Gillettes Energy Drain The Acquisition Of Duracell Marketing Essay

Gillette must assess different restructuring options to turn Duracell back into a profitable brand. The key questions and considerations for each that they need to assess in terms of Duracell following their 1996 acquisition are:

63% of Gillette’s sales come from outside of the United States (refer to exhibit A), 32% from Western Europe, 11% from Latin America, 20% from other global areas vs. only 20% of Duracell’s sales were outside of US. Zinc-carbon cells held a majority of the market share outside the United States. Conversion to alkaline outside United States was much slower than originally expected and hindered international sales of some U.S. battery companies. For example, in India, alkaline batteries made up only 3% of the battery market compared to 70% in developed countries. This has been attributed to tough economic conditions and the high cost of building new battery manufacturing facilities capable of handling the production of alkaline batteries.

Does this acquisition benefit or increase the profitability for both companies?

Duracell – In 2000, Duracell’s market share had risen by 1.78% since the time of the acquisition however Duracell’s revenue growth rate fell from +10.08% to – 5.47%, and operating margin growth rate fell from +16.89% to -27.56%. Duracell’s stock price had also fallen 45% to $34 from 1999.

Gillette – Did not have significant market growth however total costs increased from $6,984 million to $7,211 million.

Should Gillette sell off Duracell?

Since Gillette is not benefiting from Duracell, the most effective exit strategy may be to sell off this “high drain” segment.

What other recommendations can Kilt make to turn Duracell around and improve their financial performance?

Restructuring Duracell, or acquiring another company in order to benefit them. Gillette’s return on equity dropped from 0.24 to 0.2, and total shareholder equity dropped from $4,841 million to $1,824 million.

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External Analysis

Most batteries used today are dry cell batteries. This includes the alkaline battery that as an industry generated $2.6 billion in U.S. domestic sales in 2000. Batteries can be divided up into 2 types: primary and secondary. Primary batteries are essentially disposable batteries whereas secondary can be recharged and used several times. Duracell and Energizer concentrated mainly on the disposable battery market. Batteries are 25th in ranking among the top 200 products related to health or general merchandise. Alkaline batteries had become the standard in the U.S. market; however, the outdated zinc carbon batteries have remained the main ones being used in developing countries. The alkaline battery industry had 3 main players: Duracell, Energizer and Rayovac. In 1996, the three combined to total $4.8 billion in revenues and operating margins of $832 million. In 2000, combined revenues had gone up by 7% to an estimated $5.2 billion and operating margins have decreased by 3% to $807 million. Energizer Holdings Inc. was acquired by Ralston-Purina in 1986 and was the world leader of manufacturing dry cell batteries with sales volumes of over 6 billion batteries each year. They sold a wide variety of batteries as well as flash lights. In 1997, Energizer held a 36.5% market share of all alkaline battery sales. Since then the market share has dropped to just below 30% in 2000. In 1994, they generated $2.1 billion in revenues and an operating margin of $312 million. By 2000, they were generating $1.9 billion in revenues and had an operating margin of $279 million. They experienced decreasing revenues all four years and decreasing operating margin 3 out of the 4 years. Rayovac was purchased by H. Lee in 1996 and that was when it got a complete facelift. Its main brand of disposable batteries was “Rayovac Maximum” which was comparable to Energizer and Duracell batteries but cost 15% less. In the year 2000, they saw an increase of 25% in revenues and a whopping 66% in operating margins compared to 1999. Since its initial offering, Rayovac has had 16 straight quarters of increased growth in revenues. Revenues were about $400 million a year in 1996 compared to more than $700 million in 2000. During this time, they also increased their market share in the alkaline battery market from 10 to 12 percent. We can classify the rest the competitors as “Others”. Starting off with Sony and Panasonic manufacturing batteries, RCA, Gold Peak and Star Struck also came into the market soon after. Major retailers and super markets also started to buy batteries from outside companies including Duracell and Energizer, and then sold them under a private brand. By 2000, the market share of all manufacturers besides Duracell, Energizer, and Rayovac grew to 13.3% compared to 11.7% in 1997.

We can see that Rayovac is the biggest threat to Duracell because they are the only main player in the industry with constant growth in revenues, profits, and market share. However, Duracell also increased its market share to 43.48% by 2000 compared to 41.6% in 1997. Duracell had the largest market share back in 1997 and it still does. Duracell has more than 3 times the market share that Rayovac has, which was mentioned earlier that it was the only main player in the market that has seen a constant upward trend in growth. By catering to such a large segment of the overall market, Duracell has the opportunity to potentially achieve mass economics of scale/scope. This means that they can most certainly compare with Rayovac prices provided they allocate their resources efficiently and combine them with the right strategy to market them.

