD: Yes, well we worked with Bill McDonough. Is Bill in the room? I think Bill is here, right? Bill, do you want to talk about it? I think you were involved. You’re a rock star. BILL MCDONOUGH: I had the privilege of designing the factory in China and also arranging for the renewable power. It’s the first renewably powered plant in China. It’s 15 megawatts of renewable energy. And what Procter & Gamble did was tell the supply chain, which was the wind company, the grid, and the utilities that because we had a 15 megawatt load at the end of the line, we could act as the load leveler for the whole system. And they got the benefit of that, because they’d had trouble with load leveling and our factory was able to do that. So, we worked out a cost beneficial relationship and they have the first renewably powered factory in China. BOB MCDONALD: Thanks so much for your help, Bill. We have other plants around the world. We have wind turbines in our plant in The Netherlands, and other places. As I said, we’re looking for renewable energy to power all of our plants. And oftentimes we can’t do everything ourselves. We’re always looking for partners to help us. And obviously Bill was a big help in this plant in Taiqing. Thank you. Yes, please. QUESTION: Hi, Rob. I’m Craig Young. I’m also from Cincinnati, Ohio. BOB MCDONALD: Hi, Craig. QUESTION: Hi. You guys, along with other companies in Cincinnati have done a lot on the innovation side, along with your son, and really encouraging businesses, as well as encouraging all of the green stuff in Cincinnati, which is quite advanced. Can you comment on your involvement there and how you see that playing into this whole story. BOB MCDONALD: Sure. What Craig is talking about is some work that we’ve been doing as the Cincinnati business community around creating an innovation ecosystem in our community. I’m on the Cincinnati Business Council. I help chair the Innovation Committee. And what we did is we discovered that as we looked around the Cincinnati region we had a lot of universities that were developing great intellectual property. We had a lot of hospitals, like Children’s Hospital of Cincinnati, which is the third ranked children’s hospital in the world, developing a lot of intellectual property, Procter & Gamble developing a lot of intellectual property, GE Aircraft Engines the same thing. But, they weren’t connected. People were developing the intellectual property, but the property wasn’t being commercialized. So, as a business community we came together. We put together a fund of about ‑‑ well over $50 million that different businesses contributed to. We set up an office that we call Centrifuse, which is run by a Procter & Gamble executive on loan, a fellow named Jeff Weedman. And that fund is a fund of funds for entrepreneurs to come to Cincinnati and get venture capital. And then what we do is we attract these entrepreneurs to Cincinnati. Part of the agreement is that they live and work in Cincinnati. We help connect them with the venture capital. We help train them, coach them, do whatever else we need to do in order to help them make their business successful. And all the businesses in Cincinnati are connected to this. We’ve seen already a tremendous take. We’ve had people come from foreign countries and locate in our region. And we’re hoping by doing this that we can create an innovation ecosystem in Cincinnati that will benefit not only the Procter & Gamble company, but will benefit the businesses in the entire region. And so far so good, it’s working very well. Did I answer your question, Craig? QUESTION: The green component, maybe just include how that ties into the green environment? BOB MCDONALD: Well, some of these innovations and some of the intellectual property is green. But, also some of the mentoring we do with some of the startups that come to Cincinnati is teaching them about the science of sustainability. We tend to look ‑‑ we tend to be very science-based, and we tend to look at the entire lifecycle process. And then we train that so that what comes out the end is not only an innovation that could improve lives, but also is consistent with sustainability. This is the lifecycle assessment that we use. So if any of you are entrepreneurs and you’re looking for venture capital and a place to locate, please come see us in Cincinnati. We’d love to talk to you. Please. QUESTION: Hi, my name is Wendy Rosen. I’m with DuPont Industrial Biosciences. BOB MCDONALD: Hi, Wendy. QUESTION: Hi, nice to see you. BOB MCDONALD: Thank you for being such a good supplier to us. QUESTION: Thank you. I was just going to mention some of our technologies and products like the cold-water wash. So, happy to be part of that. BOB MCDONALD: Yes. QUESTION: My question is actually a lot more self-interested. I read a recent statistic that it takes about 550 years for disposable diapers to decompose. And as a mother of almost two-year-old twins, I think there’s probably a special place in hell for me. And I just was wondering about what kind of technology innovation are you bringing to that particular product? BOB MCDONALD: Yes. Obviously it’s a big issue for us. Recall our purpose, touching and improving lives. Why do we want mothers to use disposable diapers? The baby that sleeps through the night, which our diaper will allow a baby to sleep through the night, versus the baby that wears no diaper at all, which is the majority of the world’s babies, or the baby that wears a cloth diaper, which is a smaller percentage, tends to wake up every four hours when it urinates or defecates. We have clinical evidence, not surprisingly, that the baby that sleeps through the night develops better. So, we all want babies to sleep through the night. Now, having said that, we’ve got a responsibility to provide that benefit to improve that life while at the same time doing what we can for the environment. So, it was about a year and a half ago we introduced something called Air Felt Free, which allowed us to take 20 percent of the material out of the diaper. In fact, over the last decade we’ve taken 40 percent of the material out of the diaper. I mean the best way to take care of the environment is to reduce to begin with. And that’s what we’ve done. And we’re going to continue to do that. We’re going to continue to work to reduce the amount of material there, while still providing the benefit that helps improve the life. And we’re working hard to do that. At the same time, we’re working to develop programs to figure out what to do with the diaper waste when the diaper has been used, with whatever is left. We have a pilot program going in the Philippines where we’re working to figure out what to do with the diaper when it’s done, how we collect it. What we do with it. And we’re working hard on that. As I said earlier, we’ve used diaper scrap to make the blocks for parking lots, to