NEW YORK — Procter & Gamble may be basking in the afterglow of its planned $57 billion purchase of The Gillette Co., but the hard part, industry observers say, will be making it work.
Judging by P&G’s track record with earlier acquisitions of Clairol and Wella, retailers and other market experts appear unconvinced that the Cincinnati-based consumer products giant can turn a razor blade manufacturer into a vibrant beauty brand. They cite P&G’s penchant for jettisoning the talent of the acquired company, consolidating marketing spending and its inability to develop new markets that it has acquired as its main hurdles for a successful merger.
In addition, some major drugstore and discount retailers are voicing fear of being strong-armed by the new union, which will boast $60 billion in sales. “This is just part of the ongoing back and forth shift of power,” said a discount store executive.
Whether P&G can absorb another acquisition is the question on many beauty executive’s lips, most notably since the consumer company has a penchant for shedding the experts in charge of the brands it acquires, along with overhead. This is a critical point since P&G has no expertise in the razors and blades category. Succeeding in this new territory won’t be easy, in the view of consultants.
Wendy Liebmann, president of WSL Strategic Retail, elaborated on P&G’s typical acquisitions strategy: “The company tends to want to bring its acquired brands in-house rather quickly,” rather than rely on the marketing expertise of the acquired executives. “It takes a long time to get your head around a new category,” added Liebmann. “With each acquisition, [P&G] senior management can’t continue to be totally devoted to the core categories.”
Consumer products analyst Bill Chappell of SunTrust Robinson Humphrey predicts P&G likely will leave Gillette’s razors and blades business as a stand-alone operation, and first bring its personal care brands in-house, namely the men’s grooming line Gillette Complete and Right Guard deodorants. “It would be a monumental mistake if P&G brought the razors and blades business in-house, because Gillette does such a good job marketing to men,” said Chappell, adding, “It’s questionable that P&G could actually improve on that part.”
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The deal, which a P&G spokeswoman said likely will take six to nine months to close, could cause P&G to take its eye off of its most precious asset: beauty. Over the past several years, P&G has been challenged in beauty by the formidable L’Oréal Paris, retailers said, as well as by up-and-comer Physicians Formula. One retail executive said his P&G beauty business has been down and that the company has done little to boost Clairol’s hair color business. “Maybe this [deal] is to take our minds off of the fact we aren’t seeing hair color growth yet,” he said.
Indeed, sales gains of Clairol products haven’t been realized since the 2002 acquisition brought P&G into the hair color arena. In fact, sales of Clairol’s hair color brands fell by 6.7 percent for the 12 months ended Dec. 24. to $318 million, according to Information Resources Inc., excluding Wal-Mart. And while P&G was busy integrating Clairol, L’Oréal was launching new products such as Couleur Experte, a $20 dual-process hair color kit that shattered the price barrier in the category. In the skin care aisle, L’Oréal broke new ground with a $25 microdermabrasion kit that is selling like beauty’s answer to the iPod.
As if to acknowledge its slow digestion of Clairol, P&G’s Rob Matteucci, former head of the Clairol business, left the company last year and hair color was added to the title of Marc Pritchard, who is now president of Global Cosmetics and Retail Hair Colorants. Pritchard is credited with turning around the Cover Girl and Max Factor brands.
Clairol also brought Patrice Louvet, former general manager of P&G’s Northwest Asia Hair Care division, on board, naming him general manager of North America Retail Hair Care Color.
Growth in the hair color category has been negative for at least the 12 months prior to Dec. 26. One drugstore buyer noted that P&G’s ambivalent handling of the Clairol brands might signal what it will do with Gillette’s brands.
“It’s too early to tell what the acquisition will bring, but with Clairol, it seems that P&G just added the brand to an existing salesperson’s bag of goods. Where once the salesperson was selling Pantene and Secret, they then started selling Nice ’n Easy and Herbal Essences, too. It doesn’t seem to have the specialty it once did,” the buyer said of the Clairol business, adding that he hopes that the same won’t be the case for Gillette’s technologically sophisticated product portfolio.
