P&G makes Gillette merger work

feature2_120It is said that four out of five mergers do not work out and that the bigger the deal the more likely it is to fail. But Gillette’s $54bn (£27bn) sale to Procter & Gamble (P&G) in 2005 might just be the deal to disprove that theory.

It is the largest consumer products takeover to date and makes P&G the world’s biggest consumer goods company, with a combined annual revenue of over $63bn (£32bn), having added the Gillette, Duracell, Braun and Oral-B brands to its stable.

P&G chief executive AG Lafley’s task has been to combine the two apparently complementary businesses while taking advantage of their different strengths. P&G excels at innovation and marketing, while Gillette is strong on technology and speed to market.

This month the Oral-B Triumph SmartGuide launches a power toothbrush priced at an extraordinary £140 (MW last week). The product would seem to embody Lafley’s strategy of selling off underperforming brands and concentrating on beauty and health products that have higher margins and which are less likely to be imitated by retailers’ own-brands.

P&G’s first real triumph
P&G has already introduced the Gillette Fusion system razor, but that was developed by Gillette prior to the merger and then jointly launched. The Oral-B Triumph is the first major UK launch from a former Gillette company under P&G’s wing, and illustrates what is perhaps one of the main reasons behind P&G’s decision to buy Gillette.

One of the major attractions of Gillette was the opportunity to add a masculine dimension to P&G’s overwhelmingly female-biased portfolio. Women have historically accounted for about 80% of P&G’s customers, and the purchase of Gillette, a company that primarily serves men, gives both companies the opportunity to tap into each other’s areas of expertise.

P&G head of marketing for the UK and Ireland Roisin Donnelly says: “We have adopted a programme called Best of Both, which analyses what has made each company successful and looks for ways that these assets can be exploited. We at P&G have learned a lot very quickly about marketing to men and how that differs from marketing to women.”

The imminent launch of Pure Divine, a body wash for women under the Gillette brand, is likely to be the first of many such crossovers in the pipeline.

P&G’s focus on more valuable brands has led to it shedding a number of ailing lines. It has sold off Sunny Delight, Sure deodorant and several detergents, and there is speculation that Lafley will soon dispose of underperforming brands from the Gillette business. Growth at Duracell, in particular, has been disappointing.

The selling off of brands has led to more emphasis on personal care and beauty products with strong identities, such as Clairol, Wella, Olay and Pantene. These are continually developing and so are less threatened by own-label offerings.

Another key component in the merger is that the two companies have developed in different geographical areas. Gillette is strong in countries such as Brazil and in India, where P&G has always been outperformed by Unilever. P&G has excellent penetration and distribution in China, the Philippines and fast-growing Eastern European markets such as Russia and Poland.

Each company can “plug and play”, as Lafley puts it, into the others’ networks. This gives P&G an unrivalled ability to develop brands in emerging economies, where the scope for growth is enormous. Company forecasts predict that, by 2010, emerging economies will account for 30% of sales.

Going out in pairs
In established Western markets, one of the benefits of the deal is the ability to pair products in order to increase market share in specific areas and develop a significant presence with retailers. Chief executive of Commercial Advantage Consulting and former P&G employee Aidan Bocci explains: “In Europe, P&G’s Crest has never really succeeded, but the addition of Oral-B gives P&G the chance to lead the category and take it into its likely future – ‘premiumisation’. Consumers have more money to spend on premium products, hence it is a growing market sector, and this deal has placed P&G in a strong position to tap into it.”

For a merger on such a grand scale, staff losses have been relatively low, but recently three key Gillette executives, who had been brought in to head P&G businesses, departed. P&G does seem to have struggled to hold on to some of the top Gillette management and marketing talent. However, Donnelly says that in the UK, staff integration has gone very well and adds that there is no evidence of two separate cultures. The team that worked on the Oral-B launch is drawn from both companies and Donnelly says this is true across all categories.

In recent years, the P&G approach to innovation has undergone some radical changes. Previously, all inventions and new products were generated in house under highly secretive conditions. Since 2005, the doors to research and development have been thrown open to the outside world through a department called Connect and Develop.

The bigger challenge
Innovation done in such a mature company is undoubtedly hard, but finding new ways to market has challenges of its own for the world’s biggest advertiser.

The Gillette brand recently dropped David Beckham in favour of Tiger Woods, Thierry Henry and Roger Federer, three iconic sporting figures, each with their own attractions in emerging as well as established markets. Some have criticised the Gillette brand for lacking personality, yet it controls 75% of the male shaving market and its position as market leader looks unthreatened.

P&G marketers talk about the “Moment of Truth” for reaching consumers, and Donnelly says there are two key moments: one at the time of purchase and the other when the product is first used. The success of the latter depends on the product delivering, but the former is much more difficult to pin down. How do you get a message across at the strongest moment of need when there are now so many messages from so many different places jostling for consumers’ attention?

Donnelly says: “We spend a lot of time doing quantitive and qualitative research so that we understand our consumer better than any of our competitors. So we design better products and better marketing. It’s vital that we stand out, have a clear brand and an equity, and are communicating that.”

The deal has given both parties a number of significant advantages. Scale brings with it opportunities for cost cutting, and P&G predicts that the merger will create savings in manufacturing, distribution and marketing worth $1.2bn (£600m) by June 2008. But only time will tell if this union of seemingly very compatible partners is truly a match made in heaven.

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