Gillette’s Energy Drain (a): the Acquisition of Duracell

Gillette’s Energy Drain (A): The Acquisition of Duracell MACK Consulting Michelle Neill, Ali Nassem, Cindy Arsenault, Krystal Mayne, Charlene Ford, Laura Robertson March 20, 2008 Bus 491 – Gary Evans PROBLEM STATEMENTS – STRATEGIC ISSUES The Duracell Division of Gillette has lost market share and failed to move forward in the last four years, which may be the result of a lack of strategic vision and/or mandate from Gillette’s Board of Directors. It is our opinion that perhaps too much emphasis or “hype” was placed on the acquisitions potential and not enough effort has been re-focused on maintaining the Duracell Division itself.

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Gillette, and certainly Duracell, needs a revamped strategy to increase its market share and minimize its marketing and operating costs. IT IS MY OPINION THAT HERE THE 5 POINTS SHOULD BE MOVED AS OUR STRATEGIC ISSUES. Also, the last point on page 4 regarding Energizer and Walmarts relationship, I believe, should also be included as a strategic issue that should be touched on in the final analysis, because in my opinion, this is a big issue. Duracell needs to improve its supplier/retail relationship!

So, Duracell needs to improve the relationship with retailers to improve its sales, should Duracell go back to the “old” ways or acquire a competitor………………. what does everyone else think Also, the changes that I made I did not mark so everyone could read it over and see if it flows in stead of putting more enphasious on my changes alone….. Krystal Let me know what you guys think. INTRODUCTION/ANALYSIS OF THE BATTERY INDUSTRY The competitive landscape changed considerably after Gillette’s acquisition of Duracell in 1996.

Prior to the purchase, Duracell’s competition was mainly from Energizer, who was the worldwide leader in dry cell batteries. The original Energizer held a market share of 36. 6% in 1997, dropping to below 30% by the year 2000 with their operating revenues dropping as well. Competition was also offered from the Rayovac brand. Rayovac’s “Maximum” battery is comparable to both the Duracell and Energizer’s products, although it was sold at a discount of approximately 15%.

This strategy has allowed the Rayovac Corporation to enjoy growth in both market share and overall sales over the period of 1995 through 2000. Although their sales totalled only a fraction of that reported by both Duracell and Energizer, their revenue growth was consistent while Energizer and Duracell experienced negative growth over the same time period. A report in the 1999 Consumer Reports may have been a contributing factor. That publication reported that batteries were so similar overall that the wise consumer should buy based on price alone.

Sales of Rayovac’s lower-cost batteries improved consistently after the findings were reported. Minimal competition was offered from several other brands (Sony, Panasonic, Kodak, RCA), although these products were primarily offered as a complement to electronics items provided by these manufacturers. In total, the market share of primary batteries outside of the top three was only 11. 7% in 1997, rising to 13. 3% in 2000. Although part of the competitive landscape, these competitors were considered inconsequential.

Perhaps in response to the increasing pressure from Rayovac, both Energizer and Duracell started a trend of offering “new and improved” products in 1998. Although their original tried-and-true batteries continued to be available, they began coming to market with increasingly more powerful and specialized products over the next few years. This trend, however, appeared almost counter-productive. As Duracell and Energizer continued competing head-to-head with each other (see Appendix I), the Rayovac product kept winning over the consumer with their original battery.

The variety of Energizer and Duracell products on the shelf may have proved confusing to the consumer looking for a multi-purpose battery. As each new product focused on a different energy need (high-drain / portable electronics), consumers increasingly turned to what they deemed to be a more standard battery –Rayovac. PROBLEM ANALYSIS In researching this type of industry, we found three business strategy models to be useful in identifying potential solutions to our problem statements previously mentioned. The models identified were: 1. Value Chain 2.

Porter’s Five Forces 3. SWOT Analysis VALUE CHAIN We chose the Value Chain as a valuable analysis tool as it helped us to identify the operational strengths and weaknesses of the company. This allowed us to focus on improving ineffective procedures and processes while maximizing the benefits of our effective processes. From this analysis (see Appendix II), we found that Gillette and Duracell have similar target markets and distribution points, so Gillette’s distribution channels and relationships with distributors and retailers is of paramount importance.

