Strategic Report
Elizabeth Davis
Damyan Nikolov
Emily S. George
19 April 2004
The Gillette Company/ 2
PAC Consulting, LLP
Background 3
Financial Analysis 6
Porter’s Five-Forces Analysis 12
Evaluation of A Key Issue 17
Conclusions 20
The Gillette Company/ 3
PAC Consulting, LLP
Background
History
The Gillette Company, incorporated in 1917, manufactures and sells various consumer products
worldwide. The Company has five principal business segments: Blades and Razors, Duracell, Oral Care,
Braun and Personal Care. It is the world’s number-one maker of shaving supplies as well as batteries. In
2000, the Company sold its stationery products business to Newell Rubbermaid and its hair care lines to
Diamond Products. The Company's products are sold in over 200 countries and territories. The
majority of its sales, 60%, are made outside of the United States and it has production facilities in 15
countries. Gillette’s largest customer, Wal-Mart Stores, Inc., and its affiliates, accounted for 13% of
sales in 2003.
The company was begun in 1901 by King Gillette and William Nickerson. The two men sold their
safety razors beginning in 1903. By 1905, their first overseas operation in London was established, after
selling over 90,000 razor units in 1904. The company launched its self-shaving system by selling shaving
kits to the US military during WWI. It continued their efforts to capture the market by distributing free
razors through banks and boxes of Wrigley’s gum, thus winning millions of new customers. At the
same time foreign expansion was continuing and by 1923 accounted for 30% of sales. The company
began to diversify in 1948 with the purchase of Toni, which developed into the Personal Care Division.
During the 1960s and 1970s the company acquired Right Guard deodorant, and Braun. 1984 brought
Oral-B and the company thus branched into dental care. In 2004, Gillette bought Rembrant Tooth
Whitening in order to bolster the Oral B products line.
Products
Blades and Razors
The Company’s main staple and what it is best known for are its blades and razors. Gillette sells male
shaving systems under the Mach3Turbo, Mach3, SensorExcel, Sensor, Atra and Trac II brands, and
disposable razors under the Custom Plus and Good News brands. On November 7, 2002, the Company
introduced the Sensor3 premium disposable razor for men and women, its newest triple-blade product,
which was available to consumers in North America beginning in Spring 2003. Gillette's female shaving
systems are sold under the Gillette for Women Venus, SensorExcel for Women and Sensor for Women
brands, and disposable razors are sold under the Agility and Daisy brands. The Gillette Company's
major competitors worldwide in blades and razors include Energizer Holdings, Inc. and Societe Bic S.A.
The Gillette Company/ 4
PAC Consulting, LLP
Duracell
Duracell is the number-one selling battery in the world. The Company's range of alkaline batteries
includes the Duracell CopperTop and the newly-introduced Duracell Ultra alkaline batteries and
Duracell primary lithium, zinc air and rechargeable nickel-metal hydride batteries. Duracell is in the
process of recovering from a flawed advertising strategy for the Ultra battery that failed to bring in
business due to consumer’s inability to significantly differentiate it from the typical Duracell alkaline
battery, thus inspiring it to begin the “Trusted Everywhere’ campaign as well as engage in severe price
cutting so as to enhance the Company’s competitiveness in the face of private label and value brands.
Oral Care
The Gillette Company offers manual toothbrushes under the Oral-B brand and power toothbrushes
under the Braun and Oral-B brands. Oral care is one of the company’s strongest consumer products as
it continually has double digit sales increases in both manual and power toothbrushes. The Company
just launched a new advertising campaign, “Brush Like a Dentist”, which is currently the highest-rated
campaign ever in the oral care business. Gillette made a recent purchase of Rembrant Tooth Whitening
to offer a toothpaste and teeth whitener in its oral care line.
Braun
The Company sells electric shavers under the Braun brand and hair epilators under the Silk-Epil brand.
It also sells small household and personal diagnostic appliances under the Braun brand. Braun has
recently undergone some serious changes to both strengthen operations as well as reduce costs. It has
reorganized and improved its use of capital and also removed slow-moving products from its line.
Finally, Braun introduced several mid-priced shavers that are droving double-digit market share gains.
Personal Care
The Company sells shaving preparations, after-shave products and deodorants and antiperspirants under
the Gillette Series, Satin Care, Right Guard, Soft & Dri and Dry Idea brands. The Personal Care
division is currently undergoing extensive research and development for the introduction of new
products and advertising campaigns in the coming year.
The Gillette Company/ 5
PAC Consulting, LLP
Functional Excellence
The Functional Excellence initiative is an essential part of the Company’s strategy for future success.
The goals of the initiative are to free up capital as well as to achieve the right organizational structure for
the firm. It is a tool that the Gillette is using to achieve best-in-class capabilities and performance. In
order to bring the company on par with its industry peers, the Functional Excellence initiative will drive
continual change and innovation.
