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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Why Gillette? Contd...

Together they would have even more resources to enable intensive collaborative supply chain initiatives in a more cost-effective way. The merger would also bring down the advertising and media costs owing to greater bargaining power. P&G had already been using its buying power to negotiate for the lowest prices. It had spent $5.5 bn on advertising in 2004more than any other company, according to Advertising Age magazine. Gillette had spent about $600 mn on marketing.

The two companies had representation on a global scale with their products being marketed around the world. Also, both companies were looking at developing markets. According to Lafley, Gillette would give exposure to P&G in emerging economies like India and Brazil, while P&G would distribute Gillette products in China. (Refer to Table II for comparison of geographic sales of P&G and Gillette). Analysts felt that P&G and Gillette could bring new products into the market more quickly, and learn from each other's strengths. However, according to marketing guru Al Ries, "a merger that broadens a company's product line just makes the company bigger without producing any marketing advantages".

Undoubtedly, the $57 bn deal will redefine the Fast Moving Consumer Goods (FMCG) industry. The deal will give P&G the strength to compete with the Netherlands-based Unilever, and will make it the world's largest consumer and household goods company by both market capitalization and revenue growth. Though company officials feel that the deal would give P&G high bargaining power with retailers like Wal-Mart, according to Nirmalya Kumar, Professor of Marketing, London Business School, the impact may not be very significant, as Wal-Mart does not negotiate prices with P&G as a whole, but separately for each product.

According to some business analysts, the deal will create an enterprise which will be unmatched in geographical reach and competition. It will give P&G the much needed boost to further strengthen its product categories where at present it has negligible presence. The deal will help P&G unite some of the world's leading and finest products under one roof and provide the company with an additional hold in the upcoming market of men's shaving products, an area where its biggest rival Unilever does not have a presence at all. According to a former UK-based Gillette employee, "The deal will help Gillette in improving its inventory days." Though Gillette has strong brands, it is operationally insufficient when seen from market standards. At present, Gillette operates at 120 days with the standard (CPL) of 80-90 days. The deal will help Gillette overcome this inefficiency.

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