The P&G-Gillette Merger: A Dream Deal?

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Authors: Ruchi Chaturvedi N & Pradip Sinha,
Faculty Member, Associate Consultant
ICMR (IBS Center for Management Research).

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A Compulsion Rather Than a Choice

The consumer goods industry grew rapidly from the 1950s through the 1980s. However, after this period, the industry's growth slowed down. Slow sales growth, increasing cost of inputs, emergence of private labels, lower margins, difficult price negotiations, and the increasing diversity of channels, choices and consumer types posed new challenges for this $2 tn plus industry.

In recent years, major retailers had consolidated and manufacturers of consumer goods were facing pressure from them in pricing, delivery, and standardization conditions. Wal-Mart, the world's largest retailer, had expanded rapidly by adding 484 stores since 2000. By the end of 2004, it had 3,013 stores in the US. It accounted for about 8% of total retail sales in America, and its increasing presence in the rest of the world had put it in a position of strength. Over the years, it had built a reputation of passing costs on to suppliers. Wal-Mart's growing dominance had prompted competing retailers to merge. The emergence of the $11 bn combination of Kmart and Sears Roebuck as the third-largest retailer in the US market was driven by the need to gain purchasing clout over suppliers.

They had been negotiating lower prices after their merger announcement in November 2004. The main players who competed in the consumer goods industry were renowned names like P&G, Colgate-Palmolive, L'Oreal, Kimberly Clark and Masco in the Household and Personal Products category. Other players in this category included Gillette, Revlon, Henkel, and Reckitt-Benckiser. Bic. Nestle, Unilever, Pepsico, Conagra Foods and Sara Lee dominated the Food Consumer products segment. Johnson & Johnson was a big player in the Healthcare category. Most players had been gaining size with acquisitions in the recent past. Competition had made promotional offers a norm in the industry, and advertising and marketing costs had increased due to stiff competition.

A key development in the industry had been the successful emergence of private-label brands. Consumers didn't want to pay the highest possible price for goods just because of the brand name any more. In a recently conducted research, shoppers' willingness to buy branded goods had dropped by 12 percentage points, from 84% in 1997 to 72% in 2003. By 2009, this was expected to decline further to 66%. Consumer goods companies needed to handle this pressure from private labels, most of which were produced by big retailers.

Retailers and suppliers were increasingly making use of information technology to efficiently manage their operations. Wal-Mart had demanded that suppliers should fit their packaging with Radio Frequency Identification (RFID) chips to help track goods through the supply chain. As retailers continued to put pressure on manufacturers for lower prices and private labels mushroomed, product innovation became extremely important.

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