Boy Meets Girl: Gillette and P&G Hook up Their Brands: Knowledge@Wharton (http://knowledge.wharton.upenn.edu/article.cfm?

articleid=1135)

Boy Meets Girl: Gillette and P&G Hook up Their Brands

Published : March 30, 2005 in Knowledge@Wharton

The merger between Procter & Gamble and Gillette comes with
the obvious chemistry of male and female product lines, but the
two companies also share a culture of innovation and a history of
cooperation, according to Wharton faculty and industry analysts.

In a deal valued at more than $55 billion that is expected to close This is a single/personal use copy of Knowledge@Wharton. For
this fall, P&G will add Gillette's personal care men's products and multiple copies, custom reprints, e-prints, posters or plaques,
please contact PARS International: reprints@parsintl.com P.
others to its own vast portfolio of goods ranging from cosmetics (212) 221-9595 x407.

and Pampers to Folgers and Charmin bathroom tissue. The

combined company will have annual sales of $60 billion and more than 200 brands. Of those 200, 21
currently have sales of more than $1 billion a year.

In the personal care category, P&G markets Olay, Tampax, Cover Girl, Max Factor and Crest -- brands
expected to dovetail nicely with Gillette's razor and blades business, including the Mach3 and Venus
brands, as well as its Braun personal care appliances, Oral B dental products, and Right Guard deodorant.
Gillette also sells the Duracell brand of batteries.

According to Wharton marketing professor David Reibstein, the acquisition will give P&G the ability to
fine-tune its super brands. "To some degree it brings P&G into categories where it hasn't been," he notes,
but the main advantage is that the merger adds products in categories where the company has already
been operating. "P&G is the master of having multiple brands all within the same product category."

As an example, Reibstein points to detergents. In that category, P&G sells Tide, Gain, Dreft, Ivory Snow,
Cheer and Downy, all of which are marketed as solutions to different laundry dilemmas at varying price
points. "Each is positioned a little differently. Each is going after different targeted segments and is able
to command a major presence in the category. It's difficult to do this without cannibalization and without
everybody going after the same segments."

When the two companies are combined, he says, it will be even easier for managers to segment the
market. "As it exists right now, some of the Gillette brands go after some of the same segments P&G has
been targeting," he says. But after the merger, "they will be able to position the brands more cleanly
toward distinct segments."

When Blades Aren't Just Blades

Wharton marketing professor Stephen Hoch predicts that Gillette will become the best brand name in
P&G's stable. Gillette has a reputation for quality and has been able to innovate enough to prevent its
products from becoming commodities, despite the fact that shaving and razors have been around for
centuries, he says.

Even within Gillette a distinction exists between products like Duracell and the company's shaving lines,
he notes. "Duracell is a good brand name, but it's not Gillette, and the reason it's not Gillette is that
batteries are batteries. Blades are apparently not blades, or at least not Gillette blades. Gillette blades are
better quality. It's not a commodity-oriented business. Frankly, people are a little less price-sensitive when

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they are running a knife over their face every day."

Hoch says both companies have a long history of innovation. For example, P&G introduced Crest, the
first toothpaste with fluoride, in 1955, and Gillette has recently added a system that includes lubricants in
its shavers. "Both companies are focused on the consumer and continually trying to make improvements."

Hoch also suggests that Gillette may be able to teach P&G about marketing products with a recurring
revenue stream. Gillette sells razor handles; it keeps customers coming back to buy the blades that fit
those handles. P&G has only two similar products -- Swiffer, a mop handle with refillable heads, and the
Pur water treatment system. "What's interesting about razors and blades is that the lifetime value of the
customer is critical because he buys over and over again," Hoch says. "P&G will figure out how to put
that basic marketing information and knowledge into other businesses where they can make sure they
have a recurring revenue stream."

The acquisition clearly shifts P&G in the direction of personal care, which may have more potential for
strong margins than the many mature consumer segments where P&G operates, says Hoch. At one point
in the early 1990s, P&G owned Duncan Hines, Hawaiian Punch, Crisco and Jif. In April it sold its Sunny
Delight beverage business. Now its only food categories are Folgers and Millstone brand coffee and
Pringles snacks. These days P&G is not so much about what you eat, "but about cleanliness and how you
look."

Dealing with Wal-Mart

Another consideration in the P&G/Gillette merger is Wal-Mart. P&G is already the world's largest
consumer products company, with sales of $51.4 billion last year. But the addition of Gillette, with
estimated sales of $10.3 billion, gives it new clout with retailers, including the world's largest, Wal-Mart,
says William S. Cody, managing director of the Jay H. Baker Retailing Initiative. "On the retail side you
never want your supplier to be bigger than you and vice versa. The merger gives P&G a larger critical
mass -- not only with Wal-Mart but any mass merchant."

