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Is My Procrastination a Sign of Trouble for P&G?

By: Martin Tillier
Posted: 6/27/2013 10:01:00 AM
Referenced Stocks: PG

I am, like many who write, a procrastinator. Faced with a deadline, even the most mundane of tasks becomes urgent; those dishes must be put away now, those weeds in the lawn must be dealt with, I must send a thank you note to Aunt Martha for that hat (?) she knitted for me last Christmas. You probably remember the feeling from college. This morning, my regular stroll along procrastination passage took me to a place that I would imagine is looming large in the nightmares of Gillette brand managers at P&G (PG).  

It started as a musing on strange economic indicators. I once heard somewhere that consumer confidence and the general economic climate could be judged by changes in the relative sales of disposable versus cartridge razors. When things are tight, the theory goes, people start to view their $25 a pack cartridges as a luxury, and convince themselves that a $5 pack of disposables will do the same job. They then put up with the occasional cut and razor burn for a while, but the quality isn’t the same, so they switch back when the future doesn’t look so bleak. This makes sense to me as I have done exactly that at times.

While thinking along these lines, I remembered that I had intended to check out the website for a business that I had heard promoted on the radio, Dollar Shave Club. The marketing on the site was interesting. It was, shall we say, edgy, and seemed geared to the young male demographic. What intrigued me, however, was the site’s appeal to that vague feeling of being “had” that many men feel when it comes to razor buying.

Every couple of years, it seems, Gillette launches another new razor, adding more blades, an aloe strip or two and, yes, even a vibrating handle! Each new product has a different connection between the handle and the cartridge, and the old cartridges are phased out, forcing you to buy the (more expensive) newer version. I have long been aware that I am being taken for a sucker here. According to numbers given by an ex-Gillette employee in the UK, the mark up from production cost to retail on the cartridges is around 4,750%. I cannot swear as to the reliability of that, but it was overall margins in the 60% range that made Gillette an attractive purchase for P&G back in 2005.

That buyout has generally been adjudged a success, and Gillette has continued to increase market share in the razor and blade sectors, while still retaining a healthy margin. What Dollar Shave Club has done, however, is given an outlet to the consumer who has had enough. I am sure I am not alone in this. Aggressive marketing and national advertising are no longer exclusive to the big cartridge companies, and exploiting the underlying anger at being manipulated would seem to be a winning strategy. I should point out two things; I have no connection to or interest in Dollar Shave Club, financial or otherwise, and I have just signed up, so cannot vouch for the quality of the product or service.

My interest here is on the possible implications for P&G stock. The immediate effects should not be massive. Estimates of the value of the grooming sector to P&G vary between 14 and 17% of the stock price. A 10% migration to direct to consumer online buying for razors would therefore have a limited impact on P&G as a whole. What it may do, however, is popularize a different business model for toiletries and grooming products in general. Toothpaste, shampoo and deodorant are all following the same path, where each new tweak to the product is claimed to make previous versions obsolete…at a price.

Sooner or later, somebody was going to tap into the growing frustration at the marketing technique that PG has perfected, and/or the company was going to run out of gimmicks. It may be sooner rather than later. It is hard for many to envisage a large migration to online subscription for razor blades and other toiletries, but then it was hard for many to imagine people buying books online. The right product at the right time, combined with a big initial advertising and marketing budget, can seriously dent the market share and profitability of a company who has begun to take their customers for granted. The constant innovation marketing is getting old and the presence of a viable alternative leads me to conclude that PG’s acquisition of Gillette may turn out to be a double edged blade in the long run.