Procter & Gamble (
PG
) is slowly discovering that emerging economies are an entirely
different proposition than developed markets. Its shaving division,
which largely comprises sales from Gillette's shaving equipment, is
a perfect case in point. Despite dominating the western markets for
years, the company is finding it difficult to convince consumers to
move away from traditional shaving devices to disposable razors and
cartridges. Price is the main issue here but the obvious solution
(lower-tier products) means the company will have to move away from
its traditional range of high-end designs with which it has managed
to garner high market share and earn high margins from customers in
the developed world. Add to this the increasing cost of goods and
services in emerging economies and Gillette's entry into developing
markets begins to seem as much a risk as it does an
opportunity.
See our full analysis for Procter &
Gamble
When it comes to shaving, Gillette has been the go-to brand for
men across the western world. The company's range of razors and
cartridges command a near monopoly on shelves across the US and
Europe with market share of nearly 70% in most of the developed
countries where it operates. The closest competitor, Schick, seems
to have settled for second-best - the dynamics of the market have
remained largely unchanged over the past few decades.
Gillette's meteoric rise in the world of shaving devices is a
story of innovation. The company has routinely invested in
upgrading product design, consistently maintaining an edge over
competitors when it comes to attributes such as razor safety,
handling and - most importantly - the number of blades. Realizing
that design is perhaps the only
real differentiation among men's shaving devices, the
company can also be credited for doggedly protecting its design
patents. Apart from R&D, Gillette is also famous for its
extensive marketing - something it used quite effectively to move
people away from doubled-edged safety razors (in vogue until the
'60s) to the more convenient, disposable options popular
today.
The company's stranglehold over the shaving market has allowed
it to maintain a very strong pricing structure and consequently
overall margins. Its strategy has been pretty consistent. Gillette
offers its basic devices at relatively low prices, providing a low
entry point for a new customer, but really milking it when it comes
to cartridge refills. This has allowed it to operate at EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization)
margins close to 30-35%, something rarely seen for disposable
consumer products.
It was precisely the combination of strong market share and high
margins which attracted the attention of Proctor & Gamble in
2005, eventually leading to the acquisition of Gillette
later that year. A lot of things have happened since then, of
course. The slowdown in developed economies is one of them and the
rapid expansion in emerging economies is another.
But Gillette has generally found it difficult to penetrate
emerging economies with its traditional range of multi-blade
products such as Mach3 and Fusion. The reason here is chiefly
the high price point as well as general consumer inertia about
moving away from more traditional methods of shaving, including
double-edged safety razors.
In order to address these problems, Gillette turned to
innovation again. In 2010, it came out with Gillette Guard, which
marked a return to single-blade razors. This low-tier product,
directed exclusively at low-income level consumers in emerging
economies such as India, costs as little as 11 cents. Of
course, Gillette's strategy with this innovation was to
at least get consumers to move away from traditional shaving
methods. This strategy certainly seems to be boosting volume sales
- total turnover for Gillete in India, for example, increased at a
cumulative average growth rate (
CAGR
) of around 20% over 2008-2012.
Where this strategy seems to be seriously hurting the company,
however, is the bottom-line. Operating profit for Gillette India
has actually declined at a CAGR of 12% over 2008-12, despite the
rise in total sales. The emphasis on low-cost products is facing
further pressure from rising cost of raw materials. Raw material
expenses as a % of total revenes for Gillete India have increased
from around 38% in 2008 to nearly 47% in 2012.
With rising levels of income in countries like India, China and
Brazil, it can be expected that the demand for mid and upper-tier
products that Gillette sells in developed economies will pick up in
the near future. Until then, the only way for companies to really
gain a foothold in emerging economies is to gamble on their
low-tier products. We expect Gillette's margins to decline steadily
in the near future, dragging its margins for the shaving division
lower.
Top-line growth and a steady increase in market share in
emerging economies should however place the company in a strong
situation in the long term, especially when consumers in countries
like India are ready to start paying higher prices for consumer
goods. However, the company doesn't really face big-name
competitors in the segment thanks to its dominance in developed
markets. The long-term outlook remains quite positive for Gillette
despite near-term turbulence.
We currently have a Trefis price estimate of $70 for
Procter & Gamble
, which is around 5% above the market price.
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