P&G (PG) and Gillette

Gillette

P&G acquired Gillette in 2005 for $57 billion in stock.  The idea, as I understand it, was not only to acquire an attractive business in itself but also to use the Gillette brand name for PG to expand into men’s health and beauty products.  More or less, PG’s a big chunk of PG’s extensive women’s line would be repackaged, reformulated a bit if necessary, and sold under the Gillette label.

Unfortunately for PG, millennial men decided to stop shaving about ten years ago.  The big expansion of new Gillette product categories hasn’t happened.  And PG announced two months ago that it was slashing the price of its higher-end shaving products by up to 20%, effective late last month.

It’s this last that I want to write about today.

pricing

The Gillette situation reminds me of what happened with cigarette companies in the 1980s.  I’m no fan of tobacco firms, but what happened to them back then is instructive.

the iron law of microeconomics

The iron law of microeconomics: price is determined by the availability of substitutes.   But what counts as a substitute?  For a non-branded product, it’s anything that’s functionally equivalent and at the same, or lower, price.  The purpose of marketing to create a brand is, however, not only to reach more potential users.  It’s also to imbue the product with intangible attributes that hake it harder for competitors to offer something that counts as a substitute.

cigarettes

In the case of cigarettes, they’re addictive.  It should arguably be easy for firms with powerful marketing and distribution to continually raise prices in real terms.  And that’s what the tobacco companies did consistently–until the early 1980s.

By that time, despite all the advantages of Big Tobacco, it had raised prices so much that branding no longer offered protection.  Suddenly even no-name generics became acceptable substitutes.  This was a terrible strategic error, although one where there was little tangible evidence to serve as advance warning.  As it turns out, in my experience there never is.

The competitive response?  …cut prices for premium brands and launch their own generics.  There certainly have been additional legal and tax issues since, and because I won’t buy tobacco companies I don’t follow the industry closely.  Still, it seems to me that tobacco has yet to recover from its 30+ year ago pricing mistake.

razor blades

The same pattern.

Over the past few years, Gillette’s market share has fallen from 71% to 59%.  Upstart subscription services like the Dollar Shave Club (bought for $1 billion by Unilever nine months ago) and and its smaller clone Harry’s (which I use) have emerged.

Gillette has, I think, done the only things it can to repair the damage from creating a pricing umbrella under which competitors can prosper.  It is reducing prices.  It has already established its own mail order blade service.  On the other hand, Harry’s is now available in Target stores.   Unilever will likely use the Dollar Shave Club platform to distribute other grooming products.  So the potential damage is contained but not eliminated.  Competition may also spread.

The lesson from the story:  the cost of preventing competitors from entering a market is always far less than the expense of minimizing the damage once a rival has emerged.  That’s often only evident in hindsight.  Part of the problem is that once a competitor has spent money to create a toehold, it will act to protect the investment it has already made.  So its cost of exit becomes an additional barrier to its withdrawal from the market.

 

 

 

the Dollar Shave Club and Unilever

Unilever has made a $1 billion offer to buy the Dollar Shave Club, an online razor blade (and other grooming accessories) business started from scratch in 2011.

Media reaction to the deal is that this is a story about the power of the internet   …which it partly is.  The big traditional makers of razors and blades, Gillette and Schick, ignored the possibility of alternate distribution channels despite almost two decades of strong evidence of the “creative destruction” power of the internet.

But that’s not the whole story.  Two other, more traditional factors are involved:

–over the past ten years or more, razors and blades from Gillette and other manufacturers have become more complex and much more expensive.  “New and improved” (read: higher-priced) models have been introduced with greater frequency.  This has also been happening at a time when the overall market is stagnating as fewer men are shaving every day.  I can’t help believing that this behavior is at least in part as a way to justify the $54 billion Procter and Gamble paid to acquire Gillette in 2005.

No matter what the cause, however, the result has been to make the ground-level mistake of creating a pricing umbrella under which an online competitor–which, after all, will have higher unit production and distribution costs–could prosper.

–A fundamental rule of marketing is that self-cannibalization of a product market is always preferable to having an outsider grab market share from you.  Gillette et al. should have responded to the emergence of services like DSC by aggressively creating similar online products.  Yes, this may mean that total profits may end up being only 75% of what they once were.  And it means abandoning the illusion that the prior market structure will magically be restored.  But having the 75 for yourself is better than you having 50 and a new entrant having 25.

Pretended that this new competition doesn’t exist won’t make it go away.  Nevertheless, the sad fact is that the first strategy of the status quo is almost always denial.  In the short term, this protects bonuses and perks.  But allowing new competition to flourish is invariably a long-term disaster.

Amusingly, DSC investor David Pakman’s blog offers this strategy tidbit:

  • Choose categories where the CEOs of the incumbents are professional CEOs, not founders (thus are far less-likely to cannibalize existing businesses and adopt new business models).

That says it all.