Two to Tango
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Authors
Authors: Pradip Sinha & Sadhu Ramakrishna
Associate Consultant, Research Associate,
ICMR (IBS Center for Management Research).
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Why only Gillette??????
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The main question lies in why is P&G interested in acquiring Gillette? Moreover, why did Gillette plan to sell off its business notwithstanding its power-packed performance in the global market? Acquisitions are not new for P&G. It has acquired quite a few firms earlier expanding its portfolio. But, his deal is unique and one of its kind in the history of both the firms. Acquisitions occur between companies which operate in similar product lines as in the case of HP-Compaq and Daimler-Chrysler. The earlier acquisitions made by P&G were of companies operating in similar product lines which were not profitable. But P&G and Gillette, two strong and competitive companies in their own segments, have come up with a rather unique and unusual combination. |
Figure 1: Company Comparison |
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P&G |
Gillette |
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Sales |
$51.4 bn |
30,000 |
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a Year Ending 2004; b 2004 estimates; c 2003, Source: P&G
A look at the past performances of both the giants and their share prices shows that while Gillette has been doing pretty well, P&G, inspite of profits in the last quarter, has seen its share price fluctuating. In the past, P&G acquired Clairol, a hair dye company for $5 bn and then Wella, a German beauty firm, for $6.9 bn to accelerate growth and improve its market share. These acquisitions helped P&G to maintain its leadership position in the women's personal care. The main question arises as to why it acquired Gillette, whose product portfolio differs with that of P&G? One reason seems to be the uncertainty in the market due to the shift in consumers' buying patterns. Consumers are no more brand conscious, they are going for local companies' products which are of good quality and come at reasonable prices.
The evolution of local players has made the market denser and maintaining a distinctive identity from the competition has become difficult even for big players like P&G. Moreover, according to Barbara Hulit of the Boston consulting group "the consumer goods industry is caught itself between too many bumpers. They are facing problems like slowing sales, rising costs and a decrease in pricing power". Further, according to Huilt's calculation, "the sales of the consumer goods companies included in the S&P 500 index, have grown at a compounded annual rate of a mere 4.7%; while their sales, general and administrative expenses have been growing by 5% a year". This may have prompted P&G's move: To think of a bold step to acquire Gillette.
Though P&G has been into the consumer products business for the past 160 years, and its products touches more than two billion times a day, there exists an insecure feeling for P&G because of strong competitor like Unilever and the recent market fluctuations. It possesses only a single product in the men's category in the form of an after shave, Old Spice. According to the international business consulting firm, Kline & Company, the US men's grooming market is worth $5.5 bn and is growing constantly. P&G's sales in this segment are less than $250 mn which is a meager 5% of the total business. The thought of ‘Why not tap this gigantic, growing market' would have definitely gone through Lafley's mind. Gillette's acquisition will add the much needed and missing products to P&G's category. It will have products for all demographics, starting from new born babies to young girls, to household women, and now to men too.
Analysts feel that by acquiring 100% stake in Gillette, P&G is on its way to create a new era in the shaving segment. However, Lafley terms the deal as just a friendly transaction to improve the business prospects of both the companies.