Gillettes Energy Drain And The Acquisition Of Duracell Marketing Essay

Introduction

The Safety Razor Company was founded in 1901 by King C. Gillette and within 100 years, they expanded their business so well that in 2000, they generated $9.2 billion revenue. Gillette still has some weakness and must focus how to deal with their Duracell brand in an attempt to lessen low returns, to capitalize market share and to make a decision that will be best for entire Gillette’s portfolio. Duracell is facing constantly more competitive market and losing their monopoly in the battery category, although their costs continued to climb rather than go down. The chosen alternative will allow Gillette to regain their investment by keeping the Duracell line and to capitalize on their brand equity. Their main purpose is to use the Duracell name and quality, but replace costly processes with more efficiently and professionally updated ones and to then allow passing this value to its consumers. After analysis of the main issues and surrounding factors, it is obvious that the best alternative would be to restructure and reposition because unfortunately,   this acquisition created several problems for Gillette since their main goal of profit maximization was not being achieved. In the market Duracell try to adopt what will ultimately be a low cost leadership strategy.

External Analysis

This battery includes the alkaline battery that as an industry generated $2.6 billion in U.S. domestic sales in 2000 while most batteries used today are dry cell batteries. As we know there are two categories of batteries: primary and secondary. Primary batteries are disposable batteries whereas secondary can be recharged and used quite a few times. Duracell and Energizer concentrated mainly on the disposable battery market. Alkaline batteries had become the standard in the U.S. market because they lasted six times longer than the outdated zinc carbon batteries. Zinc carbon still has remained the main ones being used in developing countries. The alkaline battery industry had 3 main companies: Duracell, Energizer and Rayovac. In 1996, the three combined to total $4.8 billion in revenues and operating margins of $0.832 billion. In 2000, combined revenues had gone up by 7% to an estimated $5.2 billion and operating margins have decreased by 3% to $0.807 billion. Energizer Holdings Inc. was selling more than 6 billion batteries every year. In 1986, it was acquired by Ralston-Purina and at that time battery product was separated in 2 brands: Eveready brand (Zinc carbon) and Energizer (alkaline) battery. They sold a wide variety of batteries plus flash lights. Energizer enables to hold a 36.5% market share of all alkaline battery sales in 1997. Since then the market share reached to below 30% in 2000. In 1994, they generated $2.1 billion in revenues and an operating margin of $0.312 billion. By 2000, they were generating $1.9 billion in revenues and had an operating margin of $0.279 billion. They experienced decreasing revenues all four years (1997-2000) and decreasing operating margin 3 out of the 4 years. In1996, Rayovac was purchased by H. Lee. “Rayovac Maximum” was the main brand of disposable batteries which was comparable to Energizer and Duracell batteries and the cost was 15% less. Their main strategy is to competing on price. Their pricing tactic is comparatively low as matched with their competitors,   Duracell and Energizer, in an effort   to achieve market share. In the year 2000, they saw an increase of 25% in revenues and a massive 66% in operating margins compared to last year. Since its initial offering, Rayovac has had 16 straight quarters of increased growth in revenues and it was about $400 million a year in 1996, compared to more than $700 million in 2000. During this time, they also rose up their market share in the alkaline battery market from 10 to 12 percent. Begining 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. For more detail see exhibit 6

