The Hindu Business Line : P&G-Gillette deal: Getting the FMCG sector in a lather

IT IS competitors, rather than the listed Indian arms of P&G and Gillette, which may feel the first aftershocks of the $57-billion global acquisition deal inked last week between the Procter & Gamble Company and Gillette Company, US.

It may take several months for the deal to clear anti-trust and regulatory hurdles; and at least a year for the Indian arms of P&G and Gillette to replicate the global merger of their parents. An informal integration of the two global companies, which will result in a closer alignment of their operations and marketing strategies, could, however, begin right away.

A powerful rival

Hindustan Lever, Colgate Palmolive India, Henkel SPIC as also a host of Indian companies ranging from Dabur India to regional detergent, toothpaste and shampoo makers, may have to brace themselves to compete with a more formidable rival in P&G; the latter's strengths in the global market are likely to percolate to India, which is a big revenue opportunity.

With the acquisition of Gillette's operations, P&G becomes the second largest consumer goods company in the world with sales of $61 billion, next only to Nestle SA (with sales of $65 billion) and ahead of Unilever ($48 billion). P&G expects revenue gains and cost savings of $14-16 billion from the merger, due to elimination of overlapping functions and a planned 6,000 job cuts.

This acquisition will put 21 billion-dollar brands in P&G's product basket, overshadowing the12 the Unilever portfolio. This is expected to give P&G greater say over display and shelf-space with retailing giants such as Wal-Mart. It will also mean P&G gets greater bargaining power in its negotiations with raw material suppliers and the advertising media.

This will leave P&G with a larger war chest with which to bankroll marketing initiatives, product launches and aggressive price-cuts of the kind it initiated in shampoos and detergents in the Indian marketplace. The integration of the operations of P&G's Indian arm/s with Gillette India, which may take the combined sales to Rs 1,400 crore, will not significantly alter the rankings of consumer goods companies operating in India.

Grooming-and-lifestyle focus

Also important for its competitors is the fact that the Gillette acquisition marks a decisive move by P&G to upgrade from a mundane household products maker that vends soaps, detergents and cleaners, to a company that is into "lifestyle" products in the personal care and grooming segments.

P&G has been trying for a larger presence in the personal care business since 2001, when it first snapped up premium shampoo maker Clairol; and followed it up in 2003 with the acquisition of Wella, a leading hair care brand.

Gillette's basket of hi-tech shaving systems for men and women, powered tooth-brushes and male grooming products will neatly complement P&G' clutch of brands in the beauty, personal care and feminine hygiene segments.

P&G has been hoping that an increasing focus on lifestyle products will pep up its profit margins and growth rates at a time when the traditional household products business is succumbing to slower growth rates and pricing pressures.

Such innovative products as Crest Whitening Strips (a tooth whitening product that competes with Colgate's whitening gel- Simply White) and Swiffer Mops have already helped P&G notch up better growth rates than Unilever or Colgate-Palmolive in recent years.

Gillette will also add more high-margin products to the P&G portfolio, making for more robust profit margins than its rivals and furthering its innovation efforts.

Aggressive pricing

But P&G's success with carving out a niche for itself at the premium end of the FMCG market may not take the heat off its competitors in India or China in conventional FMCG categories such as detergents or shampoos. In recent years, P&G has been drawing on its strength in the developed markets to fund aggressive pricing strategies in the developing world.

Price-cuts and affordable products, rather than innovation, have been at the heart of P&G's marketing strategies for the emerging markets in recent years.

In India, P&G has taken deep price cuts on brands such as Tide, Whisper and Pantene, changing their positioning from premium to mid-market, in a bid to drive volume sales.

Several of its new product launches in the past year (Tide detergent bars, Rejoice shampoo and Whisper Choice) are also aimed at the price-sensitive, rather than the premium consumer.

After shoring up its profit margins and growth rates with the Gillette acquisition, there is the possibility that P&G will strengthen its offensive to gain market shares in India and China.

Wider product portfolio

The complementary nature of Gillette's products with the P&G portfolio could also prompt the latter to consider an entry into new categories in the emerging markets. P&G's Indian arms now field a limited basket of products, consisting of detergents, shampoos, feminine hygiene products, cough and cold medication and the Wella hair care range. Though the company's global portfolio features some powerful brands in skin care (Cover Girl, Olay, Noxzema), toothpastes and brushes (Crest) and premium hair care (Clairol), P&G has not introduced them in the Indian market.

