Some thoughts on Gillette India

Posted by | October 31, 2013 | Stocks | 2 Comments
One common bullish viewpoint made by most of the investors regarding Gillette has been “Market potential is huge considering its a highly under-penetrated market & Gillette is largely a monopoly business”
 
Lets break up the target market into urban men & rural men and see if there is actually that kind of potential:
 
Urban Men (Metro/Tier I/ Tier II)
Look around and talk to any working man, chances are that he will be shaving with a Gillette razor.
 
Now if entire target segment in Urban area is already using a Gillette product where can the growth come from?
  • Uptrading: A guy using Gaurd/Presto could up trade to a Mach3 and later to Fusion.
  • Rise in working population: Every year some part of youth, which otherwise finds it cool to keep beard, would start shaving more frequently as they get into corporate.
I cant figure out a third source of growth for this company’s ‘blades and razors’ division as far as Urban areas are concerned.
Its neither a story of migration from ‘unorganised to organised sector’ nor its a story of winning hearts of competitor’s customers (Gillette already caters to majority of the market atleast in Urban areas)
 
The lower class people living in urban areas generally don’t use razor; they either get it done at under-the-tree barber for Rs10 – Rs15 or do it themselves using a similar tool (called Ustra). I did a small survey which revealed some people from this segment are using a blade called Wilkinson which costs Rs10 for a pack of 5 and is again a brand owned by Gillette only. Agreed some of them are switching to Gaurd, however isn’t that cannibalizing sales of Wilkinson blades? (http://goo.gl/2ld09E)
 
Well I also know elite people who use Presto and some who have switched from Mach3 to Guard/Presto (Gillette has indeed developed a good product). But if 10 people upgrade from ‘Blade to Guard/Presto’ or ‘Gaurd/Presto to Vector’ and just 1 goes down from a Mach3 to a Gaurd/Presto, the effect on topline is nullified.
 
The segment that uses Mach3/Fusion is the premium end of the market. Over time, some of them would switch to electronic shavers-cum-trimmers (starts from ~2 grands) which have a life of over 3 years, are much smoother to use, give a close shave and leave no chance of getting a cut. Some of them have a trimmer attached which will be convenient for those who keep French/Moustache to trim it post a good shave.
 
Non-Urban (Tier III/ Tier IV/Rural Areas)
Lets assume half of these guys go to a barber for shave.(Lets call them R1) This costs 7-10 bucks in a village. Frequency of the shave could be weekly or fortnightly. So in any given month, this guy spends anywhere between Rs14 – Rs40 on shaving. A shave done with an ustra is way better than the one done with Guard (source: own experience coupled with survey). Also the professional doing 40-50 shaves every day knows how to use an ustra so chances of a cut are rare.
Point I am trying to make is that what incentive are we giving to this guy to start shaving himslef? If you include the cost of cream/gel and the 10-12 minutes one has to spend carefully doing it, there might not be a meaningful difference for somebody in a village.
 
The other half of the men population are the ones that shave at home. As of now a good proportion of them must be using an ustra containing a blade that could be of Wilkinson or some competing brand. We basically want this segment to move to Gaurd/Presto. Assuming by now they are trained to use ustra without cutting skin, it will be expensive for somebody to uptrade to Gaurd. However out of the sheer aspirations, lets assume some of this pack, and some from R1 join the do-it-yourself club, and up-trade to Guard (buy one for Rs 19/-) Is that good enough? Of course not, we want it to be like printer-ink story, buy a printer and keep coming back to us for a pack of cartridge, right?
 
My question is why would a village guy or a farmer shave every day or for that matter every week? I doubt we can do anything to increase the frequency at which a rural man shaves.
 
Guard can comfortably last for 8-10 shaves. In a bullish scenario, assuming he shaves every week, he would replace blade every second month i.e. he will spend Rs 42 per annum. (Rs 7 * 6 blades)
 
To summarize my thoughts:
Those who shave frequently (urban guys) already use Gillette
Those who don’t might switch, but the effect would not be that exponential as much as it apparently looks
 
However, I believe the good part in this story is pricing power as:
  • Monthly spend on razors is not at all a meaningful portion of one’s monthly expenses
  • Competition is low, even if price hike hurts you there is nothing you can do about it except the case where you might switch to a lower price point razor of Gillette. (this would also be rare as once you use Mach3, you wouldn’t be satisfied with a Vector).

Like most others, I also used to think of Gillette as a monopoly business, but not anymore. During my survey, one of the respondents told me that he uses a 3-blade razor, similar to Mach3, that comes with 4 extra blades and costs him Rs 50. Each blade lasts for two months (he shaves twice a week) so this Rs 50 pack is good for almost a year. Notice that I mentioned ‘competition is low’ and not that ‘competition is not there’ as I came across this Indian company called Laser (Malhotra’s). May be this company is already catering to price sensitive rural market with pricing at 1/8th of Gillette. Its shocking to learn that it manufactures 4 billion blades every year and also exports to developed markets like USA and Europe. Though today brand recall/visibility is low, who knows tomorrow this company might get aggressive to protect and in fact increase its market share.

http://www.malhotra.com/compnay.htm

 
 
Lastly, the problem with Indian men is that they forget to replace the blade. Almost everybody, including myself, uses a blade for 1-2 months, some even longer – not good for Gillette.
 
I am sure Gillette bulls would have strong rebuttals on this and I am totally game for it :) 
 
PS: I restricted myself to only the shaving products division (~70% of the business) and did not study the Duracell Batteries & Oral care segments.
 
At 5 times sales, 80 times trailing profits, 10 times book, even if the story was true, I feel its largely priced in. One might reconsider it post a 25-30% correction.

2 Comments

  • I recently attended Gillette’s AGM; this was my second AGM and was no different from last year’s or for that matter any usual Delhi AGM.. it was more about the lunch and gifts!
    Anyways, I somehow got to speak to the management and following is the stuff we discussed:

    •”Acc. to mgt Market size of ‘Blades and Razors'(B&R) is ~1400 crores and pre & post-shave is ~300 crores. Out of 1036 crore segment’s topline, only 70 odd crores is pre & post shave; rest all is razors and blades”
    • This implies Gillette has 69% (966/1400) market share in the B&R category and 23% (70/300) in pre & post shave category.
    • However estimates/mkt shares shared in corporate presentation (Oct’13), released just before OFS, were way higher:
    o ‘B&R and shave prep’ market is $530mn i.e. 3,200 crores.
    o Gillette’s market share in the B&R category is 68%
    o 50% in the overall segment

    •Speaking about competition, two names came up Topaz’s Super Max & Malhotra’s Laser. “They are mainly into double edged razors, and that’s how their volume sales are very high. In this 1.8bn double edged razor market Gillette has only 25% market share”.

    •Toothbrush market is 1,200 crores, growing at 10% per annum
    •Toothpaste market is 6,000 crores. Oral-B has launched three variants at three different price points.

    •Neither got advertisement and sales promotion break-up nor category-wise ad.”

    My take
    The market size figures confirm my bearish stance on the market opportunity in B&R category.
    Pricing power no doubt is enviable but I wouldn’t be recommending stock at this price!

    So to sum it up, cash generated from Shavings products category will finance brand building for the Oral-B toothpaste over 3-4 years. I think the segment is already hyper competitive with Colgate, Pepsodent, Close-up serving masses, GSK’s Sensodyne & Amway’s Glister serving the premium segment and then you have plethora of regional brands and each cult/baba having its own brands.

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