The Functional Excellence initiative has changed the outlook of the Company. Due to stepped-up
marketing and the introduction of new brands, especially in the disposable razor market, Gillette has
made optimistic predictions about reversing their recent market share losses. Duracell, which has been
lagging behind in earning due to high prices and some failed marketing and advertising campaigns, has
begun to rebound. Duracell has begun a restaging of the brand through the “Trusted Everywhere” ad
campaign, which has been effective. In the Asian markets Duracell’s rebound is due mostly to the
acquisition of Nanfu, one of Chin’s leading battery companies. Since the acquisition, Duracell’s profit
has increased 62% over the preceding months. Duracell has also been engaging in price-cutting, with an
average cut of 30%, to be more competitive in the battery market amongst value lines and private labels.
This ‘price-deal realignment’ initiative has improved the operating profit and margin through changed
sourcing and manufacturing fronts.
Braun has also made significant gains in its market share in Europe as well as in Japan due to
significant increases in the popularity of the Acitvator and Flex XP2 electronic shavers. In the Middle
East, Africa and Asian markets, there has been strong growth in women’s hair epilator sales.
Despite the recent introduction of the Shick Quattro into the Razor and Blade market, the Mach 3
has had significant performance gains. The razor’s global share has increased by 3%, up to 28%. These
gains are occurring in all markets, with the Russian market growing at a significantly increased rate.
Traditionally most companies have experienced significant losses in Latin America, however Gillette
has managed to make impressive sales gains in that region. This growth was driven by double-digit
advertising spending. Many companies have been pulling out of the Latin American market; however,
Gillette has remained in the market there and has thus been able to capitalize on the lack of competition.
The growth in Latin America is in sync with the growth of Gillette’s foreign presence. 70% of Gillette’s
employees are located outside of the United States and foreign markets account for almost 30% of sales.
The Gillette Company/ 6
PAC Consulting, LLP
Financial Analysis
Past Year Stock Performance
Gillette’s stock price has continued to rise over the past year despite the entrance of many products
from competitors. Major climbs and falls in the price have occurred at times when the Company
released a new report, as occurred in May and November of 2003. Since the introduction of the Schick
Quattro razor, Gillette’s stock price has climbed, which is an indicator of its dominance over the razors
and blade industry. The success of other segments has also contributed to this rise in stock price.
REVENUE BREAKDOWN
($ millions) 2003 % of total 2002
% of total 2001
% of total
Blades & Razors $3,869 42% $3,435 41% $3,200 40% Duracell $2,015 22% $1,898 22% $1,953 24% Oral Care $1,327 14% $1,249 15% $1,149 14% Braun $1,177 13% $1,056 12% $981 12% Personal Care $864 9% $816 10% $801 10% $9,252 100% $8,453 100% $8,084 100%
2003 Revenue Breakdown
Blades & RazorsDuracellOral CareBraunPersonal Care
The Gillette Company/ 7
PAC Consulting, LLP
Each of Gillette’s operating segments had higher revenue in 2003 compared to 2002 and thus the
percentage contribution of each remained essentially constant. The blades and razors industry became more
competitive in 2003, due to the introduction of new low-priced entries. The Company was able, however,
to maintain market share and improve its posisition in the market with new product introductions, such as
the Mach3, as well as increased levels of advertising. Duracell’s battery business is involved in a very
competitive industry that is experiencing deflationary prices and a reduction in category value. Duracell
introduced a new price-realignment program which has been successful as the company has been able to
grow revenue and maintain market share. The Oral Care business’ growth has been driven by the
introduction of new products. Gillette’s acquisition of Rembrant Whitenting Systems should only help the
Oral Care business to continue to grow. Braun’s growth has been driven by their focus on the dry-shaving
market and the initiative to ensure that each product line will at a minimum return greater than its cost of
capital. The Personal Care segment has been growing through the introduction of new products
introductions and greater cost reductions.
2003 Company Overview
The Gillette Company achieved record earnings per share in 2003, driven by record net sales coupled with
lower costs and significant share repurchase activity. Net sales increased 9%, reflecting favorable
volume/mix and a 5% favorable exchange impact. Net sales growth was supported by a 28% increase in
advertising. New Blades and Razors products drove significant growth for both the category and the
Company, in spite of increased competition. Duracell delivered against the objectives of its North America
price-deal realignment program by reducing pricing and lowering trade and consumer spending. This
strategy, coupled with cost-reduction initiatives, resulted in a significant increase in profit, despite aggressive
deflationary pricing activity from price-value brands. Oral Care sales and market share increased, with the
higher share partially offset by lower pricing and unfavorable mix in an increasingly competitive
environment. Braun posted an increase in net sales that was significantly aided by exchange. However, profit
from operations was down year-on-year, reflecting unfavorable product mix and higher Euro-driven costs.