According to Cody, consolidation has been occurring across all retail sectors. In the mid- to late 1990s,
grocery stores merged, followed later by drug stores. In January, articles in the media reported that
Federated Department Stores Inc., of Cincinnati held preliminary merger talks with May Department
Stores Co., of St. Louis. Federated operates Macy's and Bloomingdale's and May owns Filene's, Lord &
Taylor and other regional retailers. "On the retail side everything has gravitated to a top-two or top-three
model," says Cody. He points to the three dominant office supply stores -- OfficeMax, Staples, and Office
Depot -- and the two large home-improvement chains, Lowe's and Home Depot. When it comes to
discounters, Wal-Mart dominates, followed by Target. The impact of a combined Sears and Kmart
remains to be seen, he says, adding that apparel suppliers have consolidated to meet the negotiating power
of merged department store chains.

Meanwhile, P&G's new size will also give it additional power in negotiating advertising contracts, notes
Cody. "P&G is already the world's largest advertiser, so any scale it brings in with Gillette is not
insignificant." It will also be interesting to see if Gillette brands, which have been heavily promoted
through coupons, adapt to P&G's anti-coupon stance.

Hoch suggests that the potential for additional clout with Wal-Mart and advertisers may be overstated
because P&G already has such a strong position in the industry. More than 15% of P&G's sales last year
and 10% of Gillette's came through Wal-Mart stores. "I don't think this is about clout. They already had
clout over everybody else. I do think internationally there may be some pockets where that's untrue.
Clearly if Gillette is not doing well in a particular market, having the resources of P&G can only help."

Growth Abroad

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Because both companies are struggling with slow growth in the consumer products industry, international
expansion is another driver of the merger. P&G has 106 plants in 41 countries and Gillette has 31 plants
in 14 nations. J.P. Morgan estimates that the combined company will generate between $17 billion and
$18 billion in sales, or about 20% of total revenue, from developing markets. "The primary strategic
rationale for the deal is the opportunity to leverage exposure in emerging markets," J.P. Morgan analyst
John Faucher told The Wall Street Journal, adding that Gillette is strong in India and Brazil, while P&G
has strength in Japan and China.

Faucher, like other analysts, questions the price. "While the deal clearly makes P&G bigger, we are not
convinced that being larger is worth $55 billion," he told The Journal. "We also do not view P&G's track
record on acquisitions as stellar, as it has had problems with much smaller acquisitions in the past,
especially in driving top-line growth."

The companies expect to reap $14 billion in cost savings. P&G says the merger will result in the loss of
6,000 jobs, or about 4% of the combined workforce of 140,000. "They paid a lot of money, and obviously
they can do the numbers," says Hoch. "I do think there are some cost savings and I think there might be a
few synergies on the global front where P&G is better-established in some countries than Gillette." The
biggest beneficiary of the deal might be investor Warren Buffett, who owns 9% of Gillette. Buffett called
the acquisition a "dream deal."

Meanwhile, the P&G/Gillette merger could put additional pressure on other consumer products firms,
such as Unilever, Nestle, Kimberly-Clark and Colgate-Palmolive, analysts predict. "P&G has abundantly
shown over the last few years [that] when done right, a broad portfolio offers suppliers opportunities to
leverage R&D and technology expertise, purchasing and pricing power, and new product development,"
Prudential Equity Group analyst Constance Maneaty told The Journal. "We think that if P&G believed
there were benefits to being bigger and more powerful, the writing is on the wall for the rest of the
industry."

According to Reibstein, the merger runs somewhat counter to the recent trend in business strategy to
emphasize internal growth over expansion through acquisition. "It's interesting because we're in an era
now where there's a push for us to get organic growth, and this is not in that direction," he says. "This is
the old way."

Wharton professor of operations and information management Marshall Fisher points out that the two
companies already have a history of cooperation. For example, both companies are among the leaders in
developing radio frequency identification (RFID) systems to track inventory using tiny microchips that
emit radio signals. The companies were also founders of the Auto-ID project, an early technology group
focusing on development of RFID, at the Massachusetts Institute of Technology in 1999. In October,
representatives of both companies demonstrated RFID at a conference staged by the EPCglobal Network,
the non-profit successor to Auto-ID.

The two firms also have been active in promoting Efficient Consumer Response, a system that promotes
forecasting between suppliers and retailers on the movement of goods through distribution systems.
Fisher says the system is gaining popularity in Europe faster than in the United States. The level of
cooperation between Gillette and Procter & Gamble is unusual for companies operating in the same
industry, Fisher adds, noting that this cooperation could be because the two firms had very little direct
competition -- a dynamic that tends to spur bitter corporate rivalries.

Fisher recently was engaged to do research on retail operations for the two firms. Procter & Gamble and
Gillette are interested in studying stock-outs, or lost sales that result when there is not enough of the right
product on store shelves to meet consumer demand. Another concern is shoplifting, which can throw off
computer inventory systems. If an item is no longer on the shelf but has not been recorded as a sale, the
inventory program does not know to reorder the product, resulting in lost sales that could harm profit
margins more than the initial theft.

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Overall, executives at both firms seem unusually suited for one another, says Fisher. "There is a
camaraderie between these two that extends into the trenches."
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