This is how Gillette and Duracell have earned the ability to advertise their products in prime locations (end of aisles) in retailer stores in the past. In addition, Gillette was successful in minimizing labour and operating costs by centralizing its packaging, sorting, and distribution of Duracell products through the Cleveland Distribution Centre. We believe this would be a huge cost-saving measure that could improve the long term efficiency of the Duracell distribution process.

From personal observations by this consulting company over recent visits to retailers, it is evident that Energizer has taken over the prime retail space (large displays in optimum locations) in at least two of PEI’s major retailers (i. e. Superstore and Wal-mart). Knowing how Wal-mart works with regard to its suppliers (i. e. buying in bulk, huge consumer market share, as well as the inventory technology interface with suppliers, etc. ), this shows a huge relationship between Energizer and Wal-mart in allowing such displays to be erected.

PORTER’S FIVE FORCES We chose the Porter’s Five Forces as a valuable analysis tool as it helped us to identify the potential threats from new entrants as well as the power that the buyers have over the sales in this industry. It also helped us to identify the amount of competitiveness within the industry and how easily other products could be substituted for our products. From this analysis (see Appendix III), we identified an issue regarding pricing strategy that we feel is important to address in our proposed solution.

The key ingredient to success appears to be that battery companies must compete on price, rather than brand. This is exemplified by Duracell and Energizer’s plateau/loss of market share and Rayovac’s gain. Since there is little differentiation among batteries, other than a company’s different types (which is only competing against itself), they can easily be replaced by other brands that may appear more attractive to buyers. Consumers have a tendency to buy batteries based on price, rather than brand, since their perspective is “a battery is a battery” and they are basically all the same.

Since the threat of entry of new suppliers is high and the competitiveness is also high within the industry, it is evident that something needs to change in how the suppliers are marketing their products. Also the importance of the relationships with retailers and distributors is utmost in maintaining a strong visual presence of Duracell products within the buyer’s facilities. SWOT ANALYSIS We chose the SWOT Analysis as a valuable tool, as it helped us to identify Duracell’s internal strengths and weaknesses, as well as their external (industry) opportunities and threats.

From this analysis (see Appendix IV), we identified that these two huge brand names (Gillette and Duracell) came together to utilize their strong distribution channels and relationships with retailers, as their target consumers were very similar. We also are hoping to capitalize on the abilities of James Kilt to lead us into the next five years with a new vision and mandate of renewed growth. We also found that Duracell was not focusing on the secondary battery market, but thought it would be a potential opportunity for growth in the future, as more and more products are utilizing secondary battery power sources (i. . laptops, cell phones, etc. ). Thirdly, we found that Duracell was spending huge amounts of advertising funds on head-to-head competition with Energizer, rather than promoting its “tried and true” copper-top battery, similar to the Rayovac strategy. Lastly, we identified an opportunity to entice retailers by promoting our products with more creative incentives and advertisements. This will help to strengthen our relationships with retailers as well as provide eye-pleasing displays of our products in their facilities.

POTENTIAL OPTIONS IDENTIFIED 1. Sell off Duracell Division 2. Acquisition of Energizer 3. Acquisition of Rayovak 4. Joint Venture or contract with a popular electronics manufacturer 5. Maintain Duracell division, but go back to the basics (copper-top), and refocus research money on secondary battery market (rechargeable) The evaluation of each option, as noted above, through identifying the pros and cons for each, is shown in Appendix V. In my opinion, should be placed on first page where I previously stated

FINAL PROPOSED SOLUTION From the evaluations, we chose the final option (#5) as the most viable for Duracell to maximize its strengths and take advantage of its future opportunities. We felt this option would also address the original problem statements in that Duracell needs to get back to the basics of providing a true and trusted battery (no frills) to consumers, one that will meet all the needs of the majority of consumers so they don’t have to be energy experts to decipher between several brands for the best performer.

Consumers have shown, through Consumer Reports, that they want a regular everyday battery that is inexpensive and provides the service it is meant to provide. Through implementing a goals and objectives plan via the Board of Directors and CEO of Gillette, this would refocus Gillette’s (and Duracell’s) employees toward a common goal of providing good quality products at a fair price, as well as motivating employees to meet incentives for reaching target goals. There is an issue with Duracell changing the packaging and marketing strategies because it is expensive and not really necessary.