Personal Care had a solid year, increasing market share, sales, and profit from operations.
The Gillette Company/ 8
PAC Consulting, LLP
Income Statement
% of % of % of Net Net Net Years Ended December 31, 2003 Sales 2002 Sales 2001 Sales ----------------------------------------------------------------------------------------------------------------------------------------- (millions) Net sales $9,252 $8,453 $8,084 Gross profit $5,544 59.9 $4,942 58.5 $4,677 57.9 Advertising $ 827 8.9 $ 647 7.7 $ 576 7.1 Sales promotion $ 376 4.1 $ 319 3.8 $ 319 3.9 Other selling, general and administrative (SGexpense $2,338 25.3 $2,206 26.1 $2,112 26.1 Total SGAexpense $3,541 38.3 $3,172 37.5 $3,007 37.2 Profit from operations $2,003 21.7 $1,809 21.4 $1,498 18.5 Income from continuing operations $1,375 14.9 $1,209 14.3 $ 910 11.3 Net income $1,385 15.0 $1,216 14.4 $ 910 11.3 Net income per common share from continuing operations, diluted $ 1.34 $ 1.14 $ 0.86 Net income per common share, diluted $ 1.35 $ 1.15 $ 0.86
Operating Metrics Broken Down by Segment
Blades & Oral Personal Total Years Ended December 31 Razors Duracell Care Braun Care Company ----------------------------------------------------------------------------------------------------------------------------------------- (millions or percentages) Net sales, 2003 $3,869 $2,015 $1,327 $1,177 $864 $9,252 Net sales, 2002 $3,435 $1,898 $1,248 $1,056 $816 $8,453 % Incr/(Decr) vs. 2002 13 6 6 11 6 9 Impact of exchange 6 4 5 9 4 5 Impact of volume/mix 5 5 2 3 1 4 Impact of pricing 2 (3) (1) (1) 1 - Profit from operations (PFO) PFO, 2003 $1,426 $ 348 $ 218 $ 49 $ 73 $ 2,003 PFO, 2002 $1,299 $ 233 $ 222 $ 75 $ 51 $1,809 % Incr/(Decr) vs. 2002 10 49 (2) (35) 43 11 PFO as % of net sales, 2003 36.8 17.2 16.4 4.1 8.4 21.7 PFO as % of net sales, 2002 37.8 12.3 17.8 7.1 6.2 21.4
The Blades and Razors segment enjoyed 2003 net sales of $3.87 billion, an increase of 13% over the
preceding year. The sales growth was driven by the strength of Gillette’s premium and disposable
shaving products as well as the introduction of the Mach3 turbo series into international markets. The
most expensive blades remain the primary source of growth in the industry as the rate of consumer
The Gillette Company/ 9
PAC Consulting, LLP
trade-up is accelerating, driving the Company to expect continued demand growth for the premium
shaving systems in 2004.
Duracell’s sales of $2.02 billion were a 6% increase over 2002 numbers. This growth was driven by
‘pantry-loading’ in North America, due to the increased demand related to homeland security concerns,
blackouts, and hurricanes. The sales increase was partially offset by lower pricing through the price-deal
realignment initiative. Duracell discontinued its free-cell giveaway program and thus suffered a loss of
60% in free cell sales. Advertising spending increased by double digit percentage behind the ‘Trusted
Everywhere’ campaign, however the 50% retail price gap between Duracell and low price brands is
starting to erode Duracell’s market share, which is forcing the company to continually redefine its
marketing plans.
The Oral Care segment’s sales of $1.33 billion were 6% higher than 2002, due mainly to the success
of new products in manual and power categories, as well as an improved product mix. The acquisition
of Rembrandt Tooth Whitening System will help the Company to enter the toothpaste and whitening
markets and engage in further engage in cross-selling in this segment.
Braun’s sales in 2003 were up 11% from 2002, to $11.18 billion. This was due to gains in the electric
shaver markets as well as the household products market. The SARS epidemic led to a jump in the sales
of Thermoscan thermometers in the first half of the year. The company continues to make huge gains
in the European and Russian markets, which will continue to increase as the company inrroduces more
of their products into these markets.
Gillette’s personal care segment’s sales grew by 6% due to gains in their two core businesses, shave
preparations and deodorants. These gains are attributed to increased marketing investment and the
immediate success of new products. This encouraging news led Gillette to finalize its plans for the
shipping of several new products, including Gillette Complete Skin Care, and Right Guard Cool Spray.
