Corporate: GilLette Plans a Smooth Shave

CORPORATE: ALLIANCE
Gillette Plans a Smooth Shave

Managing Director Zubair Ahmed has decided to focus on urban markets, and shift consumer preference from flat blades to high-margin shaving systems.

ByJaya Basu

It's reflective of the tenacity of a transnational. Sixteen years ago, when the US blades major, The Gillette Company (Gillette), entered India, it was knicked by domestic competitors. The Malhotras, who had a near-monopoly in the domestic market, cut into Gillette's strategy by launching similar-sounding brands. In the early 1990s, Gillette sharpened its counter-offensive and tried to wean away one of the factions in the Malhotra family to its side. Although that failed, Gillette won in the end. The proof of its platinum-edged success: in value terms, Gillette's two Indian arms-Indian Shaving Products and Wilkinson Sword-control over half of the urban blades market.

Concedes R.K. Malhotra, 65, Managing Director, Vidyut Metallics, which owns brands like Supermax and Vidyut: ''We have a strong presence in the rural markets where Gillette is almost non-existent. However, in urban areas, the scenario is changing fast and we need to tighten our grip.'' Gillette's marketing success has translated into better bottomlines. In 1999 (ended December 31), sales grew by a quarter while net profits increased by 32.57 per cent. And the US major has decided to pursue its twin strategy of making further inroads into the urban segment, and nudge the users of safety razor blades to shift to shaving systems.

Cashing in on the Urban User

Clearly, after it failed to buy out a part of the Malhotras' empire, which could have allowed it to enter the low-priced segment, Gillette has decided to focus on the urban markets. Explains Zubair Ahmed, 47, Managing Director, Indian Shaving Products: ''While most of the blades sales are in the rural markets, these constitute low-cost flat blades. That's not a game that Gillette would like to get involved in since our gameplan is to increase value.'' Therefore, even its new launches in the flat blades segment-like Gillette Diamond and Gillette Platinum-are priced four to five times higher than that of its competitors.

But the fact is that Ahmed cannot neglect the segment which constitutes 97 per cent of the Rs 500-crore blades market. To increase its share in this market, Gillette has decided to double its capacity of safety blades to 700 million units per annum. The flip side is that Gillette's sales in this category have plateaued. For instance, annualised sales of twin-edge blades stagnated at Rs 62 crore in 1999, after having dropped in the earlier years. To add to its woes, having a major presence in the low-end segment is a pre-requisite for Gillette to successfully pursue the second part of its India strategy. That is to upgrade the users step-by-step to the more-profitable shaving systems.

Wooing Users to opt For Systems

If the company had its way, all urban users would use the Sensor Excel or the Mach 3. Explains Ahmed: ''Upgrading users is the biggest challenge. Our promotional activities are focused on shaving systems, which is the ultimate destination for the users of twin-edge blades.'' In fact, Indian Shaving Products, whose budget on advertising and promotion has shot up by 49 per cent to Rs 21 crore in 1999, has decided on an advertising campaign to push its expensive products. One of them would be the Mach 3 that, according to an ORG-MARG study has chalked up a sales ratio of 1:3 compared to Gillette's Sensor range-one Mach 3 is sold for every three Sensors-against an estimated 1:12. In addition, the retention rate for Mach 3, which chalked up global sales of over a billion dollars in its first 15 months, is nearly 80 per cent.

The reason for this strategy is clear: premium products help increase both the topline and the bottomline. In 1999, sales of shaving systems (and cartridges) accounted for 40 per cent of ISPL's turnover, up from 33 per cent in the previous year. More importantly, the margins in high-priced shaving systems like Mach 3 and Sensor, which are imported by the Indian arm from its parent, are quite high. To cite an example, in 1999, Indian Shaving Products purchased shaving systems and cartridges at an average price of Rs 15.57 per unit, against its selling price of Rs 31.90. Adds Neerav Sheth, 31, Analyst, SSKI Finance: ''A substantial part of these profits are retained by the Indian subsidiary.''

Another advantage of imports is that it helps cut down the gap between a global launch of a product, and its entry into the Indian market. For instance, while Sensor was introduced in India more than five years after its launch in the US, Mach 3 came in within 18 months of its global launch. In future, the lead time could be reduced further to a few months. Indeed, a number of other transnationals are following the same strategy to harp on their technological edge over the domestic competitors. Not surprising, when one considers that Gillette spent nearly $750 million on R&D for just one product, the Mach 3, on which about 30 patents have been registered globally.

Boosting the Parent's Bottomline

This strategy has also helped the ailing parent, whose profits before tax slumped from $2.20 billion in 1998 to $1.93 billion the next year. For, after the East Asia crisis, markets like India have become extremely important for Gillette. The growth of its Indian operations helped the US parent increase the sales of shaving systems and cartridges from 6.41 million units in 1998, (9-month period) to 17.89 million units in 1999. In addition, the parent's average selling price per unit to its Indian subsidiary went up by 15 per cent in 1999, although the latter has been able to pass on only a third of that to its customers.

Ahmed has different reasons to explain the concentration on imports. One, in 1998, the Government Of India made imports easier by putting shaving systems under the Open General Licence scheme. The second reason, says Ahmed, has to do with exclusivity: ''Most imported products are proprietary and, therefore, cannot be given to third parties for packaging.'' Three, volumes of these products do not justify the setting up a new manufacturing facility in India.

At present, Indian Shaving Products manufactures low-end twin-edge blades and shaving systems like Gillette Presto and Ready Shaver. That could change. For, an average Indian male shaves only 2.30 times a week. If that rate doubles-as marketers expect it to-it would imply that, at least for some years to come, Gillette stays a cut above the rest.

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