1/ TLDR thread...
...of yesterday's Simplanations piece by @zhr_jafri on why P&G wrote $8B off Gillette's valuation last year.

Some context: Gillette was acquired by P&G in 2005 for $57B - the biggest M&A in consumer goods space till today. https://twitter.com/vivekraju93/status/1267120144066596866

2/ At the time of acquisition, Gillette had over 70% market share of US and gross profits (price minus only cost of manufacturing) of over 60%. Innovative razor products and patents for them helped Gillette protect its market share and profits.

3/ But the last 15 years have not been good for Gillette. Sales growth slowed and was mostly negative in the last 3 years. Market share declined to 54% in 2018. This forced P&G to cut down their valuation of Gillette

Side note: How did they do that?

4/ When they bought Gillette in 2005, they paid a premium for Gillette, meaning they paid more than the assets Gillette had. That premium gets added on P&G's book as goodwill (an intangible asset representing brand value).

5/ They cut down this amount by $8B to reflect the slowing sales growth of Gillette
Back to main Q - Why were Gillette's sales slowing? Two reasons
1. Growing love for beards
2. Intense competition among razor makers

Diving into Reason 1

6/ Interesting statistic: In 2011 Indian cricket world cup team, 3 out of 15 had a beard. In 2019 WC, 12 out of 15 had a beard. Beards are the 'in-thing' now. Not just India but globally. No-shave November now attracts millions of men across the world

7/ Obviously, why will you buy a razor if you want to grow a bread? With fall in frequency of shaving - razor sales were affected. Why were people growing beards though? We always had the option to grow them but why now?

8/ Researchers at Univ. of New South Wales did an interesting experiment. Participants were divided into 3 groups and given pictures of men to rate for attractiveness (no, not Tinder). This was what happened...

9/ Group 1, which was given pics with more bearded men, found clean-shaven men more attractive
Group 2, which was given pics with more clean-shaven men, found bearded men more attractive
Group 3, which was given equal mix of pics, had no clear preference

10/ So we were basically attracted to the lowest occurring style. The research also went on to suggest that when we reach a "peak beard frequency", beards would go out of fashion and clean-shaven look will be back in vogue

11/ To seize this new trend, many beard grooming startups were started in the last few years (see pic). Every $ they sold was coming out of Gillette's existing or potential market

12/ Diving into Reason 2

While beards reduced the market size for Gillette, the number of players fighting within the now smaller razor market increased. Why did that happen?
For almost a century, the only two major players in razor market had been Gillette & Edgewell's Schick.

13/ Once both players had introduced a 3-blade safety razor, the shaving experience was close to perfect. With nothing much left to innovate on, both had been launching razors that were more 'flashy' than 'necessary' just to out-compete each other

14/ An eg: a heated razor that gives a hot shaving experience at $300 (seriously??).

15/ The massive R&D budgets & marketing campaigns for these 'flashy razors' (Gillette spent $200M in marketing for one of the razors) meant Gillette had to include these costs in their price and that made razors very expensive.

16/ So now consumers were getting razors at high prices with useless features and no other options to go to. Perfect time for disruption. It was on this premise that Dollar Shave Club and Harry's launched in 2011 & 2012 resp. No frills, affordable razors.

17/ This 90-second hilarious ad by DollarShaveClub in which the founder himself appears perfectly captures what was happening in the razor market. Must watch!!

18/ The new cos. also sold directly to consumer (D2C) & saved on the profit they otherwise had to share with retailers. The passed this savings to consumers in form of lower prices. They became an instant hit and captured 12% market share in a century-old market within few years.

19/ How has Gillette been responding?
To tackle Reason 2 - They slashed prices of razors being sold in stores by 20%. They also started a D2C service similar to DollarShaveClub and Harry's.

20/ To tackle Reason 1 - They recently announced entry into beard grooming products through 'King C Gillette'. It's still a pilot though.

21/ Only time will tell if Gillette is able to recover from this double whammy. But it is a company that has thrived on innovation in the past and stood the test of time - so history is on its side.

Fin. Thanks for your time.