Procter & Gamble (NYSE: PG), owner of the Gillette shaving empire, has had a tough time of things recently. In fact its share price struggles have been going on for about five years now (back in the spring of 2013 you’d have found the stock trading at roughly the same $80 it does today). Underpinning that underwhelming performance has been a business struggling to grow profits. Back in 2013, for example, the company made a net profit of $3.70 per share. In 2018 it was roughly the same, though in fairness negative FX effects have been massive.
A portion of the company’s woes have been pinned on the performance of Gillette. P&G’s Grooming segment is actually its smallest in terms of revenue but its profit margins are extreme. I’d hazard a guess that about 20-25 cents of every dollar spent on Gillette products ends up as net profit on average. In recent years the Grooming segment has struggled in the face of newer brands like Harry’s and Dollar Shaving Club which, between them, have gobbled up a fair bit of market share in rather a quick time frame (sub-five years).
One of the interesting aspects of these brands’ ascendency has been the direct-to-consumer approach. Dollar Shave Club, for instance, went big after it launched a Youtube video that went viral. Stodgy old Gillette, meanwhile, is stuck in the ways of selling to stores rather than consumers. This phenomenon, coupled with the poor numbers for Gillette’s parent company outlined above, has lead to some big armageddon takes in financial media. Indeed I have read pieces dismissing P&G’s entire business on the basis that Gillette’s current issues will be replicated across all of its other brands.
For any concerned shareholders I think it is useful to note that Gillette has been here before. Back in the early-1960s it was the undisputed king of the razor blade. Its domestic market share was somewhere in the region of 70-75% and margins were not only high, but expanding too. Then a new player entered the scene: British firm Wilkinson Sword. It turns out that their new polymer coated stainless-steel blades proved quite popular with consumers in the United Kingdom. By the mid-1960s Gillette’s UK profits had collapsed by over 50%.
As for the United States, Wilkinson introduced them to the market in late-1961. Not only were they gaining traction but other companies cottoned on and introduced their own stainless-steel blades. Profits at Gillette for 1964 were down around 20% on the previous year. Its share of the razor blade market dropped ten percentage points to the low 60% range by the mid-1960s, similar to the decline experienced this time around. The share price halved. What strikes me are the similarities between the two situations. Massive market share and profit margins leading the firm to rest on its laurels? Check. New entrants offering a different kind of product/experience? Check. Market share and profit declines? Check.
There is one major difference this time around. Gillette is now obviously part of the broader Procter & Gamble empire, with dozens of other brands that can prop up the show while management figures out how to stabilize the struggling parts of the business. The Beauty segment, for example, put on around $400 million in net profit last year on the back of good growth in SK-II and Olay. Of course Gillette got through that previous rough patch and went on the compound earnings quite nicely at a rate of 13.5% per annum between 1972 and 1996. I wouldn’t write it off just yet.