Boy Meets Girl: Gillette and P&G Hook up Their Brands

The merger between Procter & Gamble and Gillette comes with the obvious chemistry of male and female product lines, but the two companies also share a culture of innovation and a history of cooperation, according to Wharton faculty and industry analysts.

In a deal valued at more than $55 billion that is expected to close this fall, P&G will add Gillette’s personal care men’s products and others to its own vast portfolio of goods ranging from cosmetics and Pampers to Folgers and Charmin bathroom tissue. The combined company will have annual sales of $60 billion and more than 200 brands. Of those 200, 21 currently have sales of more than $1 billion a year.

In the personal care category, P&G markets Olay, Tampax, Cover Girl, Max Factor and Crest — brands expected to dovetail nicely with Gillette’s razor and blades business, including the Mach3 and Venus brands, as well as its Braun personal care appliances, Oral B dental products, and Right Guard deodorant. Gillette also sells the Duracell brand of batteries.

According to Wharton marketing professor David Reibstein, the acquisition will give P&G the ability to fine-tune its super brands. “To some degree it brings P&G into categories where it hasn’t been,” he notes, but the main advantage is that the merger adds products in categories where the company has already been operating. “P&G is the master of having multiple brands all within the same product category.”

As an example, Reibstein points to detergents. In that category, P&G sells Tide, Gain, Dreft, Ivory Snow, Cheer and Downy, all of which are marketed as solutions to different laundry dilemmas at varying price points. “Each is positioned a little differently. Each is going after different targeted segments and is able to command a major presence in the category. It’s difficult to do this without cannibalization and without everybody going after the same segments.”

When the two companies are combined, he says, it will be even easier for managers to segment the market. “As it exists right now, some of the Gillette brands go after some of the same segments P&G has been targeting,” he says. But after the merger, “they will be able to position the brands more cleanly toward distinct segments.”

When Blades Aren’t Just Blades

Wharton marketing professor Stephen Hoch predicts that Gillette will become the best brand name in P&G’s stable. Gillette has a reputation for quality and has been able to innovate enough to prevent its products from becoming commodities, despite the fact that shaving and razors have been around for centuries, he says.

Even within Gillette a distinction exists between products like Duracell and the company’s shaving lines, he notes. “Duracell is a good brand name, but it’s not Gillette, and the reason it’s not Gillette is that batteries are batteries. Blades are apparently not blades, or at least not Gillette blades. Gillette blades are better quality. It’s not a commodity-oriented business. Frankly, people are a little less price-sensitive when they are running a knife over their face every day.”

Hoch says both companies have a long history of innovation. For example, P&G introduced Crest, the first toothpaste with fluoride, in 1955, and Gillette has recently added a system that includes lubricants in its shavers. “Both companies are focused on the consumer and continually trying to make improvements.”

Hoch also suggests that Gillette may be able to teach P&G about marketing products with a recurring revenue stream. Gillette sells razor handles; it keeps customers coming back to buy the blades that fit those handles. P&G has only two similar products — Swiffer, a mop handle with refillable heads, and the Pur water treatment system. “What’s interesting about razors and blades is that the lifetime value of the customer is critical because he buys over and over again,” Hoch says. “P&G will figure out how to put that basic marketing information and knowledge into other businesses where they can make sure they have a recurring revenue stream.”

The acquisition clearly shifts P&G in the direction of personal care, which may have more potential for strong margins than the many mature consumer segments where P&G operates, says Hoch. At one point in the early 1990s, P&G owned Duncan Hines, Hawaiian Punch, Crisco and Jif. In April it sold its Sunny Delight beverage business. Now its only food categories are Folgers and Millstone brand coffee and Pringles snacks. These days P&G is not so much about what you eat, “but about cleanliness and how you look.”

Dealing with Wal-Mart

Another consideration in the P&G/Gillette merger is Wal-Mart. P&G is already the world’s largest consumer products company, with sales of $51.4 billion last year. But the addition of Gillette, with estimated sales of $10.3 billion, gives it new clout with retailers, including the world’s largest, Wal-Mart, says William S. Cody, managing director of the Jay H. Baker Retailing Initiative. “On the retail side you never want your supplier to be bigger than you and vice versa. The merger gives P&G a larger critical mass — not only with Wal-Mart but any mass merchant.”

