Back in 2013, I had written a post on Gillette discussing the likely challenges it is going to face in growing its business. A business with such headwinds trading at 80 times earnings should have gone only one way- down. That’s a different thing the stock has actually more than doubled given the exuberance in markets. Nevertheless, it has significantly underperformed the broader markets.
For a long time, Gillette was touted as the perfect example of a moated business, well reflected in its 70%+ market share, 60-70% gross margins and extraordinary Return on Capital Employed. This was all being protected by sustained investments in 1). product innovation; pioneered multi-blade technology and kept on launching better razors latest being a 5-blade razor 2). branding to have a dominant recall.
The demand was assumed to be inelastic given the tiny proportion of income spent on shaving products. ‘What’s the incentive to switch to a competing brand to save 10-20% when the total monthly expense is just a few hundred rupees?’ questioned Gillette bulls.
No wonder it was valued at $57 billion when P&G bought during 2005. Everyone including Mr. Buffett genuinely believed Gillette has an enduring moat. He was the largest shareholder of Gillette post P&G deal and it was one of his top four investments of that time.
But as Jeff Bezos says:
Your margin is my opportunity
Little did I know while writing the previous post in 2013, that a massive disruption was underway in the US which would change the dynamics of razor industry forever. With an eye on Gillette’s margin, DollarShaveClub.com was born in 2012 and one video changed it all:
They offered high-quality razors on a subscription basis, delivered at your doorstep every month for just one dollar compared to $20 charged by Gillette. The response? Within 24 hours of launch, it received 12,000+ orders. DSC went viral and by 2016 their customer base grew to 3.2 million with over Rs 1,000 Cr. in annual revenues. Unilever is reported to have bought DSC in a $1 billion all-cash deal in 2016.
Gillette has been reducing prices to protect its turf, yet has lost a significant ground. As per Euromonitor, its market share is down from 70% in 2010 to 55% in 2016.
Gillette’s moat is surely under threat but are investors bothered? Doesn’t seem so; Gillette India’s market cap is Rs 19,000 Cr which is 11 times trailing sales and 75 times earnings.
Some key lessons & takeaway:
- Thanks to e-commerce, search costs have fallen dramatically.
- The rate of change is accelerating; many erstwhile ‘wide’ moat businesses are getting disrupted.
- High gross margin businesses, despite being moated, are more susceptible to disruption.
- A low-cost moat is harder to breach and hence a stronger entry barrier versus other forms of moat.
- In the Indian context, a parallel can be drawn with how Patanjali is attacking incumbents like Colgate, Nestle, Dabur among others by offering similar/better products at a much lower price point.