Gillette’s Energy Drain: The Acquisition of Duracell
Strategic Management 04-75-498 Fall 2009
In this case, we aim to show the analysis and reasons for Duracell abysmal performance after its acquisition by Gillette. Furthermore, we hope to show a new strategy that could initiate a turn-around for Duracell under Gillette.
5th November 2009
General Size-up
After a somewhat long period of stagnant performance in which their stock price has seen a decrease of 45 percent, as mentioned in the case, Gillette found themselves in need of some drastic changes in order to recover, and return to being the growing success that they have been in the past, prior to their acquisition of Duracell. Gillette had seen earnings growing at 17 percent annually for 6 years prior to 2000.In 2001,a year that totaled more than $9.2 billion dollars in revenue Gillette’s Mach3 and the woman’s Sensor razors were the top two shaving systems in the United States. In an attempt to grow further and dramatically boost revenues Gillette aimed at acquiring another industry giant Duracell. Many expected that through shared distribution channels and marketing efforts the two companies would resourcefully complement one another substantially. To the surprise of many, although being successful on their own, these two companies found it difficult to develop the synergies that they had anticipated, and since have been experiencing increasing financial turmoil in terms of decreasing revenues and operating margins. Given these circumstances, Gillette’s CEO James Kilt has been given two weeks to come up with a strategy and implementation that will rectify the solution .Options including continuing with the status quo, divesting or restructuring the battery department completely.
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Issues
Since the acquisition, Duracell has not shown the potential that it had prior to 1996. Although Duracell has been maintaining market share, their revenues and operating margin are no longer growing, and in fact in 2000 had showed loses compared to years prior. Gillette now has to consider what actions need to be taken in regards to Duracell and their performance. Why has Duracell transformed from being a growing player in its industry, into a drain on Gillette’s growth? Why have Duracell’s profits been decreasing even though they are maintaining the highest market share compared to their competitors? But most importantly, what actions may be taken to return Gillette to its growing potential prior to 1996? Since 1996 Gillette has experienced increasing debts as well as decreasing income and shareholders equity. How can Gillette reverse this trend and bring their debt back to a more manageable state? Also how can Gillette turn around its dwindling stock prices and improve their income and shareholders equity?
There were a number of bad moves on Gillette’s part. Firstly, it generated a new product and attempted coexistence with their older products which created cannibalization and reduced overall sales. It realized that its competitors, such as Rayovac, would replace the older product whenever it introduced a new product. This was a good strategy, as it helped with their sales and avoided cannibalization. Also, another bad move on Gillette’s part was to spend approximately $350 million on advertising on a product that was considered to be an impulse purchase. This was considered as money down the drain which hurt their revenues very much. Looking at Rayovac, another Duracell competitor, about $55 million was spent on its ad campaign which increased its sales by 16 percent and captured 2 percent of the overall market share. This is a great strategy that Gillette could follow. Furthermore, anytime Rayovac introduced a new product, it was below the price of their previous products or at par with their competitors’ prices if not better. They also spent very little on their ad campaigns, and were very creative with them; for instance, during the “Duracell Challenge” campaign they challenged consumers to find which battery would be more suitable for their purposes and if they were unhappy with the new Rayovac product, they would refund their money. Lastly, Gillette fired approximately 200 employees in order to save $200 million. This was not needed as there was an increase in its income in 1999.
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Internal Analysis
Gillette is a manufacturer and supplier of shaving supplies and personal care products. The company is a market leader in its core business comprised of shaving supplies and the battery industry, but as stated in the case, consumers are becoming reluctant to pay premium prices for their battery products, and have begun shopping by price. As a result, this has been adding constant pressure on the company’s earnings.
Duracell is also a major player in the alkaline battery segment. The majority of consumer batteries sold in the world comprise of AAs, which also contributes to approximately half of Duracell’s earnings. Since the acquisition, Duracell has been releasing new batteries as product line extensions thus, keeping older versions still in the market, a strategy actively practiced by the new parent company Gillette. Since Gillette has been introducing their new products as line extensions rather than a replacement cannibalization has begun to take place, and in turn has been diminishing Duracell’s sales.
SWOT ANALYSIS
Strengths
Strong brand equity
Gillette’s portfolio includes acquired brands such as Braun, Oral-B and Duracell. Because of the brand value of these companies, consumers would be more receptive to their products because of their past experiences and strong brand value.
