Nicking Gillette

Gillette’s sing-song advertising theme ­ “The best a man can get” ­ may rank among the world’s great jingles, but the company’s position as a leading global conglomerate looks increasingly shaky.

It has been a grim few months for the shaving products manufacturer, which has axed thousands of jobs, issued a profits warning and lost its chairman and chief executive Al Zeien. The company’s portfolio includes Duracell batteries, Oral-B dental products, Parker pens, Waterman, Papermate pens and Braun electricals.

The tough times have coincided with the $1bn launch of the three-bladed disposable razor, the Mach 3, which has taken ten years to develop. It could take as many years again to recoup the outlay on the new development.

Now it is seeing worrying competition from the American Safety Razor Company, in the shape of an own-label product currently being sold through Asda supermarkets (MW June 10).

ASR has manufactured a rival triple blade, the Tri-Flex, which can be attached to the earlier Gillette Sensor and Sensor Excel products, though not to the Mach 3. The Tri-Flex also retails at a much cheaper price than the Mach 3 ­ £3.99 for four blades and a handle, compared with £4.99 for the equivalent Mach 3 package. Asda has trumpeted the launch, claiming it is matching the performance of the Mach 3 “at an affordable price.” A spokeswoman for the supermarket chain says: “Asda has always lobbied for luxury goods to be kept within the reach of the average shopper.”

This is a serious threat to Gillette, which is staking its future profitability on the success of the Mach 3, and hopes to reverse some of the problems afflicting it in developing markets and other sectors it operates in.

Last September Gillette was forced to cut 11 per cent of its workforce, shut down 14 factories, 12 warehouses and 30 offices, after announcing its worst quarterly results in eight years. During its first quarter this year it was forced to issue a profits warning, citing poor sales in Latin America and Russia as the source of its woes.

In January, its chairman and chief executive Al Zeien announced he was leaving the company after more than eight years at the top.

But the outlook for Gillette is also failing to inspire investors. Catherine Lewis, stock market analyst for personal care and cosmetics at Morgan Stanley Dean Witter in New York, says: “We expect second quarter profit trends to be much worse [than the first], with an operating profit decline of eight per cent-plus and a 12 per cent earnings per share decline, equivalent to $0.29 (17.5p) per share. In the first quarter, sales which were down four per cent and a growth in operating profit of three per cent were certainly not heroic.”

According to Lewis, Gillette has had trouble offsetting pockets of weakness in several core businesses and international markets, and as a result the good news on Mach 3 “has not bubbled to the top”.

The American giant’s troubles look even worse compared with its peers in the US, which are thriving in the bull market. “Gillette’s growth, compared with Standard & Poor’s 500 (an index of America’s top 500 companies), is expected to be about seven per cent, compared with 17 per cent for the rest of the index,” says Joseph Abbot, global equity strategist with research firm IBES.

Gillette’s woes seem all the more incongruous because, in business terms, it has ostensibly done all the right things. It invests heavily in research and development and advertising. The triple bladed Mach 3 was the result of ten years’ research and development, with a budget of $750m (£454.5m), and Gillette invested an ad spend of some $243m (£147.2m) in the Mach 3’s global launch through the BBDO network.

Big as the company is in the US, Gillette generates nearly two-thirds of its sales from overseas. This has led some observers to suggest that the fundamental culture of Gillette, rather than its marketing and business strategy, is part of the problem. Indeed, the secretive company has refused to comment on any of the points raised in this article.

“Zeien has been one of the archetypal chief executive officers of the world-is-flat school,” says one source. “The company is run on a command and control basis, and whatever Boston says should be done is done. The management takes little account of the fact that there may be local differences.” And because of the one-size-fits-all advertising approach of Gillette, there is, he says, little feeling of identification for the non-American consumer. This comes against a backdrop of increasing competition, especially in the toiletries market, where competitors such as Adidas, Coty and even Brylcreem have successfully managed to innovate.

Observers also point to the fact that while the company gives the impression of being innovative, spending heavily on research and development, there is little sign of real creativity.

“Look at a product such as King of Shaves shaving oil (manufactured by KMI, a company founded by entrepreneur Will King) which is perfect for the frequent traveller because it is compact. This was not Gillette innovating, it was someone else who nipped in and found a market by solving a problem. Really, [Gillette] doesn’t innovate, it follows,” says an industry source.

Some argue that historically the company has grown only through acquisition and not by developing its existing businesses ­ recent purchases include dental care products company Oral-B in 1984, Parker pens in 1993 and battery maker Duracell in 1996.

But not all analysts are so pessimistic about Gillette’s prospects. They regard recent troubles at Gillette as the unfortunate result of problems in foreign markets and play down the threat from competitors such as ASR.

Tony Vento, analyst with securities company Edward Jones, says: “The American Safety Razor Company has come out with razors in the past that have been manufactured to compete with Gillette products, but they have not been so good. No one has the same type of technology [as Gillette]. Gillette’s profit shortfalls have to do with problems in West Asia and Latin America. Just look at the company’s track record ­ it has never really been criticised for being a command and control company in the past. These are specific problems to do with the markets.”

Gillette is not alone in its difficulties. Procter & Gamble, the world’s largest consumer group, said last week that it was cutting 15,000 jobs worldwide at a cost of £1.2bn. It is an attempt by the company to restore sales growth and to revive a culture of innovation, which it has recently lost while opening up new international markets. P&G is also aiming to halve the time it takes to bring new products to market.

“Companies such as consumer product manufacturers P&G and Colgate have come under tough times since the Asian financial crisis. This has resulted in their having difficulty in generating profit. So it should not be a surprise if Gillette is suffering too,” says IBES’s Abbott.

Others claim that the Mach 3 is safe from competition simply because it is such a good product and consumers can really feel the difference. The new razor is said to have 36 new features and gives a closer shave. And with the sheer volume of advertising behind it, the Mach 3 brand is rapidly on the way to becoming one of the best known in the world of shaving.

The Berkshire Hathaway company, run by the so-called sage of Omaha Warren Buffett, which is famed for perennially sound investment decisions, still holds a nine per cent stake in Gillette. This alone is liable to reassure most analysts that the company’s long-term health is good.

But nagging doubts remain. If the ASR razor is able to make a serious dent in Mach 3’s sales, then Gillette and its shareholders may wonder why it spent ten years and $750m developing such a product. Like P&G, it will have to look again at how long it takes to bring a single new product to the market. And consumers and stakeholders such as Buffet may well wonder whether Gillette is still the best a man can get.

With additional reporting by Paul Edwards


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