We want to take the opportunity in this newsletter to talk about one of the stocks we like – Gillette. Gillette has perhaps one of the most durable franchises that one can think of, specifically in shaving systems, where it is the undisputed leader globally with more than 80% market share. Technology and scale are the source of the very strong moat around its business. Many years back, it did get some competition from Bic and Shick, but it was able to quell competition through large investments in technology and stay ahead of the curve.
India is perhaps the only place where one can buy the shaving systems business separately, as the original Gillette has been merged with P&G globally. India is also potentially the largest market for Gillette given the hirsute nature of its population. Penetration of shaving systems in India continues to be very low despite years of solid volume growth by Gillette, as the market in volume terms is still dominated by cheaper double edge blades. Gillette India has been innovating to ease the transition from double edge blades by introducing a number of different products along the price curve. Some of these like Gillette Vector and Gillette Guard have been designed specifically for the price sensitive Indian market. Both have gained significant traction and the Indian consumer has before him a reasonably well laid out path from Gillette Presto to Gillette Fusion and whatever other improvements in technology that may come about in the future. Gillette’s competitors do not have the financial muscle to invest so significantly in technology and one can reasonably expect that Gillette’s value market share in a deeply under penetrated shaving systems market, will grow over time.
Gillette was available at a very attractive price till a few months back because it appeared that investors were focusing on near term profitability, particularly the losses in its recently launched Oral B toothpaste. Besides, Oral B toothpaste, Gillette has a reasonable share of the tooth brush market where it enjoys the No.2 position in the market after Colgate. It also has presence in the portable battery market with the Duracell brand. P&G has got into a transaction globally to sell its Duracell business to Warren Buffett’s Berkshire Hathaway. However, this is a small part of the value of Gillette and will not have much impact on the overall value.
What attracts us to Gillette is its superior competitive position and a highly underpenetrated market which sum totals to a fairly high growth rate for an extended period of time, perhaps extending to decades. Added to that is the fact that anyone who uses a Mach 3 or a Fusion, has a low probability of moving back to a lower grade brand in the Gillette stable because of the difference in experience. This should ensure a gradual premiumization of the market, which can be captured by Gillette because of a near monopoly in the market.
All in all, Gillette meets all our criteria for quality other than its temporary lower profitability. The global management has indicated that it wants to move towards profitable growth globally. Our conviction in the stock increases every time we shave in the morning and whenever we scan the grocery shelves for competition. All in all, a worthy part of a long term investor’s portfolio.