This has resulted in a constant reaction to new products on the market, but there was no real need to do this because Duracell’s copper-top product was already a great product. This has actually diluted their market share, rather than increased it, as several Duracell batteries were available (copper-top, Ultra). Their advertising was out of sync with their targeted customers (ex. space, hospital commercials) resulting in profit losses from the advertising and changing names/packaging problems, this area needs to be changed. Customers recognized the copper-top battery as being trustworthy, effective and long-lasting, so why change success?

Over time, both Duracell and Energizer became so focused on competing with each other and ultimately themselves, they have missed the fact that Rayovac and other small battery suppliers have continued to increase their market share and profit margins by sticking with one product at an economical price. (See exhibit 6 in the case for the basis of this analysis). Secondary batteries (rechargeable) are more popular in recent years with more innovative technology (i. e. laptops, digital cameras, rechargeable toothbrushes, ipods, shavers, cell phones, CD players, etc. ) and more customers wanting a environment friendly product.

These products are now replacing many previously primary battery-operated devices. Secondary battery markets are continuing to grow, and with more and more customers focusing on working to improve the environment by purchasing environment friendly products, the future holds high potential for re-chargeable products. APPENDIX I Competitive Analysis Time Line Cindy’s exhibit APPENDIX II Value Chain General Administration Gillette is quite diversified with four distinct business segments: Personal Grooming, Small Appliances, Oral Care Products, and Portable Power (Duracell).

Their financial accounting and regulatory policies are assumed to be standard within the two divisions of Gillette and Duracell, as they produce consolidated business statements. Brand recognition for both Gillette and Duracell is, without doubt, very important and strong for both groups of products. This leads to a competitive advantage, in itself. HRM CEO of Duracell continued as the head of Duracell upon its acquisition in 1996 to, presumably, maintain a level of consistency for the Duracell division.

In 2001, a new CEO was brought in to reposition Duracell to hopefully create a renewed vision for this division Technology Development Maximize the benefits of both Gillette and Duracell by keeping the “best of the best” researchers and developers, and eliminating the non-essential/non-productive positions. Duracell researchers have taken the approach that constant upgrading of battery technology formulas is what the consumers are looking for, based on the continuous new product offering of the last few years (1998 – 2001). 1) Procurement Alkaline batteries require four main components as supplies: (1) Zinc powder as an anode (positive electrode); (2) Manganese powder as the cathode (negative electrode); (3) Potassium Hydroxide as the electrolyte; and (4) the casing of the battery. As the majority of these components are natural resources, which are highly toxic and flammable, the number of suppliers that would provide them would be assumed to be limited. Also, they must be procured in small quantities and are subject to fluctuating prices.

Therefore, we are assuming the procurement process for any battery manufacturing company would be similar to any other as the market for these products would be very specific and limited. Inbound Operations Outbound Marketing Service Material Handling, Inventory storage, Distribution of products to the line. (need research) Generic manufacturing process used to produce all types of batteries. Different printing on packaging, but completed in centralized distribution centre. 2) Duracell created a streamlined and centralized packaging, sorting, and distribution centre to minimize costs and labour. (2) Advertising, Promotion, salesforce, quoting, channel selection, relations, and pricing. Member surveys, employee surveys, corporate teams working on organization goals, e-mail & internet, customer service. Notes: (1)Constant Upgrading of Battery Formulas: This may not have been the best way to proceed, as it led to constant competition between the two big battery competitors, as well as huge cash outlays for distinct marketing strategies as each product was launched.

While Duracell and Energizer were caught up in this “Coke and Pepsi marketing tug of war”, they neglected to notice the smaller competitor, Rayovac, with a singular product consistently gaining market share. (2)Centralization of Packaging, Sorting, and Distribution of Duracell products to final destinations: Cleveland Distribution Centre, including new building and expansions to existing buildings resulted in an agreement with PSI (Production Systems Inc. ), who provided conveyors and sorting equipment to handle product from 16 different packaging lines to accommodate Duracell’s total US shipments. Duracell was extremely impressed with the entire installation and start-up process and consolidation of their distribution line on June 16, 1997, which resulted in a capacity of 70 cases per minute, virtually without human interface. This decreased costs, including labour, and improved consistency and efficiency in packaging and distribution of the products. ” (www. productionsystemsinc. com/case. htm) APPENDIX III Porter’s Five Forces The Threat of New Entrants – MODERATE to HIGH There are already three very prominent players in the battery industry –Duracell, Energizer, and Rayovac.