Cash Flow
2003 2002 2001 Free GAAP Free GAAP Free GAAP Cash Cash Cash Cash Cash Cash Years ended December 31, Flow Flow Flow Flow Flow Flow ----------------------------------------------------------------------------------------------------------------------------------------- (millions) Net cash provided by operating activities $2,640 $ 2,640 $2,077 $ 2,077 $2,092 $2,092 Additions to property, plant and equipment (408) (405) (624) Disposals of property, plant and equipment 45 43 59 Free cash flow $2,277 $1,715 $1,527
The Gillette Company/ 10
PAC Consulting, LLP
Net cash used in investing activities $ (518) $ (362) $ (564) Net cash used in financing activities $(2,250) $(1,844) $ (735) Effect of exchange rate changes on cash 8 5 (1) Net cash provided (used) by discontinued operations - (22) 93 Increase (decrease) in cash and cash equivalents $ (120) $ (146) $ 885
Gillette’s cash-generating abilities continued to strengthen and grow during 2003. Cash provided by
operations remains the company’s primary source of funds to finance operations, capital expenditures,
share repurchases and dividends. Gillette analyzes its free cash flow as a measure of its liquidity, as well
as its ability to fund future growth in the Company and to provide a return to investors. The firm does
not account for it as a measure of the residual cash flow which is available for discretionary expenditures.
Market Capitalization Comparison
Market
Capitalization % Total
P&G 1,327,162,000 43.90%
Gillette 38,890,500 1.25%
Energizer 3,780,000 0.10%
Other 1,304,967,500 43.20%
Industry 3,019,800,000 100.00%
From this chart, Gillette would seem to be a small company; however, upon further examination,
one discovers that Proctor and Gamble competes in many more markets and industries than Gillette.
Thus, Gillette’s most direct formidable competitor is Energizer. The two companies compete head-to-
head for the number-one and -two spots in their shared industries, namely the razor and blade industry
(Gillette vs. Schick) and the battery industry (Duracell vs. Energizer). A comparison of the market
capitalization rates of these two companies reveals that Gillette has a market capitalization rate 10 times
larger than that of Energizer, demonstrating the Company’s influential position in the market.
FINANCIAL COMPARISON Gillette Energizer P&G
Valuation R/Os
PE (TTM) 28.3 10.45 24.85
Beta 0.25 NA -0.15
Price to Sales 4.22 1.51 2.82
The Gillette Company/ 11
PAC Consulting, LLP
Price to Book 17.29 4.44 7.8
Dividends
Payout Ratio (TTM) 36.14 0 39.47
Growth Rates
Sales (TTM) vs TTM 1 Yr. Ago 9.45 41.7 12.23
Sales - 5 Yr. Growth Rate 9.04 3.04 3.15
Capital Spending -5 Yr. Growth Rate -100 -6.62 -10.35
Financial Condition
Quick Ratio (MRQ) 0.57 0.7 0.6
Current Ratio (MRQ) 1.3 1.67 0.97
LT Debt to Equity (MRQ) 1.49 1.08 0.68
Total Debt to Equity (MRQ) 1.49 1.19 1.09
Interest Coverage (TTM) 32.2 9.7 15.9
Profitability Ratios
Gross Margin (TTM) 59.38% 42.93% 50.28%
Gross Margin - 5 Yr. Avg. 67.23 43.60% 46.29%
EBITDA Margin (TTM) 21.65 12.11 22.4
EBITDA - 5 Yr. Avg. 25.31 16.7 20.62
Operating Margin (TTM) 20.90% 10.85% 18.10%
Operating Margin - 5 Yr. Avg. 15.60% 11% 15.60%
Net Profit Margin (TTM) 15% 78.03% 12.00%
Net Profit Margin - 5 Yr. Avg. 12.30% 8% 9.79%
Management Effectiveness
Return On Assets (TTM) 13.91% 7.88% 10.80%
Return On Assets - 5 Yr. Avg. 10.59% 7.24% 10.99%
Return On Investment (TTM) 21.06% 11.30% 18.60%
Return On Investment - 5 Yr. Avg. 17.62% 10.14% 18.60%
Return On Equity (TTM) 64.50% 25.50% 34.17%
Return On Equity - 5 Yr. Avg. 45.62% 14.78% 34.14%
Overall, Gillette’s financial position reflects the mature nature of both the Company and the
industries in which it competes. Maturity is underscored by the large dividend payout. Also, Gillette’s
P/E ratio is below the market average due to the relatively large and mature market situation wherein
growth prospects are minimal. Gillette is a highly leveraged company as exemplified by the total debt to
equity ratio. The Company’s return on equity (ROE) is relatively high at first glance. However, it is
significantly higher than should be expected because of the number of impending lawsuits regarding the
Mach 3 and the Shick Quattro as well as the pension payments of the company. Despite litigation, the
The Gillette Company/ 12
PAC Consulting, LLP
Company is best viewed a stable, non-cyclical, and risk-averse firm, as reflected by its Beta coefficient
of .25.