stop cars, and we’re working on other ways to get value from that material. Thank you for your question. QUESTION: Thank you. My name is Yasu Thulreseris (ph) Danbridge College. There’s been a lot said about green jobs and the greening of jobs, and with the current national focus on job creation, and from your vantage point, do you see any particular area for which jobs will be created in the future other than those in science and engineering for which there will be a need for education? BOB MCDONALD: In my opinion, and maybe our company is a little bit different, but every one of our jobs is a green job. The way we look at sustainability as part of our purpose, it permeates the entire organization. So, if you join us in marketing, and let’s say you came from Harvard Business School, we would expect you to be trained or we will train you in how to market. Obviously, we have to do a better job on the use of Tide Cold Water. But that’s the idea. Every one of our scientists would be trained, and we would train them as well, to think about the sustainability of our products. When I do innovation reviews for each one of our categories, I’m looking for what are the sustainability aspects of every innovation we come up with. So, it permeates our entire operation. I think as I step back from it, one of the things I’ve seen over my 33-year career is originally we were largely chemical engineering, and I think today we’re more multi-disciplinary, chemical, mechanical, and biological or biology. I see more and more use of biology in what we do today than we did in the past. And I think there’s going to be an intersection between biology and chemistry that will end up resulting in tremendous innovations as we look at things like biomimicry and other things. QUESTION: Hi, Bob. John Needham with Fortune. BOB MCDONALD: Hi, John. QUESTION: Question for you about your consumer research, nobody does more of it than Procter & Gamble. And I think the statistic that you cited a few minutes ago, if I got it right, might be a little depressing to people in this room, if 85 percent of consumers don’t want to make a tradeoff for the environment. I’m wondering if in your research you’re seeing a change in that attitude over time, whether consumers are becoming more environmentally conscious, and whether young people are more environmentally conscious in their consuming decisions than older people are? BOB MCDONALD: Yes. I think both of your hypotheses are true, John. Younger people are more so than older people, and there is a change. But it’s not dramatic. And I think that’s good news in a way, because what it’s saying is that consumers are consumers. They’re interested in their self-interest. And what our job is is to come up with the solutions, to come up with the innovations that will solve these problems without causing a tradeoff. Oftentimes when people buy what are supposedly green products and they don’t clean, they then don’t buy any other green products. And that’s a bad thing. So, what we need to do, and it’s more challenging as Wendy said, is we need to create innovations that don’t involve tradeoffs. They still clean well, but they’re good for the environment, which is a little bit more of a marketing challenge because you not only have to advertise and market the cleanliness, or the superior cleaning, but also the environmental benefits. And that’s what I was being challenged on earlier. And that’s more difficult because it’s not part of the brand name. You know, if you buy a product that has “green” as part of the brand name, your assumption is that it’s going to be better for the environment. Not always is, but that’s the assumption. If it’s Tide Pods, you might not understand the environmental benefit. And that’s why we have to try to educate it. So, I tend to believe that innovation will solve our problems. I mean, I’m a big believer. Matt Ridley wrote a book called “The Rational Optimist.” I believe in that book. He talked about the fact that innovation has solved most of the world’s problems over time, and it was back in the 1800s, 1850s or so, that people in the UK thought they’d all die under a heap of horse manure because of all the horses they needed, and nobody expected the innovation of the automobile. So, I think innovation is really the answer, and what we need to do, those of us in industry, is make sure we’re constantly innovating these new products that will be better for the environment. That was very fast. You must have Nike sneakers on. QUESTION: Andrew Alessi (ph) with Credit Suisse. BOB MCDONALD: Hi, Andrew. QUESTION: Hi. I’m guessing that during your earnings calls you’ve probably never had a mainstream equity analyst ask you about your sustainability strategy, and how it differentiates P&G from your competitors. So, is that because your sustainability strategy isn’t material, or material enough in terms of the top issues affecting your sector, or is it that it’s material but mainstream equity analysts just don’t get it, so they don’t ask about it? If that’s the case, how can you really drive the conversation with the equity analysts? BOB MCDONALD: The good news is, I go out and talk to investors because I have open conversations with all investors. More and more of the kinds of investors we like, the long-term investors, the ones who are looking to buy and hold a company, and have their wealth grow with that company, we pay $6 billion a year in dividends. We buyback $6 billion a year of our stock. Our dividend yield is 3 percent. And over time we’ve grown. When I joined the company in 1980, our stock price was $2.32. Today I think we’re about $77-78. So, more and more investors are getting concerned about sustainability and its role in the company before they buy the stock. That’s the good news. I think the bad news side of it is you’ve got more people today trading stock in a short-term speculative way, and as you know sustainability is a long-term issue. So, I don’t think it’s a matter of us getting the word out. I mean, we put out a sustainability report every year. We talk about it wherever we go. We talk about our purpose. We talk about the role of sustainability. But for some shareholders that’s just not of interest, at least in the timeframe that they look at owning your stock. One group that I can tell you that its’ really of interest is on college campuses. I was at Harvard Business School recently, Butler University, other universities, wherever I go on college campuses one of the things people want to talk about is first the purpose of the company, because they want to work for a company that tries to make a difference in the world, and that’s important to them. And secondly, what’s the sustainability strategy of the company, and how does that fit into the purpose. So, I think that’s good news. Thank you very much for your time, and thank you for the great questions.