Others think the acquisition might dilute the Cover Girl and Max Factor businesses, perhaps even giving Revlon more time for revival.
“This can distract them,” said industry expert Allan Mottus. He added that a big part of the allure of Gillette for P&G is to expand its international business — another component that could remove the emphasis for the short term from beauty.
Mark Griffin, president and chief executive officer of Lewis Drugs Inc., a regional drugstore chain based in Sioux Falls, S.D., is among those thinking that the effort P&G must put into digesting the acquisition could give Revlon some wiggle room. “It gives Revlon a breather. No matter how you cut it, it isn’t easy to take on a $57 billion acquisition.”
The acquisition also could help L’Oréal flourish in mass beauty. “L’Oréal is kicking on all cylinders,” said Mottus. “Their new products, such as the glycolic peel, are hot and the company is going to learn so much from its freestanding stores.”
But the Gillette acquisition does offer P&G a real opportunity to immediately delve into the men’s beauty business. Gillette, far from a true beauty brand with shave, batteries and oral care accounting for much of its revenue, last year launched Complete Skincare, a six-item men’s line that includes a shave gel, an SPF 15 moisturizer and a cleansing bar. Men’s beauty is a category that P&G has only dabbled in with its Old Spice brand, even as the segment grew from a niche market into an estimated $175 million business, $45 million of which comprises face lotions and cleansers, P&G’s specialty. The balance comprises aftershave sales.
Even with Old Spice, P&G has been a relatively minor player in the thriving men’s arena. Compared with its competitors, P&G seems to have arrived at the party late. Since 2002, manufacturers such as Beiersdorf and Neutrogena have carved space on crowded mass retail shelves with product lines that defeminize the skin care experience and instead focus on true product benefit.
Beiersdorf’s Nivea set the standard for what men liked and wanted in their personal care regimen with Nivea For Men. No-nonsense products with masculine packaging sealed its potential. Most recently, the brand launched the mass market’s first men’s antiaging treatment, Nivea Revitalizing Lotion Q10, and last year expanded the brand with several face products, including Fresh Cooling Shaving Gel, Oil Control Face Wash and Oil Control Lotion.
Neutrogena also has built a solid men’s skin care business comprising face wash, shave gel, face scrub, face lotion and, most recently, a deodorant bar. Unilever, known in mass beauty for its hair care portfolio, designed an entire Suave shampoo and styling line for men, complete with 12 stockkeeping units. And L’Oréal, which has several men’s hair color sku’s, is rumored to be entering the blossoming men’s skin care category this spring.
Retailers also are starting to respond to the growing category. Rite Aid, for one, has doubled the amount of space it dedicates to men’s grooming, from four to eight feet. CVS last year signed an exclusive deal with King of Shaves’ XCD brand to sell its men’s skin care products.
Whether P&G can pull off supporting a men’s skin care brand remains to be seen, let alone whether the firm can nurture it into a relevant, competitive business. Already some analysts are saying Gillette Complete may fall by the wayside as “the opportunity for P&G is [in making] line extensions of the Gillette brand,” not necessarily retaining existing products.
But Gillette isn’t just a men’s company. Roy White, vice president of education for the General Merchandise Distributors Council, discussed its women’s business. “Just look at what they’ve done in women’s shave,” he said. Since it hit the market in 2001, Gillette’s Venus brand has amassed sales of $2 billion and continues to introduce new, higher-priced versions, such as the battery-power Venus Vibrance, due out this spring. And Gillette does have some beauty roots: The company once owned Germaine Monteil as well as Jafra, a direct beauty company.
What both companies have going for them — given their stature as category captains across several beauty and personal care areas — is their capacity to leverage reams of consumer research to help retailers build a more profitable, consumer-friendly assortment. And both have independently pushed retailers to adopt a “good, better, best” merchandising strategy to encourage consumers to trade up to more expensive products.
But will the consumer see a difference? Gary Crawford, director of nonfoods operations of United Supermarkets, believes consumers will see better products with higher levels of marketing expertise.