Due to the changing climate of the overall marketplace with the growth of Wal-Mart and the
introduction of many new low-cost products, the Functional Excellence initiative will be more vital as
the Company is required to cut prices and generally streamline the Company so it is able to maintain its
historical place.
All told, though, the comparative financial analysis figures for Gillette do reveal that the Company is
presently in a strong position--in relation not only to its nearest competitor, but also to industry leader
Proctor and Gamble. Gillette has effectively positioned itself so as to be a formidable company that will
further challenge this consumer products giant as it expands. Gillette has the money to make it grow
and if its financial trends continue, it will be a very profitable company in the next few years.
Porter’s Five-Forces Analysis
Internal Rivalry
There are numerous companies which compete in the consumer products market, especially in the
industries where Gillette’s portfolio segments operate. Each of these respective markets is fairly mature,
which limits the amount of mobility within them. However, Gillette has managed to achieve a
dominant position in each segment over the years. The introduction of lower-cost private label
products in large quantities has begun to shift the industry and change the practices of the leading
companies.
The razor blade industry is the most mature of the markets in which Gillette competes and is the
market in which Gillette is the most well-known. They have a commanding market share of over 28%
in the market, with the closet competitor, Shick (a subsidiary of Energizer) holding the next highest
share with 21% of the market. Despite the introduction of new low-cost razors from private label
companies such as Wal-Mart and Costco, as well as the introduction of the Schick Quattro razor,
Gillette’s market share has increased by over three percent in the past three years. This indicates that
there is extreme customer loyalty as well as brand recognition within this market. This has led to
increased outlays for research and development and advertising by all companies to convince customers
to continue to try their new and better products.
The battery industry in which Gillette competes under the Duracell label is also a mature industry
that has been constantly changing and developing over time. Duracell is the major player in the market
with over 30% of the market share. Energizer is the other major player with almost an equal market
The Gillette Company/ 13
PAC Consulting, LLP
share. These companies have been the leading innovators and players in this market since the invention
of the battery. The introduction of the low-cost and private-label batteries has caused both companies
to spend more money on research and development as well as in advertising. Out of this new need
came the introduction of “Duracell Ultra.” The execution of the marketing and advertising plan for this
product failed, allowing Energizer to gain considerable ground from Gillette.
There are two different main uses for batteries, in hospitals and in our private homes. Hospitals
require their battery to be the best and longest-lasting battery and thus are less interested in the low-cost
rival batteries. They do not consider the price of low-cost batteries as these products lack public
widespread public respect and potential liability. The attitude of this hospital segment contrasts to that
of consumers, who will often make purchase decisions based solely on price.
Gillette also competes in the luxury personal care and household goods markets under the Oral B,
Braun and Right Guard names. These markets are not as mature as the battery or razor markets, but
they are very saturated due to the wide range of available products. Oral B makes a number of different
products in the dental care market including toothbrushes and toothpastes, both of which provide heavy
competition due to people’s changing and different preferences. Thus, the need for variety in the
market is high. As a consequence, the profit margin of many industry firms is low. Oral B has not
found a niche in the market, which has prohibited it from fully reaching it potential. Braun is in a
precarious position as each of its products faces a unique set of of competitors—many of which
specialize in this given product area.
Entry
The mature nature of most of the markets in which Gillette competes in makes it hard for new
companies to enter. In the recent past the only new entrants have been the private labels which are able
to offer low cost products. Due to the high cost of entry, other companies attempting to enter any of
the markets with any niche other than the low cost entrant have failed quickly as they were never able to
generate any cash flow or have enough sales so as to not be bankrupt by the end of their first year of
operation. This is in a large part due to the first mover advantage which is inherently beneficial in these
markets as a way to capture an audience and maintain their loyalty.
Gillette has always been the world leader in razor production since it began. Schick has a long
history of razor and blade production as well. Thus the market has a very high concentration ratio.
However, as exemplified by the Mach 3 and the Quattro, Gillette continues to have the first mover
advantage, as they did here coming out with a multiple razor bladed razors. The entrance of Schick into
this field did nothing but boost the market share of Gillette. The low cost razors are of a different
The Gillette Company/ 14
PAC Consulting, LLP
nature and Gillette does not invest heavily in their low cost razors due not only to the simplicity but also
to the notion that the people who do use disposable razors will continue to buy the same kind, and
going off name recognition they will remain the lead position.