These three alone dominate the battery industry and own a majority of the market share. This can be very discouraging for new entrants since they would be competing against existing competitors with strong brand identification. However, batteries are also an impulse purchase that the majority of consumers purchase based on price rather than name brand (a battery is a battery) which could encourage new entrants to enter the market and compete on price rather than brand. In regards to the battery industry, new entrants shouldn’t have much trouble securing distribution channels since there are so many to choose from.

Batteries can be found anywhere from groceries stores to large department stores. However, since batteries are a commodity, buyers /distributors have no problem finding alternate suppliers which can be discouraging to new entrants. There is also the issue with switching costs since buyers have no problem finding other suppliers, switching costs are low which can be risky for new entrants because they can be easily replaced by another brand. The Bargaining Power of Buyers – MODERATE to HIGH The power of buyers is both moderate and high.

It’s moderate since there is not just one store/location that a supplier could sell their batteries to. They have a number of different distributors they could go to who could sell their batteries (ex. Grocery stores, department stores, electronic stores, etc). On the other hand, it’s also high because buyers can easily replace their product with another battery supplier. The buyer has the power to play one company against the other since they are confident they can always find alternative suppliers. This is especially true with commodity products such as batteries.

This is associated with the lack of switching costs a buyer has to face which again means a buyer can easily switch suppliers without cost consequences. The Bargaining Power of Suppliers – LOW It is assumed that Duracell purchases very little outside products to make their batteries (research unavailable). We are basing this assumption on the fact that because of the ease of entrance to new companies into the industry, we feel the power of supplies is low, or else these weaker suppliers wouldn’t survive in the market.

The Threat of Substitute Products and Services – HIGH It is evident within the industry that Duracell, Energizer, and Rayovac batteries are easily interchangeable in the minds of the consumer. The threat of substituting one product for another is very high, based on where the product is located in a store (i. e. at the checkout) and its price (i. e. base priced vs premium priced). Some independent electronic manufacturers are producing their own batteries for their own electronic products (i. e. CD players, toothbrushes, other “batteries included” products, etc. , automatically eliminating the need for purchasing batteries separately to run the product at its initial purchase. The Intensity of Rivalry among Competitors in an Industry – VERY HIGH Rivalry is fierce in the battery industry especially since the industry has now entered the maturity stage. The few top battery companies are now fighting for market share since firms seeking to expand their sales have to earn those new sales away from their competitors. Duracell and Energizer are the forerunners and have the most recognized rivalry and are known for constantly trying to “up” one another.

Batteries are also seen as a commodity, and consumers tend to choose based on price since there is very little differentiation between the batteries themselves. Lack of switching costs also has the same effect, as competitors can easily replace each other’s products. APPENDIX IV SWOT Analysis – Duracell (D) / Gillette (G) STRENGTHS WEAKNESSES ?diversified business (G / D)? may have paid too much for Duracell (7. 3B in stock) (G) ? Duracell is the leading producer of alkaline batteries in the USA (D)? does not focus on secondary battery markets, main focus is primary (D) ?

Duracell is seeing constant growth—between ‘91-’96 8% growth and 46% revenue increase, with operating margins increased by >75% (D)? battery purchasers are mainly impulse purchases 75% of alkaline sales (D) ? Gillette’s earnings are growing at 17% annually for the last 6 years (G) ?Gillette’s stock fell 45% to $34 in 2 years (‘99 – ’01) (G / D) ? industry generated 2. 6B in the USA alone in 2000 (D)? two main competitors—Rayovac and Energizer (D) ? Duracell battery division is makers of all battery sizes and styles (D)? In 2000, discounters were responsible for 52. % of total dollar sales of alkaline batteries—too much power in the hands of the merchants—and has increased steadily every year since—48. 7% in 1996 (D / G) ? Duracell is more well known than Rayovac (third largest competitor) (D)? Over expanding into too many market products and divisions may be causing potential profit losses and market growth ? total revenues between Duracell, Energizer, and Rayovac exceed 4. 8B in revenues & 832M in op margins? it is up to merchants to effectively maximize retail shelves and floor locations with Duracell products (D) ? nly Energizer and Rayovac are main competitors (D)? Rayovac costs 15% less than Duracell (D) ? Gillette implemented layoffs at Duracell—4,700 employees and shutdown of 14 plants resulted in a savings of $200 million. (D / G)? Rayovac is increasing market steadily with both revenues & op margins increasing with revenues in 2000 of 700M and increased market share from 10% to 12% (D) ? James Kilt has an excellent performance background (D / G)? Main supplies issues ? Duracell has access to Gillette’s strong and efficient distribution channels to market its products in the same target areas (i. . supermarkets, drug stores, etc. ) (D / G)? Energizer is continuing to release new improved batteries and increasing its revenues in the battery market—in 2000 1. 9B revenues & 279M operating margin (D) OPPORTUNITIES THREATS ?increase Duracell division to focus more on secondary batteries markets (D)? parts of the country do not use alkaline batteries ? promote alkaline batteries outside of the normal three channels? Rayovac is growing steadily with 16 quarters straight in revenue growth (D) ? provide better/more incentives for merchants to place more emphasis on Duracell products (D)?

