Gillette

Taking it on the chin Apr 16th 1998 | BOSTON From The Economist print edition

The launch of a new razor will test whether Gillette deserves to be so admired by management gurus

HOW many ways can there be to remove the 15,000 bristles that sprout so relentlessly on the male chin? Gillette, saved from humiliation eight years ago by the launch of the Sensor range, with not one but two blades, this week unveiled an even more revolutionary advance in shaving: the Mach3 (see article).
Gillette’s future may not exactly be on a razor’s edge—it has 71% of the North American and European market for razors and blades—but it needs those bristles. The company, whose consumer brands include Duracell batteries, Oral-B toothbrushes and Parker and Waterman pens, is beloved by management consultants. But investors have begun to fret about slowing growth, lacklustre sales and an imminent change in top management. Growth has slowed in the hugely profitable razors division, partly because Schick, its smaller rival, has recently launched a new razor of its own. Last August, the mildest of profit warnings was enough to send the shares tumbling nearly 20%, although they have since recovered.
The Mach3 is the company’s biggest and most important new product since the Sensor, and the company hopes it will have a similar effect. Eight years ago, Gillette was losing its grip on the razor market to cheap throwaways and facing the fourth in a succession of hostile takeover bids. Sensor saved the company on both counts. Today, Gillette is vastly stronger. Its market capitalisation has jumped from $3 billion in 1986 to $66.1 billion today, putting it among America’s 30 biggest companies.
Will the new shaver be equally successful? The answer will test Gillette’s unusual approach to innovation in the consumer-products business. Most such companies tweak their offerings in response to competition or demand. Gillette, boasts Al Zeien, the company’s 68-year-old chairman, launches a new product only when it has made a genuine technical advance. To make the Mach3, Gillette has found a way to bond diamond-hard carbon to slivers of steel. Michael Hawley, the company’s chief operating officer and Mr Zeien’s appointed successor, boasts that it “will blow the doors off other technology”.
But razors are not the only products where the company’s researchers beaver away at innovation. Duracell Ultra, due to be launched in May, is an alkaline battery designed to last 50% longer than its rivals in devices that need a lot of power, such as palmtop computers and personal CD-players. Mr Zeien also promises, later this year, a “universally new, remarkable” toothbrush, which abandons the usual practice of stapling the filaments through the brush head.
At heart, Gillette likes to think of itself as a giant research laboratory. It spends 2.2% of sales on R&D, twice as much as the average consumer-products company. “We manage ourselves like a pharmaceutical company,” says Mr Zeien. “The people working on our toothbrushes are PhDs in polymer chemicals.” Like a drugs company, Gillette has a product pipeline: the successor to the Mach3 is already being developed. It does better than the pharmaceutical industry on another measure: almost half of its $10 billion sales in 1997 came from products introduced in the past five years, more than SmithKline Beecham or Johnson & Johnson can boast. Mr Zeien expects to maintain that, helped by more than 20 big product launches this year alone.
Such aggressive innovation inevitably cannibalises still healthy sales of older products. The slower growth that scared Wall Street last year was caused partly by Gillette’s decision to run down stocks of its Sensor and Atra shavers ahead of this week’s launch. While most rivals would consider this suicidal, Gillette uses the strategy to ramp up prices of new products. Mach3 will sell for around 35% more than SensorExcel, which itself was 60% more expensive than Atra, its predecessor. Duracell Ultra costs 20% more than a conventional battery. Mr Zeien insists that premium prices do not matter: “People never remember what they used to pay. But they do want to feel they are getting value for money.” Perhaps; but shavers may nick themselves at the thought of paying a hefty $1.60 a blade for the Mach3.
Gillette’s emphasis on refining the manufacturing process is much admired by management gurus such as Rosabeth Moss Kanter, a Harvard Business School professor. “Few companies are as good at combining new products with new ways of making them,” she says. “It gives Gillette a huge advantage over the competition.” Three-quarters of the $1 billion spent on the Mach3 has gone on 200 new pieces of dedicated machinery, designed in-house, which will churn out 600 blade cartridges a minute, tripling the current speed of production. Mr Zeien says that this means the investment will pay for itself within two years. The fact that the company spends more on new production equipment than on new products is, he says, one reason why Gillette regularly hits its target of reducing manufacturing costs by 4% a year.
Another difference between Gillette and most other consumer-products companies is that it does not tailor its products to local tastes. That gives it vast economies of scale in manufacturing. Those are mirrored on the distribution side, where it usually breaks into new markets with razors and then pumps its batteries, pens and toiletries through the established sales channels. The impact on margins is dramatic—Salomon Smith Barney’s Holly Becker notes that the group’s operating margin, currently a fat 23%, is rising by a percentage point a year.
And Gillette’s products obviously have global appeal. Last year 70% of the company’s sales were outside America. More than 1.2 billion people now use at least one of its products every day, compared with 800m in 1990. The company has sliced into developing markets: it has 91% of the market for blades in Latin America and 69% in India, measured by value. It would love to shave China, too, but the trouble there, or so says Jorgen Wedel, executive vice-president of Gillette’s International Group, is the Chinese beard, or lack of it: “If they shake their heads, they don’t need to shave.” Gillette may therefore rely on the Chinese passion for gadgets such as pagers, and lead its push into that market with Duracell.
Of heirs and hairs
The biggest question concerning Gillette’s future is not technical but human. Much of the company’s recent success must be put down to Mr Zeien. When he took over, Gillette’s name was on everything from sunglasses and watches to calculators. He forced a focus on a few world-leading products. But he is now past normal retirement age, and has been persuaded to stay on the board for another year with the lure of new stock options. Investors worry about his heir-apparent, Mr Hawley, who is 60 and has a very different management style. Compared with the clear-thinking, strategic Mr Zeien, whose ability to communicate has been a hit both on Wall Street and in the company, Mr Hawley comes across rather as a strong operational manager.
Mr Hawley acknowledges their different styles. “Al is an architect first, then a builder; he has a new concept, and then worries about how to make it work. I would flip it for me. My experience has been building and expanding. I see myself as a catalyst, helping to make something new from what we have.”
Harvard’s Ms Kanter thinks the company can weather a change at the top: “Gillette’s global sensibilities are ingrained in the culture. This is not a cult of personality. I am increasingly impressed with Gillette’s corporate modesty. They don’t spend time making top management into media stars.” Other challenges remain. Braun, the consumer-appliance business that Mr Zeien tackled in his early days with the company, recently appears to have lost sparkle, although it could be revived by a move into home diagnostic products such as blood-pressure monitors and pregnancy kits. And the new shaving system, with so much invested in it, has to prove a success. A company trading on a sky-high multiple of 42 times this year’s expected earnings cannot afford even the smallest of nicks.

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