For almost a year now (and in some cases longer), the consumer powerhouses that defined brand strength and corporate excellence for much of the decade have been struggling. Coke, Disney, and Gillette (all, perhaps not coincidentally, companies in which Warren Buffett owns a large stake) have found themselves essentially treading water, both in terms of earnings and in terms of their stock prices. More than a few epitaphs for these companies have already been written.
Although it’s tempting to see the mediocre performance of these firms as evidence of a natural tendency to revert to the mean (that is, no one can be king of the hill forever), the differences between them are right now more striking than the similarities. Coke is battling slumping demand and price wars at home as well as weakness abroad, and has watched its increases in sales shrink to almost nothing. Disney’s problems are less clear. Sometimes it looks as if there’s been a secular transformation in the American appetite for Disney’s brand of popular culture, so that kids are too sophisticated to go for Disney cartoons anymore. But it’s unlikely that this kind of transformation could have happened in three years, and more likely that Disney’s problems reflect the basic difficulty of being in the culture industry, which is simply that it’s hard to figure out consistently what consumers want.
Gillette has been the most disappointing of these companies, announcing last week that its earnings in the current quarter would come in below already-reduced expectations. Gillette also said that profit growth in the rest of the year would be slower than it had previously forecast. This is the third time in the last four quarters that Gillette has fallen short of expectations, which is remarkable when you consider that the company’s record of meeting estimates during the 1990s was essentially pristine. In an article I wrote last year on the debut of Gillette’s new three-bladed razor, the Mach3, I argued that Gillette was uniquely positioned to remain on top, because its razors were the best and most popular razors in the world (a combination I don’t think is true of any other product). But since that article appeared, Gillette’s done nothing but flounder.
Testimony to my singular lack of prescience? Perhaps. But what’s amazing about what’s happened to Gillette is that the company has seen its profits tumble even as its core razor business has thrived. The Mach3 is now, less than a year after its debut, the most popular razor in the United States, despite a hefty price tag. Gillette has extended its domination of the razor market worldwide, and now owns 73 percent of that market, which far from being stagnant is growing at 11 percent a year. If all Gillette did was make razors, then it would be in great shape.
Unfortunately, Gillette also makes Braun appliances, Papermate pens and stationery, and toiletries (together, these divisions account for about a third of Gillette’s sales), and these businesses are rotten, especially abroad. With its razors, Gillette is able to turn its technological superiority–the Mach3 really does shave better than other razors–into premium prices. But it’s a different story with its other products. No one seems to be too desperate to own a Braun coffeemaker, for instance. If it’s too expensive, they’ll just buy something else instead. Similarly, Gillette doesn’t appear to have any special knack for making great shaving creams, so the profit margins in that business are driven down by competition. All the dynamics that make the razor business so great, in other words, are just not at play in these other divisions. Gillette’s not lying when it says that foreign demand for these products remains especially weak. But it’s not dealing with why that’s the case.
The obvious question, then, is: Shouldn’t Gillette sell off these divisions and just concentrate on razors (and perhaps batteries, since Gillette owns Duracell, which seems to be doing OK)? I asked executives at the company about this last year, and what they said was that if Gillette sold off the divisions, someone would be tempted to buy Gillette and milk the razor business as a cash cow.
But while it’s understandable that Gillette wouldn’t want to do anything to endanger its independence, there’s no way that diversifying into mediocre businesses is an economically sensible thing to do. If Gillette’s shareholders want to diversify, they can do so easily enough, by buying shares in other companies. Gillette’s managers shouldn’t do it for them, especially when diversification means being in the appliance and stationery business.
Perhaps just running a razor company will make other companies come snooping around. But what Gillette’s managers should be worrying about is whether they’re using capital as efficiently and productively as they can. And the only way for them to do that right now is by selling these other divisions to someone who really wants to run them and go back to what they know how to do best.