The battery market has had a surprisingly large number of entrants in the recent years, however due
to the various characteristics of the market, such as the concentration ratio and the substantial costs
associated with operating in the market. This is due primarily to the entry of private labels into the
market which has the ability to attain the large capital outlays as well as access to easy distribution. The
companies who are not associated with private labels, such as Rayovac, have had a hard time remaining
in the market. The increase in the number of companies competing in the market has driven the price
of even the top end batteries down considerably. Duracell is struggling with this as they are being
undercut by many competitors, including their main competitor Energizer. The company has begun to
slash their prices, however to retain their position in the market the prices of their batteries will have to
fall along with those of the rest of the market which amounts to about 20-30%.
Oral Care, Braun and Personal Care all have easier entry into their markets that the razor or battery
markets due not only to lower costs, the variety of products offered but also due to the continual
development of the market due to new technology and innovation. Thus the first mover advantage is
the most important factor in attaining status in the markets. In this way, if a company is able to come
up with a new idea, they create their own sub market which they control and monopolize. They also
have the ability to bundle and or cross sell their products which can be very effective and create
significant barriers to entry for companies threatening to enter into a particular submarket.
Substitutes and Complements
There are many substitutes available in each of the markets in which Gillette competes in due not only
to their competitors but also the nature of the markets allows for many alternatives which provide the
same services. There are not many complements in the same ways depending on the specific object or
tool which is being discussed.
The razor blade industry grew out of the necessity for a man to be able to shave his face easily and
quickly. However, many substitutes and complements have developed. It is true that the classic barber
shop shave is the best substitute for a razor blade due mostly to the luxorious feeling which it gives.
Thus the main substitutes are the increases in quality of the razor blade, such as an upgrade from a Bic
to a Mach 3 razor. The only issue with these substitutes is that it is very possible to steal from your own
products market share. Electric razors provide the highest upgrade from non-electric razors, as they are
a faster and more efficient way of shaving, whether it be face or legs. The complements in the market
The Gillette Company/ 15
PAC Consulting, LLP
are shaving gel and after shave, which are deemed necessary in most cases. These products are
purchased essentially on a one to one basis with razors and are often marketed along with the razors of
the particular maker.
Batteries are very different in that they are purchased in order to make other gadgets work.
Currently there are no real substitutes for batteries, unless the long life battery is considered to be its
own product. The situation does allow for numerous complementary products, these being all of the
battery operated products on the market. The developments in technology are beginning to alter the
battery market as there are now solar powered gadgets and other products which are beginning to
reduce the role of batteries in society.
Oral Care, Braun and Personal Care are not essential good, thus they have substitutes in their
respective markets but not few complements. Low end private labels are the main competitive
substitutes for each of these markets, however high end products are also available. The range of
substitutes depends on the exact product, as well as does the existence of complementary goods.
Supplier Power
The key inputs are different for each of the different markets; however they are all based off the same
idea. Once a product is developed, Gillette produces it in one of their factories in India or China.
There is not much supplier power in these markets due to the current economic conditions in the third
world countries. The people in China and India are not concerned with the wages they are being paid so
much as that they are being paid any amount due in part to a lack of a union. There is no shortage of
workers either due to over population problems in the countries.
Buyer Power
With such a wide range of products offered, there are many different categories of buyers, including
general consumers, hospitals, the government, beauty salons, and schools. These groups can however
be divided up into two groups, professional and recreational users. General consumers have their own
group while the others are all in the professional group. This distinction is very important as the two
groups as each has very distinct needs and requirements which they look for when they are purchasing
their products. The general consumer is most concerned with price and thus exerts considerable
influence on the prices of products offered in the markets. Regardless of the quality of the product, if
there is another one at half the price, the consumer will buy the cheaper product. Consumers are brand
loyal as well. Once a person finds the brand and type of product he or she likes, he or she will continue
to buy that brand unless they can be convinced that another product is significantly better.
The Gillette Company/ 16
PAC Consulting, LLP
This loyalty is also common among warehouse retailers. When stores such as Walmart and Costco
find a certain brand of product is selling better than another, they purchase more and more of that
brand, eventually eliminating the others from their shelves, which in turn eliminates those brands from
competing in the markets. Brands are only able to enter onto the shelves of these stores by offering the
product for free or at significantly lower prices than the lowest price before. Consumers also talk by
word of mouth about products which indicate the importance of quality to them as well.
Although quality maybe important to consumers, it is not their primary concern like it for
professionals. Hospitals are not concerned with the price of a product as they are the most concerned
with how long the product will last and how well it works. If a battery is placed in a patient’s heart to
keep it beating, the doctors will use the battery that they believe will last the longest and have the least
chance of malfunctioning. This same logic applies to beauty supplies and teeth cleaning mechanisms
and brushes as these professionals again want to use the highest quality.