In contrast, Gillette India already has a presence in personal care (shaving gels and after-shaves) and toothbrushes (Oral B). After the integration of Gillette's operations with P&G's, the latter could consider using Gillette's distribution network to enter new categories in the Indian marketplace.

If it does, Colgate-Palmolive India (which derives the bulk of its revenues from toothpaste and toothbrush sales), Hindustan Lever (for which skin-care has been the fastest growing business in recent times) and Henkel SPIC (which has just found a toehold in the personal care market) could find competitive pressures intensifying.

Indian companies ranging from national players such as Dabur India and CavinKare to smaller regional brands may also come under pressure to counter P&G's aggressive stance.

Hurdles ahead

As with any merger of this size, there is much that can go wrong with the P&G-Gillette deal. To start with, anti-trust regulators may ask the combine to divest key brands in toothbrush and deodorant segments where the P&G-Gillette combine will hold dominant market shares. But given the minor overlaps between the two portfolios, anti-trust requirements may not damage significantly the benefits from the deal. At worst, this process could delay the formal integration by a few months.

The more important challenges for P&G could lie in integrating the operations, manufacturing facilities, the workforce and work culture of two companies, which have functioned independently for so long.

Acquisitions of this size usually take up the attention of the management for a long time and could distract from focussing on tactical issues such as countering competitive threats, considering the vast markets and product ranges they are involved in.

Critics of P&G's acquisition-led strategy point out that buying so many brands may distract the management from nurturing them. Clairol, the hair-care brand that P&G acquired in 2001 has in recent times lost market share to L'Oreal.

P&G is also yet to complete the integration of Wella's hair-care business, acquired in 2003. This being the case, the equity expansion that follows this deal could also dilute P&G's near-term performance, especially as it has had to shell out a big premium over Gillette's market value.

The inevitable delay in the formulation of country-specific strategies could give P&G's Indian competitors the breathing space to formulate counter-strategies.

Experience with other global mergers such as those of Aventis with Bayer or Unilever with Bestfoods suggests that it could be months or even more than a year before the Indian subsidiaries copy the global integration of the parents.

In this case, there would also be questions about whether the merger has to be routed through P&G's listed or unlisted arm. Resolving regulatory issues such as whether there should be an open offer to Gillette India shareholders may also take time.

The existence of an Indian co-promoter on the Gillette board, which wants to stay on with the company, may also slow the process of integration. Competitors could use the resulting hiatus to strengthen their ties with distributors or launch new products to pre-empt P&G's moves.

These will, however, be relatively short-term issues that P&G can iron out if the merger works at the global level. Assuming it does, this deal will significantly strengthen P&G's hands in the Indian market over the long term, forcing companies operating in the Indian FMCG space to brace up for a vastly more powerful rival.

A push for more mergers?

WILL the P&G-Gillette deal pressure other global consumer goods companies to consider the acquisition route for building scale? It appears unlikely that either Nestle SA or Unilever (the two consumer goods companies closest to P&G in size) will consider a hasty acquisition just to best P&G.

Given its focus on beverages, food products and infant foods, Nestle operates in segments considerably different from P&G and does not directly compete with it for any significant portion of its business.

Unilever does compete directly with P&G for about a fourth of its business. But the former has, in recent years, pursued a strategy that is in diametric contrast to the latter's. While P&G has been relentlessly churning out new products and buying up competitors, Unilever has been divesting brands and businesses to focus on fewer, stronger, brands.

In the four years since 2000, Unilever has divested 140 businesses, using the cash generated from these sales to build core "power" brands. The company's business plan for the years to 2010 is predicated on further debt reduction, cost cutting and a re-alignment of operations to pep up profit margins and cash flows, which will be distributed to shareholders through dividends and buybacks.

American analysts commenting on the merger suggest that a combination of smaller rivals such as Colgate-Palmolive with Reckitt Benckiser or Energizer Ltd with Colgate-Palmolive is a possibility.

If these deals materialise, they could strengthen the Indian operations of Colgate-Palmolive India.

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