Internal Analysis

Gillette has remained the world leader in shaving products for the last century following its inception in 1901. In 2000, Gillette made more than $9.2 billion in revenues and had the top two shaving systems in the United States by 2001. Gillette’s earnings were experiencing a growth rate of 17% per annum prior to the acquisition of Duracell. During its first 100 years, Gillette tapped into many different market segments and by 2001, it comprised of 4 main business segments: personal-grooming products, small appliances, oral care products, and portable power. By 2000, Gillette ranked 5th in personal care manufacturers, it was the 2nd largest deodorant producer in the world, and was still the world leader in shaving products. In small appliances, Braun became a part of the company in 1964. In 2000, it held 16% of the market share in the men’s electronic shaver market, while ranking 5th in the production of coffee makers. Gillette also acquired Oral-B in 1994 and created the best selling powered toothbrush called Braun Oral B 3D. In September 1996, Gillette acquired Duracell for $7.3 billion in stock. Gillette was well known for its solid relationship with vendors, especially drug stores and retailers. It was anticipated that this would most certainly be strength for Gillette in order to distribute Duracell products. Between 1991 and 1996, Duracell was the leading producer of alkaline batteries in the United States and experienced constant growth in revenues at a rate of 8% per annum. During this time, they managed to increase total revenues by 46% and operating margins by 75%. Duracell has exhibited much strength over the years including having the largest market share in their category and consistent growth in revenues between 1991 and 1995, prior to their acquisition by Gillette. However in the year 2000, Duracell was responsible for only $2.6 billion of Gillette’s revenues and $439 million of its operating margins. Between 1996 and 1999, Duracell’s revenues increased consistently, but fell in 2000. Their operating margins were also growing between 1996 and 1999 until they experienced negative growth in 2000. Between 1998 and 1999, Duracell Ultra seemed to be gaining market share whereas the rest of their products were losing market share. It seems that Duracell Ultra is one of Duracell’s major strengths and has certainly played a large role in maintaining a high market share. However, other Duracell products seem to be losing ground in the market and are having a tough time competing with the other major players. There is no evident threat of any new large players entering the market, but lowered price substitutes are available and there is intense price rivalry already going on between Duracell and the other two major players. Duracell possesses resources that are relatively valuable, but competitors also have access to similar resources thus not making them very rare. Duracell’s Ultra as well as most other products show characteristics that are somewhat imitable and substitutable. It is only a matter of time that a competitor will come out with something to match it. But, Duracell has the largest market share and Duracell Ultra can be used as a vehicle to potentially dominate the market if Duracell uses the right strategy.

Alternatives

Divest of the Duracell Segment

Gillette could sell off Duracell since this acquisition did not benefit or gain a competitive advantage for the company, such as cost savings and market growth. After the acquisition in 1996, Gillette’s total cost increased from $6,984 million to $7,211 million and its net income fell from $1,081 million to $392 million. On the other hand, Duracell’s operating margin growth rate fell from +16.89% to -27.56% while its revenue growth rate fell from +10.08% to -5.47%. As Gillette’s portable power segment, Duracell only generates $439 million of Gillette’s operating margin, but it cost Gillette $1,012 million for restructuring and asset implementation over the last few years. Since this segment’s earnings do not currently cover the costs, it will be better for Gillette to sell of this “high drain” segment. This could help Gillette to increase its profitability.

Restructure and Reposition

Gillette could restructure and reposition Duracell in attempts to make their market share and profits to grow. They may adopt a multi-focus strategy. For example, Gillette may focus their alkaline battery sales within the United States, a market in which they were the dominate producer of alkaline batteries prior to the acquisition. Conversely, Gillette may focus their sales outside of the United States on their zinc-carbon batteries, since alkaline batteries are far too expensive in outside markets such as India. In India, there is a much larger market for the cheaper zinc-carbon batteries due to the economic conditions. They may also decide to ship their batteries to developing countries rather than build costly manufacturing facilities in those countries. Once the economies in these countries improve, then they may want to change their strategy to build new facilities and make a major push for alkaline batteries.

Since AA batteries account for almost half of all alkaline sales, Gillette may also chose to drop some battery lines such as those used for hearing aids, and concentrate on the batteries that are higher in demand. They need to ultimately become low cost leaders in the markets that they choose to stay in. Once they are able to compete with competitors with lower prices, essentially their massive market share will create a barrier for new entrants and make it harder for existing competitors to keep up. It will ultimately make them the dominating force not just in terms of market share, but also cost. Energizer is already in a position where they have been losing market share between 1997 and 2000. Duracell can also look into using Gillette’s connection with vendors in order to do more business with private super markets and chains and supply them with products that they can sell under a private label.

Merger and Acquisitions

Gillette could review different merger and acquisition opportunities regarding Duracell in order to improve gross profit margins. A merger and/or acquisition may also be beneficial in terms of shared resources, expertise, and R&D and as a result greater sales revenue, growth in market share, and diversification. A merger with Rayovac could be considered as their combined size would put them well ahead of Energizer as they are a growing force in the alkaline industry. Rayovac produces alkaline batteries at 15% lower costs than Duracell and Energizer and integrating their processes with Duracell may make the company more efficient. More than that Rayovac is currently a rival that can potentially pose a bigger threat in the future. An acquisition will insure market dominance. However, despite this it is not certain whether Gillette has the available resources at this point in time considering the massive loss they faced due to selling off their stationary division which we saw on their last income statement. Also it is not certain what Rayovac’s plans are for the future since they are doing pretty well on their own and seem to be a growing force in the industry.

Implementation

The chosen alternative to be recommended is to reposition Duracell by restructuring the brand and product line. The first step will be to develop a new business model. Gillette’s aim should be to minimize costs as batteries are a convenience good and pass this value on to consumers. Shifting to a higher volume model will require evaluating and streamlining processes. The new business model will rely on a thorough assessment of the brand so a deadline of 30 days for a draft should be budgeted for. Following this the time frame will be dependent on how much restructuring is going to be done to internal processes (depending on which processes can be streamlined). A myriad of different changes will then be rolled out in each department. One of the biggest will be to marketing as a new positioning in the market will require passing this message on to consumers through promotion and advertising. Sales targets will need to be adjusted to fit the new model through the distribution department. A review period of three months should be taken to assess whether changes have been beneficial and to what degree. Until the end of this period, changes should be made incrementally and if adequate progress is shown, a more permanent shift should be undertaken. The practicality of this alternative is dependant upon what is found when the internal processes are assessed. It may prove to be too costly to streamline processes, or that doing so would only minimize costs fractionally in which case the benefits would be negligible and repositioning in the market as a value brand. Should this happen then Gillette should consider divesting Duracell as a contingency as their losses may continue to magnify.

Exhibit A