This puts the manufacturers in a difficulr position as they must produce the highest quality product
at the lowest price so as to please both sets of purchasers. The best bet a manufacturer can do given the
situation is to make a high quality product and through advertising as well as brand loyalty which has
developed over the years, entice consumers to buy the product. If hospitals start to use a certain kind of
battery, general consumers will begin to buy that battery because it is what the hospitals use and thus if
the hospital uses it, it must be good logic sets in. Out of this cycle arises an advertising strategy, as
happened with Duracell and their “Trusted Everywhere” ad campaign. Thus the buyers exhibit a
significant amount of power over the prices and marketing of the products.
Evaluation of A Key Issue
The Battery Problem
After an in depth analysis of Gillette, we have determined that the major problem in the company rests
with Duracell and the battery industry. Although this is considered a mature industry, it is constantly
changing due to changes in technology and the necessities of society. Currently Duracell, Gillette’s
battery entity, is revamping their marketing and advertising campaign; however we believe they need to
refocus their R&D energies if they want to continue their position as the industry leader.
The battery industry is currently divided into two sub-markets, primary and secondary. The primary
market consists of disposable batteries, which are used on an every day basis by consumers and
comprise over 90% of battery sales. The secondary market, which has been growing at a rapid pace, is
The Gillette Company/ 17
PAC Consulting, LLP
composed of the rechargeable batteries, which are becoming more important to society as technology
continues to develop in the communications and media fields.
Most of the battery industry is concentrated in the primary market which is generally considered to
be a mature market. It has developed into a market whose growth is driven by increases in replacement
sales. This is due to the availability of these batteries to the general public. Lead acid and alkaline are
the most common primary batteries currently. However, the recent availability of lithium to the general
public has begun to change this.
The secondary market, which is currently composed of nickel metal hydride, lithium polymer, and
lithium ion batteries, deals with areas considered juvenile industries which have and have the potential to
experience exponential growth. Now common place markets which are served by secondary batteries
are: portable computers, computer memory preservation, mobile telephone and portable video cameras.
In the near future the secondary battery market will begin to move into new markets which have high
potential for success, such as that for electric vehicles, utility load leveling and remote power storage.
In the past the secondary batteries have developed into primary battery sources. Lithium containing
and nickel hydrogen were a specialized niche 10 years ago and are now available to the general consumer
and are experiencing great success. Thus, today’s secondary batteries will develop into the primary
market as secondary battery makers are able to manage higher voltage systems as their flexibility in
shape, size and contour have proven to be of increased consumer interest.
The development of new products will allow for the improved performance of batteries as well as an
increase in their use in society as they will lead to new battery products which will begin to replace more
conventional resources such as the combustion engine and utility AC power. Many current products
that require batteries, such as laptops, cell phones and camcorders, have short life cycles, which require
battery market participants to closely monitor changes in the applications and consequently continually
modify their batteries.
Thus, the goal of battery designers is the development of portable accumulators that are able to
store large amounts electricity for long periods of time and allows for repeated charge and discharge
cycles as well as be inexpensive. It will become essential for battery producers to form long term
relationships with electronic companies to ensure the use of their batteries in the products.
Duracell is the market leader in the battery industry, and has historically concentrated its efforts on
products in the primary battery market. Due to early presence in the market, Duracell was able to attain
a market leader position in what developed into a two company market with Energizer. This position
provided Duracell with a comfortable cushion which led to a lack of innovation or investment in R&D
The Gillette Company/ 18
PAC Consulting, LLP
in the past. However, the past few years have brought major changes not only in the market but also in
the technology behind the product.
The rapid growth of Wal-Mart and Costco and the introduction of their low price brands have
turned the primary market for batteries into a search good market, with brand loyalty falling dramatically.
The low cost batteries are on average priced 50% lower than the comparable product offered by
Duracell. Duracell has managed to cut their prices by 20-30% on most of their products through the
Functional Excellence Initiative, and are relying on advertising and customer loyalty to help them
continue to be profitable and hold onto market share. The current primary market for batteries is fading
into extinction due to the recent growth in new technological fields which has necessitated the
development of long lasting rechargeable batteries. Due to its stable position in the battery industry
previously Duracell did not invest heavily into R&D in these arenas.
Thus, the Duracell is facing two large problems. The company is heavily invested in the general
consumer primary battery market, which not only is being phased out due to new technology, but has
developed into a search goods market, with new low priced products which are pricing Duracell out of
the market. The heavy investment in the primary market poses another problem for Duracell as they
have neglected the rapidly developing secondary battery market, which will, as lithium batteries have
recently done, become the major driver in the primary market. Without a change in strategy and refocus
of R&D money, the company is in jeopardy of losing its market leader position due to its inability to
change and develop with the changing technology of the era.
