Gillette evaluates shops

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Gillette Co. Chairman-CEO James Kilts is evaluating ad agency relationships as part of a broader "review" of all vendor relationships. That likely will mean lower compensation for Gillette ad agencies. It conceivably could open the door to consolidation or other agency changes on the $600 million global account.

And that puts the onus on the incumbents, Omnicom Group's BBDO Worldwide and Interpublic Group of Cos.' Lowe Lintas & Partners, to justify their costs and demonstrate their effectiveness in order to hold on to their share of the business.

BBDO has the most at stake in advertising, handling media plus the flagship Gillette shaving brand, Duracell batteries and Right Guard deodorant. Lowe handles the Oral-B and Braun brands.

Yet as Mr. Kilts evaluates relationships, he also vows to increase the company's sagging ad support. The former Nabisco CEO with a reputation for bluntness and dispassionate analysis delivered both in his first public appearance with analysts and investors last week. He left little doubt about his goal in reviewing agency relationships as part of his "Strategic Sourcing Initiative," which aims to leverage Gillette's scale to "secure the best possible price on all external spending." He expects to complete all reviews by year's end.

Gillette VP-Communications Eric Kraus did not characterize the agency aspect of the vendor review as a formal agency review that would lead to new agencies, and he wouldn't speculate whether Gillette would consolidate its two shops down to one. "We're taking a look at all areas of spending to make sure we get the best value," he said.

Gillette appears intent on putting a heavy focus on cost and efficiency in agency dealing. In that environment, consolidation or agency shifts could happen. Or so some hungry agencies hope; one agency intent on cold-calling Gillette last week was looking for a marketing director's e-mail address-because the marketing executive's voicemail was full.

Mr. Kilts said no one will be spared scrutiny in the vendor review regardless of tenure of relationship or preferences of individual business units. Mr. Kilts cited analytics as a key shortcoming of Gillette marketing, comparing Gillette to a pilot who tells passengers the guidance system is broken and "we have no idea where we are or where we're going," but adds: "The good news is we have a 200 mph tailwind and we're making great time."

Said Mr. Kilts: "We must know a lot more about how much more marketing money we should spend, although logic and experience tell me we're not spending enough."

He blamed Gillette's problems in part on unrealistic 15% to 18% annual projected earnings growth. In what he called a "circle of doom," Gillette invested in new products to meet expectations, saw sales fall short, then cut marketing expenses and increased quarter-end trade loading deals to retailers to cover shortfalls, which later intensified because of declining ad spending.

Gillette reported $9.2 billion in net sales last year in restated results; gross sales were $10.5 billion, adding in about $1.3 billion spent on trade promotion. Gillette's ad spending as a percent of gross sales fell from 8% in the early 1990s to 5.8% last year, while sales promotion rose from 9% to 13.2%, Mr. Kilts said.

His solution: Lower earnings targets by an unspecified amount, lower long-term sales growth projections to 3% to 5% annually and increase marketing support to achieve those goals.

Company problems aside, the Mach 3 razor, launched in 1998, has been one of the most successful consumer product launches in history, Mr. Kilts said, while the recently introduced Venus women's razor is exceeding early sales expectations by 20% with what he termed the best-testing advertising in Gillette history. He said Gillette needs to spend more on disposable razors as well as the base Duracell Copper Top battery and Oral-B toothbrushes, including a battery-operated power toothbrush.

Analysts panned Mr. Kilts' refusal to provide precise earnings guidance, with at least three downgrading the company after the talk, but they generally applauded his analysis of Gillette's problems. "While the plan was short on specifics and the timing of a turn, he did present a real dose of reality on the state of the company," said Deutsche Bank Alex. Brown analyst Andrew Shore.

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