Energizer – 2nd largest battery competitior, with slightly increasing growth in operating margins recently. ?lower Duracell prices to compete better against Rayovac and to continue to take market share from Energizer (D) ? Purchase another competitor ?Increase R&D to determine what is going wrong and where to focus future efforts ?option to “get back to the basic” type of battery to compete on a national scale and head-on with the basic battery competitor (D) APPENDIX V Evaluation of Potential Options 1. Sell off Duracell Division Pros If we sell off the Duracell division, profits from the sale could go towards increasing our Gillette line of products. ?Possibly save money from court battles in the future. ?Save money from our hugely extensive advertising campaigns, etc. ?If we sell, we could possibly up our share worth if Gillette continues to have profit gains. Right now, our share worth might not be as high as it could be because of our declining profits in the Duracell division. Cons ?We would be exiting a very high-demand industry. There is still potential for market share gain/profit growth if costs could be controlled and minimized. . Acquisition of Energizer Pros ?We could gain huge market share. ?Could potentially eliminate other “smaller” competitors that don’t have as deep of pockets as we do. ?Larger advantage of highly skilled individuals, etc. ?Have more capital expenditure. ?Have access to different patents (formula’s, etc) we may not currently have. Cons ?Having to redevelop the business structure. (Board of directors, locations of plants and offices, etc) ? Having to share profits with Energizer. ?The two companies may have different objectives for the merged company. There may be different culture and management styles which could potentially result in poor integration and co-operation. ?Potentially high cost to acquire. 3. Acquisition of Rayovac Pros ?Could result in market share increase. ?May have the power to eliminate other smaller competitors in the industry. ?Have more capital expenditure. ?Rayovak has been experiencing growth in both revenues and operating margins, which could possibly mean that with an acquisition Duracell, we could learn from Rayovak and together we could cut costs and gain some additional profits. Cons Restructuring the business structure. ?Having to share profits. ?Rayovak is still considered a new force in the industry, so could be a risky decision if we merge together. 4. Joint Venture or Contract with a popular electronics manufacturer Pros ?Gain market share because of these popular electronics that will be operated by Duracell batteries. (Example: computers, cell phones, etc). ?A joint venture will strengthen long-term relationships or give an opportunity to collaborate on short-term projects. ?Share risks with partner. ?Access to greater resources, including specialized staff and technology. Opens up a growing market to offer Duracell’s brand name to rechargeable battery-operated devices. ?With a contract, there’s no loss of control or profits on the product, but there is a strong brand recognition factor that would be beneficial to both entities. ?Could also contract with other suppliers of grooming products or other products that use batteries to have the batteries included in the packaging. Cons ?Making sure all board members and management are well versed on the objectives of the venture can be sometimes over looked and or difficult to make clear. Partners may have different objectives for the joint venture. ?There may be different levels of expertise, investment, or assets brought into the venture by the different partners. ?Different cultures and management styles result in poor integration and co-operation. 5. Maintain Duracell division, but go back to the basics (regular copper-top Duracell), and refocus research money on secondary battery market (rechargeable) Pros ?No longer competing with themselves, and only supporting one product, so focus marketing funds in one place. No sharing of profits with others, so maintain control of operations. ?There is an upswing in the secondary battery market (potentially a huge future here). ?Continue to use current strong distribution channels. ?No wasted dollars on competing with “special brands”. ?Consumer education is limited on the battery technology, so they make their decision on price, something they understand. Cons ?Potential temporary loss of profits with loss of premium battery market. ?Educated battery consumers may be turned off by no “new innovative ideas” – perception-wise.


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