“Shrinking isn’t always a good thing for the industry,” said Crawford. “I don’t think P&G will take its eye off anything. I think they’ll add more lines as it sees fit and cut what needs to be cut.”
And, Mottus thinks, in an interesting twist, P&G might actually become more entrepreneurial when it comes to product development. “Procter has been oriented to going big; this may give them the chance to innovate.”
Added Griffin at Lewis: “P&G is creative and Gillette is known for manufacturing. Putting the two together is a coup. Consumers should benefit.”
The verdict is still out whether retailers will feel the pinch from the megadeal. On a conference call with investors last week, Alan G. Lafley, chairman and ceo of P&G, said with the addition of Gillette, P&G is projected to grow to a $75 billion company by the end of the decade. The deal has been approved by the board at both firms, but must still be given the green light by regulators and shareholders.
Retailers as mighty as Wal-Mart might not flinch at P&G’s beefed-up size, and may continue negotiating with the supplier as they normally do.
“Procter was a 400-pound gorilla before the acquisition,” said SunTrust’s Chappell. “Now, it’s a 410-pound gorilla. Either one can crush the competition.”
But deals of this magnitude generally hit regional retailers hard. “I think anytime you have fewer sources, it is a bigger challenge,” said Lewis’ Griffin.
Often, big vendors link with powerful retailers, leaving regional chains behind in new products and programs. However, Griffin said P&G has been attuned to regional needs and he expects that will continue.
However, retailers smaller than Wal-Mart will feel the impact of the deal, mainly since the acquisition means one less deep pocket to support lucrative retailer programs, such as trade shows. These venues can mean the loss of as much as $50,000 per show in support. But the real pain for retailers will come from the potential absence of Gillette’s promotional dollars, especially when it comes to in-store promotions and cooperative ad campaigns.
“There will certainly be less promotional opportunities,” said one industry consultant who works closely with retailers to build their beauty business.
He added, “Gillette was extremely aggressive in their spending. They would pony up increased funds to drive business, whereas P&G uses a standard percentage for their promotional budget. P&G always had a problem with Wal-Mart because [the retailer] was trying to drive prices down. But now P&G is a larger, broad-based player and is in all kinds of categories, such as shave and batteries,” the consultant continued, asserting that P&G’s bulk will now strengthen its influence because of its newly broadened base. This could have an impact on its negotiations with Wal-Mart.
“I think Wal-Mart has been insulated from this for a long time, but there will be less room for them to make demands,” the consultant said.
Other retailers have mixed feelings about the marriage of P&G and Gillette. On one hand, retail chain executives are happy about the prospects of product innovation under P&G’s tutelage combined with Gillette’s expertise in manufacturing. But many grumble about the ongoing consolidation in the manufacturing sector. With fewer vendors, retailers fear tougher price negotiations and a lack of creativity.
Some drugstore executives think the ongoing compression shifts the balance from retailers to manufacturers, making it harder to strike opportunistic deals. “They just had to counter Wal-Mart,” said one discount store source. Explaining the shifts of power, he continued, “First, manufacturers had more power, then point-of-sale scanning technology shifted it to retailers. Category management put it back in the vendors’ court and then Wal-Mart rewrote the rules.”
However, Wall Street seems unmoved by the deal’s possible effect on retailers.
“I haven’t really given much thought to it,” said Jack Russo of A.G. Edward & Sons. “CVS will still be dealing with much of the same thing,” such as the rising cost of prescriptions, not pricing issues from the P&G-Gillette deal.
Ulysses A. Yannas of Buckman, Buckman & Reid Inc. said the merger wouldn’t likely affect drugstores since they traditionally pay more — and charge more — for consumer goods than retailers such as Wal-Mart anyway.
He was unfazed, too, about the impact on Wal-Mart, explaining that P&G’s and Wal-Mart’s relationship is decades old. P&G’s second-largest U.S. office is practically across the street from the retailer in Bentonville, Ark.
“Wal-Mart buys 17 percent of P&G’s inventory and 15 percent of Gillette’s inventory. I doubt if P&G is interested in disturbing that relationship,” Yannas said.
— Faye Brookman, Andrea Nagel and Molly Prior