Market leadership
The company’s products, being well-known and with a reputation for quality are also market leaders in their respective categories. Gillette held a 77.2 percent market share in the razor blade refill market and 52.4 percent market share in the disposable razor market. Duracell is the market leader in the highly competitive global alkaline battery industry, with a worldwide share of 39 percent. This allows the company to generate more revenues by leveraging its brand effectively. Furthermore, Duracell has strong relationships with vendors, which allows for its products to be placed at high traffic points and at impulse purchase areas. Because of this, a symbiotic relationship can be formed which now allows for a number of Gillette products to be placed at these locations as well.
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Well-diversified portfolio
Gillette has a well-diversified portfolio in terms of product and market diversification. The company though primarily engaged in the shaving supplies business, also derives about 60 percent of its revenues from other businesses such as batteries, oral care and personal care. Also, the United States are Gillette’s single largest market with a share of 37 percent within the industry. Also, sales from foreign operations account for the remaining part of revenues. Diversification of this nature helps the company avoid the risk of overdependence on any one source for its revenue stream. The majority of Duracell’s income comes from the sale of its AA batteries. Because of the widespread popularity of these batteries, and the company’s acquisition by Gillette, Duracell now has an alternate market opportunity. Furthermore, all battery powered equipment that was previously marketed and to be marketed in the future by Gillette will undoubtedly include sample Duracell batteries.
Weaknesses
Gillette does not have well diversified portfolio in terms of the income it receives from its segments. Gillette’s core business is still dependent upon its personal grooming segment as this segment accounts for more than 93 percent of its total operating margin ($ 1.42 billion in operating margin and $ 1.512 billion in profit from operations).
Similarly, the majority of Duracell’s profits were based upon the sales of its AA alkaline battery. Both companies have has a number of competitors in the market which offer similar products that are more appealing to price conscious consumers.
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Opportunities
Gillette has held a strong presence in the personal grooming products market in the United States. It’s Mach 3 and women’s Sensor razors were the top selling shaving systems during 2001. Because of this, it would be able to place its future products as the top sellers if it is able to replace the Mach 3 and the Sensor razors with a good marketing strategy. Furthermore, it would be able to introduce new products under its market leader products names as accessories and add-ons.
Because of Duracell’s strong vendor relationship, and its presence at impulse locations, it may be possible that Gillette products would also be placed at these locations which would increase product visibility. Furthermore, since some of their products are complementary, they could be bought in tandem. For example, after purchasing batteries, a person might see a replacement head unit for its Braun electric shaver, or a new head for his/her Oral-B battery powered toothbrush. This would increase sales of both sectors and contribute towards brand strength.
Because of the symbiotic relationship that some its products would have, this would increase the number of consumers loyal to the Duracell brand. For example, any new battery powered item release by Gillette could include sample Duracell Batteries. This would allow for consumers to use both products. Furthermore, these products would probably have some form of text stating that Duracell batteries are recommended over other batteries. This could be a great incentive for consumers to continue using Duracell batteries for Gillette products for two reasons; firstly they had used it before with positive results and secondly because they are recommended by the consumer electronics company.
Finally because of the large range of products that Gillette releases, from battery powered shavers, to electric toothbrushes, Duracell would be able to lower its dependence upon AA batteries as a major source of its income. If certain Gillette products were to include Duracell branded batteries, then Duracell would be able to decrease its dependency upon its AA battery segment. Together Gillette and Duracell could also create special battery packs that would not be available from its competitors. For example, a Braun electric rechargeable shaver would use a battery pack that is specially made for Braun, most likely by Duracell. When the battery pack reaches the end its usage life, the consumer would most likely have to purchase the special battery pack from Braun in order for his/her electric shaver to work again. This would increase Duracell’s independence from its AA battery segment as well as increase its market share.
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Threats
Gillette may have to increase its prices due to the losses it has incurred from the acquisition of Duracell. If there is an increase in Gillette product prices, it may be possible that this would adversely affect Duracell because of the potential loss that it would face from the consumers buying a Gillette competitor/imitator product and the loss of future Duracell sales. In addition, if Gillette’s sale of Duracell’s specific battery powered devices would lower as this would directly affect Duracell’s bottom line. This would be most apparent in consumer devices that use brand specific batteries, such as battery packs for Braun electric razors and Oral-B electric toothbrushes.
Lastly an increase in prices could deter new consumers from trying out Gillette and consequently Duracell products. This decreases the scope for future growth for both companies.
There are a number of companies that Duracell actively competes with in order to garner market share; these include Rayovac and Energizer. Rayovac has been able to increase its market share at faster rates than Duracell had. Additionally, there is a threat of new competitors entering the market all the time. These new private players, and store brands are able to compete with Duracell products due to having lower prices.