The battery industry is one that must keep evolving and changing as new products are introduced
into the market, which require specialized batteries. The past twenty years have seen very little change
in the both the uses of batteries as well as their chemical makeup. Thus, the industry grew into a mature
market with Duracell and Energizer both staking claims to over 30% of the market. Duracell fell behind
in R&D and investment in the development of a secondary battery component to its business. Recent
technological advances are pushing the current secondary market into the primary market, thus phasing
out the alkaline and lead batteries of the past.
The obvious solution for Duracell is to increase their investment in R&D to develop long lasting,
durable quality rechargeable batteries comprised of the more efficient and powerful nickel metal hydride,
lithium polymer and lithium ion compositions. By changing their R&D focus to develop this battery
technology, Duracell will be able to maintain if not increase their market share and thus leading position
in the battery industry.
Currently Duracell is in the process of revamping their marketing and advertising campaign, and are
pumping more money into the ‘Trusted Everywhere’ campaign.In the current market, the company is
The Gillette Company/ 19
PAC Consulting, LLP
not getting the benefit which justifies this new expense. Batteries have developed into a search good,
and Duracell is unable to compete on a price level with the new low cost brands, thus their customers
are brand loyal. These individuals do not need to be bought over with ads to make them purchase
Duracell batteries, and by running the ads the company faces a small chance, under 5%, of attracting
new customers who previously were purchasing low cost or Energizer brand products. Thus, if the
company were to cut advertising cost by 15%, they would be able to continue to have a successful
advertising campaign, just not to the current extent to which it is.
Duracell’s R&D focus has been on the development of their primary batteries, specifically the
alkaline and recently the lithium battery. The company has not focused its resources on the future of
the industry, which is currently what they must do in order to continue to be a major player in the
market. An increase in 15% for R&D would allow the company to further focus its efforts on the
development of new battery technologies as well as speed up the development and production process.
As the company owns most all of its production facilities, it will not be as difficult to convert their
current machines to accommodate the new product. If Duracell is able to do this in a timely and
efficient way, the Company, will be able to gain a first mover advantage in the new product markets.
Due to its capabilities and reputation in the market Duracell should be able to form contracts and
relationships with electronic producers such as Sony, Hitachi and Motorola, for exclusive rights to their
products. In this way Duracell will be able to grasp a large portion of the market as they will be the
industry leader in the production of the newest technologies.
The first mover advantage is extremely important in the battery industry as many companies develop
their product around specific battery capabilities. Thus, if Duracell is able to attain this position, even
for a brieft period, their batteries and technologies will become the bench mark from which electronic
devices are built around. This will become greatly advantageous as new products such as electric cars
become more prevalent in society.
Currently Enegizer, Duracell’s leading competitor in the battery industry is not focusing significant
R&D energies on the secondary market as they are focusing on the development of their Lithium 2
battery, which has recently been introduced into the market. This battery, although more powerful and
efficient than the alkaline or lead acid models, is not on the same level with the nickel metal hydride or
lithium polymer batteries. The lithium battery is also not able to be marketed in the rechargeable field,
which is where the future of the battery industry lies, as society becomes more dependent on portable
electronic devices, such as cell phones, lap tops and digital cameras. If Duracell is able to capitalize on
this opportunity, they will be able to essentially capture the entire market, which, when the secondary
market becomes the primary one, will give Duracell essentially complete market control.
The Gillette Company/ 20
PAC Consulting, LLP
Conclusions
As a company, Gillette is doing very well and is in a good situation for the future. All of its market
segments are growing in most categories. The firm is in a position of market dominance, which allows it
to invest more heavily in R&D in all industries as all are continually changing and developing. The
Company’s ability to introduce new products as well as extend the life of established products is going
to depend on the Company’s ability to identify changing consumer tastes and needs and to develop new
technologies, differentiate their products, and gain market acceptance of new products.
The battery industry is of specific concern for Gillette, as the industry is rapidly changing. Duracell
does not currently invest heavily in R&D, thus growth could be hurt by: technological or design
changes in portable electronic devices that use batteries as power sources; continued improvement in
the service life of primary batteries; improvements in recharable battery technology; or the development
of new battery technologies. However, if Duracell is able to invest more heavily in these changing
technologies, it will be able to obtain the first-mover advantage in the electoronic industry battery
supplier, which will givem them the reassurance of a dominant market position even in the face of the
low-cost batteries being sold by WalMart and Costco. Further, Duracell should not lose sight of the
hospital market segment that remains low to its trust-worthy quality level.
The Gillette Company/ 21
PAC Consulting, LLP
References
“2002 Annual Report and 2003 Proxy Statement.” The Gillette Company. Boston: 17 March 2003.
“Form 10-K” The Gillette Company. Boston: 1 March 2004.
Jakubik, Christopher. Personal Interview. 8 April 2004.
<www.hoovers.com>
<www.marketguide.yahoo.com.>