According to Cody, consolidation has been occurring across all retail sectors. In the mid- to late 1990s, grocery stores merged, followed later by drug stores. In January, articles in the media reported that Federated Department Stores Inc., of Cincinnati held preliminary merger talks with May Department Stores Co., of St. Louis. Federated operates Macy’s and Bloomingdale’s and May owns Filene’s, Lord & Taylor and other regional retailers. “On the retail side everything has gravitated to a top-two or top-three model,” says Cody. He points to the three dominant office supply stores — OfficeMax, Staples, and Office Depot — and the two large home-improvement chains, Lowe’s and Home Depot. When it comes to discounters, Wal-Mart dominates, followed by Target. The impact of a combined Sears and Kmart remains to be seen, he says, adding that apparel suppliers have consolidated to meet the negotiating power of merged department store chains.

Meanwhile, P&G’s new size will also give it additional power in negotiating advertising contracts, notes Cody. “P&G is already the world’s largest advertiser, so any scale it brings in with Gillette is not insignificant.” It will also be interesting to see if Gillette brands, which have been heavily promoted through coupons, adapt to P&G’s anti-coupon stance.

Hoch suggests that the potential for additional clout with Wal-Mart and advertisers may be overstated because P&G already has such a strong position in the industry. More than 15% of P&G’s sales last year and 10% of Gillette’s came through Wal-Mart stores. “I don’t think this is about clout. They already had clout over everybody else. I do think internationally there may be some pockets where that’s untrue. Clearly if Gillette is not doing well in a particular market, having the resources of P&G can only help.”

Growth Abroad

Because both companies are struggling with slow growth in the consumer products industry, international expansion is another driver of the merger. P&G has 106 plants in 41 countries and Gillette has 31 plants in 14 nations. J.P. Morgan estimates that the combined company will generate between $17 billion and $18 billion in sales, or about 20% of total revenue, from developing markets. “The primary strategic rationale for the deal is the opportunity to leverage exposure in emerging markets,” J.P. Morgan analyst John Faucher told The Wall Street Journal, adding that Gillette is strong in India and Brazil, while P&G has strength in Japan and China.

Faucher, like other analysts, questions the price. “While the deal clearly makes P&G bigger, we are not convinced that being larger is worth $55 billion,” he told The Journal. “We also do not view P&G’s track record on acquisitions as stellar, as it has had problems with much smaller acquisitions in the past, especially in driving top-line growth.”

The companies expect to reap $14 billion in cost savings. P&G says the merger will result in the loss of 6,000 jobs, or about 4% of the combined workforce of 140,000. “They paid a lot of money, and obviously they can do the numbers,” says Hoch. “I do think there are some cost savings and I think there might be a few synergies on the global front where P&G is better-established in some countries than Gillette.” The biggest beneficiary of the deal might be investor Warren Buffett, who owns 9% of Gillette. Buffett called the acquisition a “dream deal.”

Meanwhile, the P&G/Gillette merger could put additional pressure on other consumer products firms, such as Unilever, Nestle, Kimberly-Clark and Colgate-Palmolive, analysts predict. “P&G has abundantly shown over the last few years [that] when done right, a broad portfolio offers suppliers opportunities to leverage R&D and technology expertise, purchasing and pricing power, and new product development,” Prudential Equity Group analyst Constance Maneaty told The Journal.  “We think that if P&G believed there were benefits to being bigger and more powerful, the writing is on the wall for the rest of the industry.”

According to Reibstein, the merger runs somewhat counter to the recent trend in business strategy to emphasize internal growth over expansion through acquisition. “It’s interesting because we’re in an era now where there’s a push for us to get organic growth, and this is not in that direction,” he says. “This is the old way.”

Wharton professor of operations and information management Marshall Fisher points out that the two companies already have a history of cooperation. For example, both companies are among the leaders in developing radio frequency identification (RFID) systems to track inventory using tiny microchips that emit radio signals. The companies were also founders of the Auto-ID project, an early technology group focusing on development of RFID, at the Massachusetts Institute of Technology in 1999. In October, representatives of both companies demonstrated RFID at a conference staged by the EPCglobal Network, the non-profit successor to Auto-ID.

The two firms also have been active in promoting Efficient Consumer Response, a system that promotes forecasting between suppliers and retailers on the movement of goods through distribution systems. Fisher says the system is gaining popularity in Europe faster than in the United States. The level of cooperation between Gillette and Procter & Gamble is unusual for companies operating in the same industry, Fisher adds, noting that this cooperation could be because the two firms had very little direct competition — a dynamic that tends to spur bitter corporate rivalries.

Fisher recently was engaged to do research on retail operations for the two firms. Procter & Gamble and Gillette are interested in studying stock-outs, or lost sales that result when there is not enough of the right product on store shelves to meet consumer demand. Another concern is shoplifting, which can throw off computer inventory systems. If an item is no longer on the shelf but has not been recorded as a sale, the inventory program does not know to reorder the product, resulting in lost sales that could harm profit margins more than the initial theft.