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Internal Analysis

Gillette has remained the world leader in shaving products for the 100 years following its commencement in 1901. Before acquiring of Duracell, Gillette’s earnings were experiencing a growth rate of 17% per year. During the 20th century, Gillette tapped into many different market segments and by 2001; it consists of 4 main business segments: personal-grooming products, small appliances and portable power oral care products. By 2000, Gillette was the 2nd largest deodorant producer in the world and was still the world leader in shaving products. It was also ranked 5th in personal care manufacturers, in small appliances, Braun became a part of the company in 1964. Gillette also acquired Oral-B in 1994 and created the best selling powered toothbrush called Braun Oral B 3D, after combining their capabilities. Gillette’s overall goal focuses on the skillful marketing of superior technology to achieve worldwide control. Asset leverage, strong financial position, , pricing, effective communication, strong brand equity ,high R&D, reputation management were all the positive nature of this company. In September 1996, Gillette acquired Duracell for $7.3 billion in stock. Gillette was recognized for its strong relationship with vendors, especially drug stores and retailers. It was projected that this would most definitely be strength for Gillette in order to distribute Duracell products. During 1991 to 1996, Duracell becomes the leading producer of alkaline batteries in the United States and experienced steady growth in revenues at a rate of almost 8% per year. During this occasion, they managed to increase total revenues by 46% and operating margins by 75%. Duracell exhibited shows much strength over the years including having the largest market share in their category and consistent growth in revenues from 1991 to 1995, before the acquisition by Gillette. On the other hand, in 2000, Duracell was accountable for only $2.6 billion of Gillette’s revenues and $439 million of its operating margins. Between 1996 and 1999, Duracell’s revenues increased constantly, but fell in 2000 and same with the operating margins. They were also growing between 1996 and 1999, but in 2000, they experienced negative growth. Fortunately, from 1998 to1999, Duracell Ultra noticed to be gaining market share while the rest of their products were losing market share. It was obvious that Duracell Ultra is one of Duracell’s major strengths and has surely played a large role in keeping a high market share. However, other Duracell products seem to be fail in the market and are having a hard time competing with the other competitors. After facing hard time still there is no obvious threat of any new large company entering the market, but certainly lowered price substitutes are available in the market and there is severe price rivalry already going on between Duracell and the other two major competitors. Duracell lowered list prices for the AAA and AA batteries in response to intense price competition from Rayovac and Wal-Mart. Duracell’s Ultra as well as most other products show characteristics that are somewhat imitable and substitutable. It is only for the time being, that a competitor will come out with something to match it but Duracell is still save. But if Duracell uses the right strategy, as Duracell also has the largest market share and Duracell Ultra can also be used to shoot up potentially dominate the market.

Alternatives

In my opinion, Gillette should sell off Duracell since this step of acquisition was to be found growth and cost savings. After the acquisition in 1996, according to the stats, Gillette’s total cost increased from $6.984 billion to $7.211 billion and its net income fell from $1.081 billion to $0.392 billion. Then again, Duracell’s operating margin growth rate fell from +16.89% to negative 27.56% while its revenue growth rate fell from +10.08% to -5.47%. As Gillette’s portable power segment, Duracell only able to make $0.439 billion of Gillette’s operating margin and it also cost Gillette $1.012 billion for restructuring and asset implementation over the last few years. In view of the fact that this segment’s earnings could not able to currently cover the costs, I think it would be better for Gillette, if they sell off this “high drain” segment. This could help Gillette to increase its profitability and market share.

It should be realized that one of the main features Rayovac is following up its promotions is its honest focus on differentiating their products, creating value and making the use of experience for customers more reliable and memorable. In return, they were experiencing satisfying results. To establish a market position, Rayovac has also signaled continued   expansion geographically through strategic mergers and acquisitions of competitors in different countries. But if Gillette really want to give one more shot to see whether Duracell can make profit in the market or not, so it should come up with a strong strategy and analyze all the factors that Rayovac has considered.

Restructure and Reposition

To position successfully, Company need to know the key benefits of its product. You must have to know what benefits your target market wants. You also have to know what benefits you can offer in the market that your competition won’t be able to.. Use these common benefits to position your product. Therefore, keeping all those points Gillette must restructure and reposition Duracell in order to make their market share and profits to rise. They could also follow a multi-focus strategy for example; Gillette may focus their alkaline battery sales in United States, a market in which they were the leading company who produced of alkaline batteries before acquisition. On the other hand, Gillette may focus their sales outside of the United States markets such as India for their zinc-carbon batteries, since alkaline batteries are far too expensive in outside. In India, due to its economic conditions they have a huge market for the cheaper zinc-carbon batteries.

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Conclusion

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. The chosen alternative to be recommended is to reposition Duracell by restructuring the brand and product line. The first and the main step is to develop a new business model. Gillette’s intent should be to reduce costs of batteries that can attract more customers and make it a competitive strategy for the company. 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. 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.

Exhibit 6