Razor Burn at Gillette

Why its cautious turnaround plan may not sway investors

With its sweeping views of New York, the 106-story-high Windows on the World restaurant inspires lofty ambitions. But when Gillette Co.'s (G ) new CEO, James M. Kilts, unveiled his turnaround plan there on June 6, the aim was to bring investors down to earth. Since 1998, Kilts's predecessors have repeatedly promised that the King of Blades would soon return to the 15% to 20% earnings growth it delivered during much of the '90s. But Kilts ridiculed those goals as a sure recipe for "bad decisions," promising he would set far more "realistic targets."

Sounds like a good start. But in an uncertain economy, the 53-year-old Kilts is going to have to do a lot more than that to rev up Gillette and its investors again. Kilts, who signed on in February, faces monumental challenges. Along with Coca-Cola Co. (KO ) and Procter & Gamble Co. (PG ), Gillette benefited mightily as globalization opened vast new markets in the 1990s. But that tide has turned against Gillette as the global economy has soured.

In the past several years, Gillette has been losing market share in products accounting for some two-thirds of its sales, including batteries, toothbrushes and disposable razors. Profit margins are plummeting, the stock price is in the dumps, and employee morale is at a low point. At Duracell alone, says Kilts, "turnover has been staggering."

To sharpen Gillette's performance, Kilts is going to need to repair the battery business. Since paying $7 billion for Duracell, Gillette has captured the premium end of the market with its Ultra battery. But by neglecting the mass market, it has been taking a beating from Energizer (ENR ) and Rayovac (ROV ), which have cut Duracell's overall share to 46%, from nearly 50% in 1997. In the first quarter, operating profits plunged 49% on a 14% drop in sales.

RECHARGED. Regaining share and profits will require more innovative marketing and more competitive pricing. "They have priced themselves right out of their market," says Gary Stibel, a partner at New England Consulting Group. Kilts has already brought in a new president. Later this month, he'll relaunch Copper & Black under the name Coppertop, backed by a $100 million ad campaign. Problem is, Energizer will relaunch its core battery later this summer with its own $100 million campaign.

Fortunately for Gillette, Kilts knows a thing or two about fixing up companies. In his former job as CEO of Nabisco, he slashed costs and increased advertising. And he encouraged innovation. As a result, he reversed Nabisco's falling market share before selling the company to Philip Morris last year.

Now, Kilts must prove he can work similar magic at Gillette. To boost profitability, he must take a sharp knife to "a sloppy, undisciplined organization that has let the bureaucracy get out of control," says Harvard Business School professor Rosabeth Moss Kanter. He vows to slash capital spending by $250 million a year, weed out the marginal products that take up vital shelf space, lay off 3,300 employees, and cut inventories to 90 days, from 120. But more cuts may be needed. Many analysts, for example, think he ought to exit Braun's marginal household-appliance business altogether.

Kilts will have to do all that and more if he's to win back the investment community, which has been burned by a run of bad news in recent years. The onetime highflier has seen its stock sink from a high of $63 in early 1999 to $28 after three years of flat sales, declining earnings, and eroding market share for most products. Even so, with a multiple of 27 times this year's expected earnings, "this is not a cheap stock," says Robert E. Torray, president of Torray Corp., a major investor.

Conceding that this "will be a transition year," Kilts warns that it may take until yearend, or even next year, to see results. Still, with some of the world's strongest brands under his belt, if Kilts can deliver like he did at Nabisco, Gillette should be able to grow at a consistent 10% annual clip, figures Patrick Schumann, an analyst at Edward Jones. That may not sound like much. But it may be the best Gillette shareholders can hope for.

By William S. Symonds in New York

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