No new CEO, but Gillette does have a new product

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Just two weeks after the sudden ouster of its CEO by unhappy shareholders, Gillette Co. announced launch plans for the long-awaited women's version of its best-selling Mach3 razor. But after "The best a man can get" wasn't good enough for Wall Street, can a women's razor lift Gillette's fortunes?

The new system, Gillette for Women Venus, features oval-shaped triple-blade cartridges, an ergonomic handle and a storage unit to hold the handle and blades in the shower. The cartridges include Comfort Blade technology, a new, cushioned-blade design adapted from the Mach3 meant to produce a closer, more comfortable shave. The technology is being phased into all Gillette products next year.

Gillette plans to spend $150 million supporting Venus during its first year, the bulk of its marketing budget for women's razors. A campaign from BBDO Worldwide, New York, breaks in April 2001 including TV, print, outdoor and Internet and is themed "Reveal the goddess in you."


The razor will be in stores in the U.S. and Europe in April 2001 and will continue rolling out overseas through 2002. The handles and refill razors will be priced at $7.49 to $7.99 at retail, about the same range as the Mach3 system.

Gillette spent more than $300 million to bring Venus to market, including extensive consumer testing. Observers had initially expected the launch to come during the second half of 2000.

The Mach3 razor, introduced in late 1997, gave Gillette a shot in the arm and quickly replaced the Sensor Excel as the company's flagship product. While Mach3's share has dropped to 38.2% of the market for the 52 weeks ended Sept. 9, from 45.7% a year before--according to AC Nielsen Corp. figures compiled by J.P. Morgan Securities--it remains the top-selling razor in the U.S. Mach3 blade refill sales--an indicator of repeat use--have increased their share to 32.8% from 24.8%.

But despite Mach3's dominance, the Venus announcement was received with skepticism by financial analysts, who have grown impatient with the company's attempts to improve its bottom line. Analysts point out that while it produces leading brands such as Mach3 and Sensor razors and Duracell batteries, Gillette's profit growth has not matched its brand strength.

Gillette has strung together eight quarters of earnings growth below 10%, a disappointment to Wall Street, noted Bill Steele, analyst at Bank of America Securities. The problem has been in a balance sheet allowed to get out of control and little investment in building sales, Mr. Steele said.

Gillette has leadership positions in the razor market, where it held 71.5% of razor dollar sales and 80.1% of blade sales for the 52 weeks ended Sept. 9, according to J.P. Morgan. It also dominates the battery market, where Duracell holds 50% of sales and the leading market share in toothbrushes with Oral-B's 32.4%.

"How do you reconcile that kind of brand strength with sub-par [earnings per share] growth?" asked Mr. Steele. "Goodness knows, Gillette has the brands."


On Oct. 19, Gillette announced Michael Hawley would retire immediately as chairman-CEO, with President-Chief Operating Officer Edward DeGraan named as acting CEO.

The company had just posted flat third-quarter results, with $2.32 billion in sales, unchanged from the same time last year (up 5% after adjusting for currency). Profits were $575 million, down 3%.


Board members, led by investor Warren Buffett, asked for Mr. Hawley's resignation at a meeting that day. Mr. Buffett's investment fund, Berkshire Hathaway, is the largest institutional shareholder in Gillette and has long criticized the company's management for its underperforming stock.

Mr. Buffett's strong participation was "unusual and could presage rapid, significant change," said Morgan Stanley Dean Witter & Co. analyst Catherine Lewis, one of several analysts who upgraded their forecasts for Gillette's stock right after Mr. Hawley's ouster.

"Gillette has achieved critical mass in its businesses and now must change its culture to maximize profitability and cash flow," Ms. Lewis wrote. "Announcement of a new CEO could be a near-term catalyst for the stock."

Mr. Hawley, 62, was elected chairman in April 1999 and led the drive to concentrate on the company's core shaving, battery and oral care businesses. Earlier this year, Gillette sold its haircare and stationery products brands and shopped around portions of its Braun appliance business before deciding to keep the unit whole.

In conference calls with analysts and reporters after Mr. Hawley's ouster, Mr. Buffett said the board members were satisfied with his leadership, but they felt the company could do better. Mr. Buffett said the search for a new CEO should take about six months.

Unable to shake the repeated questions about the reasons for the ouster, Mr. Buffett reached for a baseball metaphor to explain the boardroom coup. "If you have a .320 hitter, he may be very good, but you hope for a .360 or .370 hitter," he said. "A company like Gillette needs a .370 hitter."

Copyright November 2000, Crain Communications Inc.

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