In 1-2 punch, Gillette shaves costs, sprouts new lines
Gillette has been a major force in shaving products since Americans first attacked whiskers with doubled-edged blades at the start of the 20th century. During the 1960s and '70s, however, the company tried to buy into businesses that promised to grow faster than the market for chin scraping equipment -- concerns, for instance, that made wigs, plant food, and perfume. Unfortunately, Gillette's profits got nicked.
So for six years, Gillette's board chairman, Coleman M. Mockler Jr., has been honing Gillette's corporate strategy into what he calls ''a dual emphasis on both business expansion and cost control.'' Along the way, he dumped most of the ill-fated acquisitions, including a leather goods concern, Welcome Wagon Inc., and a chewing gum manufacturer in Italy, as well as the makers of wigs, plant food, and perfume.
Now analysts say Gillette is on the verge of completing a transformation into an operation that skillfully uses the funds flowing from blade and razor sales. As a result, Gillette's earnings should grow at a 15 to 20 percent rate in the next two years, Deepak D. Raj, a Merrill Lynch analyst, says.
The first step in the company's two-pronged strategy involves freeing up cash by boosting productivity, cutting costs, and shedding unpromising products. The push on efficiency has been so successful that although sales have risen 57 percent since 1976, the number of employees has fallen 8 percent in the same time period.
The money Mr. Mockler, a Harvard Business School graduate, raises by squeezing expenses and spinning off losing ventures is plowed into beefing up advertising budgets.
''Mockler has cut out a lot of bad acquisitions and product lines and redeployed assets,'' noted a Morgan Stanley & Co. analyst, Brenda L. Landry. ''He has a major cash cow in the razor and blade business. He is taking profits out of it and pouring them into other areas.''
The company's recent new product push has paid off, Mr. Raj at Merrill Lynch notes. He figures that products introduced since 1975 accounted for 42 percent of 1980 sales. Gillette's latest new business, announced April 15, is a plan to make blades and razors in the People's Republic of China with a joint-venture partner.
Old and new products get aggressive advertising and promotional support. Ad and promotional spending accounted for 16.5 percent of sales in 1981, up from 12 .8 percent in 1976. The bigger marketing budget was a major factor in boosting sales of toiletries -- such as Right Guard antiperspirant, Foamy shaving cream, and Silkience shampoo -- from 13 percent of profits in 1977 to 17 percent last year.
Still, Mr. Mockler, who earned $459,000 last year, has not kept Gillette from being buffeted by the economy. Compared with 1980, earnings in 1981 were flat, at $4.11 a share. And in the first quarter of 1982, earnings fell 19.5 percent, to $1.08 a share.
The recession and changes in foreign currency values were key culprits in cutting Gillette's recent results. In the first quarter of 1982, ''our (foreign) sales were translated into dollars at approximately 15 percent less value than last year,'' Mr. Mockler explains. Some 57 percent of Gillette's sales and 48 percent of its profits come from overseas.
Gillette treasurer Milton Glass notes that because of the recession, ''consumers are using up their bathroom closet inventory'' of Gillette products, while retailers are keeping less stock on their shelves.
With large shares in several key markets, Gillette is well positioned to rebound if reductions in individual federal tax rates boost retail spending in midyear. ''When the economy recovers, the company that has new products and has kept up its marketing push gets super-size (market) share gains,'' noted John B. Ottman, a Cyrus J. Lawrence Inc. analyst.
''Our worry is consumer confidence,'' says Morgan Stanley analyst Landry. ''Will (it) come back and stay?''
Even if consumers pick up their spending in the second half of 1982, Gillette will have to struggle for the extra spending with strong competitors including Bic Pen Company. Bic has just launched a $10 million ad campaign contending that tests with an electron microscope show its low-cost disposable razor offers performance equal to Gillette's higher cost Trac II system, which is not disposable. ''We don't think the claims are valid or correct and we are getting material to present to the networks to get the ads pulled,'' says chairman Mockler.
Disposable razors now account for about 25 percent of the shaving market, ''although the disposable market appears to be flattening out as a percent of total sales,'' says Merrill Lynch's Mr. Raj. And the Bic ad campaign is not expected to have a major effect on Gillette. ''I don't think Bic is a material threat to Gillette in blades and razors,'' said Mr. Ottman.
Bic also challenges Gillette's Paper Mate brand in writing instruments. But in that market ''Paper Mate has had major market share gains in the last several years,'' Ms. Landry noted.
Share gains in pens do not not always mean greater profits, however. In 1981 Gillette's writing instrument profits dipped to 8 percent of total earnings, from 11 percent the previous year. One reason is that the company sold fewer profitable refillable Eraser Mate pens and more disposable versions of the product.
At the same time Gillette held onto its market share of cheaper pens by cutting the price of its Write Brothers line.
Profits are better in toiletries, partially because of cost cutting. The company has moved aggressively in this area and ''has led the industry in the flow of new products,'' analyst Ottman said. Gillette's Aapri apricot facial scrub and Silkience moisturizers have been well received, analysts say. And at its annual meeting April 15, Gillette announced that this summer it will launch a new shampoo dubbed ''For Oily Hair Only,'' with a $12 million promotion budget.
Meanwhile, the company is trimming back on its Braun electric appliance operation, pulling out of the photographic and high fidelity businesses.
Since its capital spending requirements are easing, Gillette will likely have extra cash to pursue new acquisitions or raise its dividends, analysts say. ''From a liquidity point of view we feel pretty good,'' Mr. Mockler admits.