High Margins and Share for P&G’s Gillette Business

by Trefis Team
-11.75%
Downside
79.65
Market
70.29
Trefis
PG
Procter & Gamble
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With its acquisition of The Gillette Company in 2005, Procter & Gamble (NYSE:PG) added four major brands – Gillette, Braun, Duracell and Oral-B – to its portfolio.  After the $57 billion acquisition was complete, P&G became one of the largest consumer companies in the world, ahead of players like Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL).  More importantly, the company gained access to a much larger portfolio of products targeting men.

We estimate that the acquired businesses (Gillette, Braun, Duracell and Oral-B) constitute over $55 billion of P&G’s value.  Gillette & Braun alone are worth about $45 billion and constitute over 17% of the $84 Trefis price estimate for P&G’s stock.

The high value of the Gillette & Braun “grooming” businesses is attributable to their high market share in the grooming market and high EBITDA margins (a measure of profitability) compared to other P&G businesses.

New Product Launch, Acquisitions Will Increase Market Share

Gillette acquired premium male grooming brands Art of Shaving and Zirh in 2009. Innovative efforts have led to the launch of newer and advanced grooming products such as Gillette Fusion Pro-Guide and Gillette Pro-Series.

Gillette has a dominant presence in the grooming (razors, blades) market with a share of over 70%.  We believe that Gillette’s share will continue to increase as the company continues to acquire niche brands and offers a wider range of products.

Increasing Sales of Higher Margin Premium Blades Will Boost Operating Profits

Gillette launched its five-bladed Fusion line in 2006 with a 40% price premium over Mach3, its three-bladed product offering. To entice consumers to use Fusion, P&G rolled out an aggressive marketing campaign supporting the use of Fusion and making older Gillette razor brands seem obsolete.

Under the classic home-grown razor and blade business model, Gillette sold razors at lower prices to a large number of consumers worldwide to entice them to buy Fusion blades in the future.

We believe P&G’s marketing and promotion efforts are paying off as a large number of consumers upgrade to premium razors and blades. We expect the resultant increase in sales for Gillette’s higher priced blades will boost its profit margins.

You can see our complete $84 Trefis price estimate for P&G’s stock here.

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