Gillette's Five-Blade Wonder
By William C. Symonds
At first glance, Gillette's Sept. 14 announcement that it plans to start selling the world's first five-bladed razor seems like a classic case of overkill. Gillette (G ) already offers men the three-bladed Mach3 system, in both manual and battery-powered versions. And rival Schick offers four blades on its Quattro razor.
Do men really need the new five-bladed Fusion, especially considering that Gillette is planning to sell Fusion blades at a stiff 30% premium over what it now charges for "the best a man can get?"
"MOST SIGNIFICANT LAUNCH."
The overkill logic may seem compelling at first glance, but it's off-base on closer inspection. Despite its high price, the launch of Fusion is probably the closest thing to a slam-dunk in the intensely competitive consumer-products industry, where many new products never gain traction. It should be a huge boon to Procter & Gamble (PG ), which is expected to wrap up its acquisition of Gillette this fall.
"Fusion will fuel a significant increase in Gillette earnings," predicts Gary Stibel, founder and CEO of New England Consulting Group in Westport, Conn. Stibel calls Fusion "the most significant launch ever at Gillette." One reason: For the first time, Gillette is rolling out two versions of its new razor at once -- a manual and battery-powered model. Plus, it's introducing a line of male-grooming products under the Fusion name, including a shave gel, which should boost a business that has long lagged behind.
Sure, these are rosy predictions. But consider Gillette's history. It last introduced a major new shaving system in 1998, when it rolled out Mach3, the world's first three-bladed razor. At the time, skeptics scoffed that men would never trade up to the triple-bladed wonder, especially since it was priced some 25% higher than SensorExcel, which had been Gillette's top system. But Mach3 had afterburners. Today, these razors -- including the battery-powered M3Power -- dominate the U.S. market, with a 34% share, even though they're the most expensive.
Mach3 has also eclipsed Schick's Quattro, even though it has one fewer blade. Gillette estimates Quattro commands just 2.5% of the market. And Energizer Holdings (ENR ), which acquired Schick in 2003, reported in late July that sales in its blade and razor division rose just 2% in the quarter ending June 30, to $253 million.
In sharp contrast, Gillette's sales of blades and razors surged 11%, to $1.2 billion, in the second quarter. Even more telling, while Gillette's operating profits in its core division jumped 16%, to $488 million, in the second quarter, Energizer earned just $20 million from its blade and razor business.
Gillette's shares barely budged on the Fusion announcement on Sept. 14, dropping 1% on a down day on Wall Street, to $53.24. But that doesn't say much about investor reaction. Because shareholders of both Gillette and P&G have approved the merger of the two companies, Gillette stock no longer trades as if it were a stand-alone company (even though it still is, until the merger closes).
Yet there's good reason to believe Fusion can repeat Mach history. For starters, it offers compelling technology. Like Mach3, it incorporates multiple innovations -- not just more blades. By spacing the blades 30% closer than before, Gillette says it has created a new "shaving surface" that reduces irritation. Fusion also features a smoother coating on its blades, and an enhanced "Lubrastrip" infused with vitamin E and aloe.
As it goes head to head with Schick, Gillette maintains that the combination of these improvements produces a shaving experience that most men find significantly superior. Peter Hoffman, president of Gillette's Blades & Razors Div., says Fusion was tested on some 9,000 men, who compared it to both Mach3 products and Quattro. "They preferred Fusion by a 2-to-1 margin over its rivals," says Hoffman. That's the same kind of overwhelming preference men showed for Mach3 over its rivals back in 1998.
Another reason Fusion is likely to be a home run: Gillette has had decades of experience in persuading men to trade up to more expensive shaving systems. Moreover, the rollout will be conducted with almost military precision. And it will be backed by what Hoffman calls a "blockbuster marketing program" that will rank "as the largest in our history." The rollout will begin in the U.S. before moving to Western Europe. And within three years, Hoffman predicts annual Fusion sales will top $1 billion and eventually overtake those of Mach3.
Unlike most consumer-product companies, Gillette doesn't have to worry much that a rival will try to copy Fusion. Sure, another company might be able to put five blades on a razor. But no one else has the technology, expertise, or money to produce a truly comparable razor. That's a key reason why Gillette has dominated the shaving business for decades now.
Fusion could also help energize Gillette's broader male-grooming business, where it has long been held to only about 30% share of shave-prep products. For the first time, Gillette is launching a full line of grooming goods at the same time as its new razors. "Fusion will get so much attention that it will drive a lot of men to try these grooming products," predicts Stibel of New England Consulting Group. If so, it will help ratify P&G's belief that Gillette can become a much bigger player in the growing male-grooming products market.
Fusion is also an affordable luxury. Sure, men will have to shell out $10 for an introductory set of a Fusion razor and two blades, and $12 or more for a four-pack of replacement blades. But over time, Hoffman figures Fusion will cost only about 20 cents a shave, "or about $50 a year." That's fairly reasonable compared to the cost of Starbucks coffee, bottled water, and other increasingly common everyday luxuries.
As Fusion hits the market, it should further increase the extraordinary earning power of the King of Blades. As an activity, shaving is about as mature a business as you can find -- few, if any men or women, are shaving more often. But since Gillette introduced the higher-priced Mach3 in 1998, its sales of blade and razors have jumped about 50%, to $4.3 billion, last year, while profits hit a record $1.63 billion.
Moreover, Hoffman says Gillette managed to develop Fusion and Fusion Power for slightly less than the $680 million it spent on Mach3 seven years ago. Combined with other efficiency gains Gillette has made in recent years, "Fusion should be accretive to our earnings from day one," says Hoffman. If so, it could become Gillette's most successful razor ever.
Symonds is BusinessWeek's Boston bureau chief