Furthermore, rival companies in any of Gillette’s segments could make business relationships with other battery manufacturers thereby taking away from both Duracell and Gillette’s market shares. This could also deter future consumers, as new consumers who were unwilling to purchase a branded item, instead opting for a cheaper imitation. If this imitation is of insufficient quality, then consumers might be deterred to even try branded items such as a Gillette/Braun shaver.
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Since value battery brands are also available on the market, consumers might use other generic batteries instead of Duracell batteries in the Gillette devices. This could decrease Duracell market share but could be a positive factor if consumers would like to upgrade towards Duracell if they were unhappy with an imitation product.
External Analysis
In today’s battery market most batteries that are used are dry cell batteries, which include the most familiar alkaline disposable battery, which in 2000 generated $2.6 billion in the United States domestic sales. The Duracell battery falls under the primary batteries.
Porter’s 5
In today’s battery market most batteries that are used are dry cell batteries, which include the most familiar alkaline disposable battery, which in 2000 generated $2.6 billion in the United States domestic sales. The Duracell battery falls under the primary batteries.
Duracell had two main competitors: Energizer and Rayovac as well as some electronic manufacturers who intensified to enter market. Energizer, Duracell and Rayovac combined revenue and operating margin totaled $4.8 billion and $832 million respectively in 1996. Duracell and Rayovac experienced increasing market shares growing by 4.3 percent and 22 percent respectively, unlike Energizer who experienced a drop by 18 percent in the periods between 1997 and 2000. Competitions between these firms are based on price and upgraded products. Since the industry is very standardized, Duracell has been attempting to obtain a competitive advantage through an economy of scale, but the presence of many competitors makes the rivalry very intense.
The threat of new entrants in this manufacturing industry is relatively high. Even though there are barriers such as high economies of scale, brand identity and patents, low switching costs and undifferentiated technology inputs make it easy to start-ups to emerge in the segment. Since some of the retailers are making their own private label brands, it can quite easy for a new entrant to begin a relationship with retailers to produce the batteries formally manufactured by other big players. Furthermore, considering the lack of brand loyalty and inconsistency battery purchases (impulse purchase, 75 percent) the battery market is open for new low cost providers.
Also, the power of buyers is high, consisting of retailers and wholesalers. The retailers’ stores possess the same quality batteries as wholesalers but are priced less because of the lack of differentiation, low switching costs and the high availability of the products within competitors retailing outlets.
Lastly, the power of suppliers is low, because the various inputs such as metal and the other chemicals are not custom-made and are easily accessible. Also, increased global and domestic competition diminishes suppliers’ power.
1997 was dynamic year for all firms involved. Energizer upgraded its AA and AAA batteries, Rayovac presented its new “Maximum” battery, and niche players such as Sony introduced Stamina line and Panasonic also updated their offerings. In 1998 Gillette made their first upgrade to the traditional Duracell battery line introducing the “Duracell Ultra” in AA and AAA sizes boasting 50 percent longer life in high drain devices. The new Ultra was introduced as a product line extension to the traditional “Copper Top” but at a 20 percent premium, which now were available in all sizes. Ultra was focused on the premium battery market and because of this the two brands were run simultaneously, a strategy actively practiced by Gillette within their respective markets. In doing so, Ultra doubled its market share by cannibalizing the original Copper Top market. In the third quarter of 1999, after publication of an independent Customer report, Duracell lost 17 percent of the market and possessed 6.9 percent market share with the Ultra and a 36.5 percent market share of other products unfortunately losing 17 percent of the market.
Financial Analysis
Gillette had originally acquired Duracell in September of 1996 for $7.3 billion in stock. Gillette’s earnings at this time had been growing at a rate of 17 percent annually for the six years prior to the acquisition. Before being acquired by Gillette, Duracell had been the leading producer of alkaline batteries in the United States. In the five years before acquisition Duracell was growing at a rate of 8 percent per year in revenues to a total of 46 percent over those five years. The company also increased operating margins by more than 75 percent. When Duracell was acquired by Gillette, the three main competitors were Duracell, Energizer and Rayovac, who totaled $4.8 billion in revenues within the same year as the acquisition. Duracell and Energizer increased their revenue from 1996 to 2000 by 1.3 percent but operating margins dropped more than 10 percent. Rayovac, on the other hand achieved growth in both revenue and operating margins. Instead of continuing with the growth they had previously been accustomed to achieving, Duracell began to decrease in operating margin, as sales were changing from drug stores and supermarkets to discount stores that were more inclined to take discount batteries. In May of 1997, Gillette announced restructuring plans at Duracell with an estimated charge of $283 million and anticipated layoffs of 1,700 jobs. These types of layoffs and restructuring lead to decreased assets and increased liabilities which decrease the value of the company (see exhibit 1).
