By David Shook
Think of the last time you saw a clever advertisement for Duracell batteries. Pink bunnies banging drums? Nope, that's Energizer, Duracell's key rival. Can't remember? That's because Duracell's owner, Gillette Co. (G ), hasn't done much to build the brand -- or its own stock price, for that matter -- since the Boston-based maker of the Sensor and Mach 3 razors acquired the battery company in 1997.
Now Gillette has a new CEO, James Kilts, who did a fine job revving up Nabisco's lethargic cookie and cracker brands like Oreos and Chips Ahoy! (see BW Online 1/26/01, "Can James Kilts Put a New Edge on Gillette?"). He made them taste better. He packaged them in mini sizes. Heck, he did the world a favor and got rid of Corn Nuts.
Now, as Kilts packs his bags for the move to Boston, investors might want to wait awhile before following his star. When he starts his new job in mid-February, he will take over from an interim CEO who replaced Michael Hawley, whose short tenure came to an abrupt end last fall when he was ousted by the company's board.
Kilts is stepping into a tough situation. Gillette sales have been flat since the Mach 3's rollout in 1998 -- something that can't be blamed on the razor. But now the razors-and-blades division -- Gillette's largest, accounting for 35% of sales -- is preparing for a March launch of the Venus, the women's answer to the triple-blade Mach 3. Priced at around $7.50 for a pack of two, some analysts are questioning whether women will pay that much for a triple-blade razor when a double- or even single-blade works fine.
True, that's what analysts said about Mach 3, too. But "this may be more of a niche product," says William Steele of Banc of America Securities, who shaves with the Mach 3 and swears by it. "At the end of the day, many women are still fond of much cheaper disposables," he says. At the same time, Steele concedes: "I have to say the Venus is a very attractive-looking razor. And Gillette did a great job marketing and promoting Mach 3."
While Mach 3 and Venus aren't cheap, many on the Street regard Gillette's stock that way right now -- especially at its current price of around $33 a share, vs. a one-year high of $43. But hold on: While Gillette enjoys a blue-chip reputation, plenty of other consumer-products stocks have done well in an otherwise dismal market. Lehman Brothers analyst Ann Gillin contends Gillette is actually pretty expensive compared to other large consumer-products stocks. That's why she has a current rating of market perform on Gillette as she considers the challenges Kilts has inherited -- like getting the company's overall sales growth moving.
"We still see some execution risk in the stock," Gillin says. "That...has me staying on the sidelines." Gillette's valuation actually makes it the second-most expensive stock on a cash-flow basis in the handful of companies she follows. Only Colgate-Palmolive (CL ) is higher. To be sure, 2000 was a bad year for nearly all the battery makers. Sales suffered after a stellar 1999, when businesses and consumers loaded up on batteries in case dire predictions about Y2K problems came true. But in 2000, while Duracell remained the top-selling battery, it lost market share. Kilts has work to be done.
But the most pressing question for Gillette might be whether Venus can dominate the women's market as Mach 3 does the male one. This is an especially critical question for Gillette given that Mach 3 was launched during blistering U.S. economic growth in 1998 while Venus will hit stores in a weakened economy.
Peter Hoffman, president of Gillette's blades-and-razors unit, says not to worry. Despite the Mach's 3 high sticker price (a pack of eight blades costs about $15), it's selling extremely well and generated $1 billion in sales last year. "We've sold 60% more razors in 2½ years on Mach 3 than we did on Sensor after its launch," Hoffman says of the best-selling razor in the company's history. "Seventy-five percent of users stay with it...and we've also gone around the world with Mach 3 faster than we did with Sensor."
The company's market research shows that Venus will cut a wide swath into the ladies' shaving market, and Gillette plans a quick rollout. Good thing, because more than $750 million was spent developing and promoting the Mach 3, and $300 million more has been poured into the Venus.
The company isn't making projections at this point. But millions in research and marketing don't guarantee dominance. What's more, there's at least some evidence that Mach 3 sales haven't grown at the rate the company expected. Sensor, the razor launched in 1990, helped Gillette expand its total razor-and-blades division to more than $2 billion in sales in 1991, vs. $1.2 billion in 1989. That's a 67% increase.
By comparison, Mach 3 boosted division sales by 14% from 1997 to 1999 to a total of $3.3 billion. Sensor and Mach 3 account for most of Gillette's razor-and-blade sales. That division brings in 35% of total revenues, while Duracell produces roughly 27%. Oral-B toothbrushes and dental-care products, and Braun electric shavers are responsible for most of the remainder.
Hoffman says acquisitions and a much better foreign-exchange environment in Europe during Sensor's launch assisted the his division. Conversely, foreign exchange has hampered sales growth during the Mach 3 era. So has the fact that Gillette was opening important international markets during the Sensor launch -- markets that have slowed in recent years.
None of this is to say that Mach 3 hasn't been a hit for Gillette. And Venus could once again confound the skeptics. If Kilts can apply his branding expertise and management know-how to batteries, razors, toothbrushes, and electric shavers, Gillette may well be worth a closer examination six months from now. In the meantime, cutting-edge stock buys probably lie elsewhere.
Shook covers financial markets for BW Online in New York
Edited by Beth Belton