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Get Four
|  | JANUARY 28, 2005
By Robert Berner P&G: Razing Rivals with Gillette? The merger boosts P&G's heft with powerful retailers and helps to firm margins while other competitors struggle with pricing pressure For its 168-year history, Procter & Gamble (PG ) has largely been a consumer products giant that caters to women, selling brands such as Ivory soap, CoverGirl cosmetics, and Olay skin-care products. With the announcement today of P&G's $57 billion acquisition of Gillette (G ), P&G will become a powerhouse in male grooming products as well. In one fell swoop P&G takes control of Gillette's shaving razor business, the world's largest. In addition, it gets Gillette's Braun electric razor division and the Right Guard antiperspirant line, which is stronger among men than P&G's deodorant offerings. BUYING A STRONG BRAND. Cincinnatti-based P&G is already the world's largest consumer products concern, with sales of $51 billion in sales last fiscal year. The addition of Gillette, with $9 billion in sales, will strengthen P&G's hand in a consolidating retail industry where powerful vendors such as Wal-Mart (WMT ) are calling the shots. The deal "creates an enterprise that's unmatched in geographic reach and competitive positioning," Deutsche Bank analyst William Schmitz said in a report. Gillette shares surged $5.42, or 11.86%, to $51.11 around midday, while P&G's shares fell $1.56, or 2.8%, to $53.76. The deal marks P&G CEO Alan "A.G." Lafley's third major acquisition since he became CEO in 2000 and led a turnaround that has pummeled competitors from Kimberly Clark (KMB ) to Colgate-Palmolive (CL ) and Unilever (UN ). In that time, he has bought Clairol to push P&G into the bigger-margin hair-colorant business and Germany-based Wella AG to move into higher-end hair-care products (see BW, 2/7/05, "Welcome To Procter & Gadget"). But with his latest move, P&G is buying arguably the strongest consumer brand in the world -- Gillette's shaving business. PLUMPING MARGINS. Gillette now has an astounding 72% of the U.S. market for blades and razors. And it stands alone, with no strong No. 2 in the market, unlike with Coke (KO ) and Pepsi (PEP ). In the first three quarters of 2004, sales at Gillette's blade and razor business jumped 11%, to $3.24 billion, while the division's operating profits soared 13%, to $1.27 billion. That amounts to 44% of the company's total sales and 68% of operating profits, respectively. Compared to other consumer products outfits, Gillette, like P&G, has had unusual success in moving pricing up. The launch last year of Gillette's M3Power battery razor came with a price tag 50% higher than the previous model and now commands 35% of the U.S. razor market in terms of dollar sales. So the acquisition bolsters Lafley's strategy of moving into businesses with higher profit margins, such as beauty products and pharmaceuticals (see BW Online 1/28/05, "Lafley on P&G's Gadget "Evolution""). The deal helps counter the downward margin pressure it faces as it expands aggressively into markets in developing countries where it must launch lower-priced products to make inroads. And it provides new sources of sales growth as consumer product companies struggle against each other in overcrowded product categories that are growing about 3% a year. FORMER TALKS. It also puts P&G into the male product aisles in stores, a place where it has never really been. Arguably, its only true male brand was introduced last year when it launched Mr. Clean AutoDry, a car-cleaning system powered by a hose. Now P&G has the opportunity to extend some of the existing technology in its current brands into those of Gillette. For example, it could sell an Olay male skin-care line under a Gillette brand name. While P&G overall is No. 1 in deodorants, led by its Sure brand, Gillette has more male customers with Right Guard. The deal would also boosts P&G's Crest oral-care business, which has grown rapidly, helped by the acquisition in 2001 of SpinBrush, a low-price electric toothbrush. But Gillette has a bigger position in the electric brush market with its Oral-B line. "Gillette is very competitive, probably the best in the world right now in power brushes," Lafley said in a recent interview with BusinessWeek. This will clearly put more pressure on rival Colgate. P&G and Gillette have held talks before. Ironically, those talks helped lead to the ouster of former P&G CEO Durk Jager when it leaked out that the giant was looking at acquiring Gillette as well as two pharmaceutical outfits. At that time, P&G was more interested in Gillette's battery technology with its Duracell line of batteries. That's one of Gillette's weaker divisions, which could get eventually shed. This time around, P&G has taken the leap in the hopes that Gillette's acquisition will boost its position as the dominant consumer products player.  Berner is a correspondent in BusinessWeek's Chicago bureau
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