In December 1999 an independent customer report produced data showing that cheaper battery brands have the same lasting power as the more costly ones. This report advised consumers to purchase by price and with studies showing batteries, 75 percent of the time an impulse buy, Duracell and Energizer suffered with their higher costs while Rayovac thrived (see exhibit 2).
Duracell and Gillette did not work together and missed out on the opportunities of making two products that combined the power of both, such as Oral B and Braun who combined their capabilities to create the Braun Oral-B 3D. Companies such as Sony and Panasonic instead worked towards telling consumers that their batteries work best in their products, which is another opportunity that Gillette missed as they could have incorporated Duracell batteries with Gillette products. Duracell continues to keep revenues high but growth operating margins are falling both in Duracell and Energizer, while Rayovac continues to grow (see exhibit 2).
With debts continuing to grow within Gillette they need to work more towards growing their production of lower priced batteries, cut their advertising and marketing and increase research and development.
Alternatives
In the midst of this financial turmoil, caused by a diseconomy of scale, as well as the apparent struggle between these two industries giants, Gillette is faced with the reality of having to make a move soon. In the worst case Gillette may divest their holdings in Duracell, and sell off the struggling industry leading battery giant. Since Duracell is not performing up to its strong reputation Gillette would be lucky to receive compensation higher than half of its net worth for the firm, making this option very undesirable. If Gillette keeps Duracell, it may have to contend with messy internal politics and misappropriation of resources.
Gillette may also continue with the status quo. The market share and revenues of Duracell are still increasing only at a much slower rate, and Gillette may choose that they are not really in that bad of position and let the market take its natural course. In doing so they would continue to operate with their existing marketing and production strategies with the products they have and are planning on introducing in the future. Unfortunately, if the market were to continue on its natural course consistent to its performance now, Gillette’s diminishing financial stability as well as its stock prices will continue to get worse which could ultimately result in bankruptcy protection.
Another option available to Gillette would be to restructure and refocus the battery department. In doing so Gillette would begin to produce low cost batteries and in addition focus less on marketing and more on research and development. At the end of this option, Gillette could divest of Duracell within the 2 to 5 year period for a profit if this is successful.
Recommendation and Implementation
Based on the information provided within the case, the recommendation for Gillette would be to cut back on the excessive marking strategies that are costing the company hundreds of millions of dollars and use the excess capital to reinvest back into the firm in terms of research and development. The emphasis on new research will be used to produce a better line of low value higher quality batteries effectively, efficiently and at a low cost of production. Since the release of the study in Consumer Report, individuals are beginning to purchase their batteries based on price therefore, having a battery available at a price point that is more attractive to the consumer will be a step in the right direction. The premium battery line that Duracell has produced may still be put to use by marketing these batteries to link them with other Gillette products. Rather than marketing these premium batteries for other companies’ high drain devices, Gillette may start an advertising campaign that pushes the performance benefits of using Duracell products in their electronic devices and vice versa. In hopes of attaining goals of increasing profits, operating margins and equity Gillette should be able to restructure their organization to adapt to these changes within a two to five year period, and in turn experience growth of 17 to 20 percent. Effectively doing so Gillette will be able to again exploit Duracell’s full potential as it were prior to 1996. By successfully implementing this option, it may leave Gillette in a very lucrative position. Gillette now has the option of divesting Duracell as a successful performer with increasing potential at a much higher price or continues to operate Duracell with the newly implemented strategy. Either way Gillette will now be in a significantly higher strategic and earning position, with the ability to grow successfully within both industries at a more substantial consistent rate.
Conclusion
The question asked in the case, will the board be willing to accept implicit acknowledgement, that the acquisition had been ill-advised? Here we would say they may not accept full blame for the situation, but partial blame for not implementing a strategy, that may better exploit the new products within their respective industry. If Gillette had done this they would have known that consumer’s do not consider batteries as a personal product, would in fact have different purchase patterns such as by price rather than functionality. If Gillette had made the attempt to learn this they would have positioned themselves in a much better position either by outsourcing, to find a more efficient way to produce batteries of equal or better quality than any other better brand and sold them at a competitive price. Therefore, ensuring maximum growth or at least at a more constant rate as result of constant sales.
