Gillette Investors: The Best a Man Cannot Get

Henry Ford knew automobiles would change the world. The rest of the world didn't know that.

His vision was to build cheap quality cars for the masses.

However, in the early 1900s, cars looked like noisy toys for rich people. The world was fascinated about car racing.

But Henry Ford had no interest in car racing. He realised two things...

To build a company, he needed funds from investors and to get public attention he needed to build a racing car.

Both, people and investors during the early 1900s were obsessed with fast cars and races. That was probably the only and the fastest way to get media, public, and investor attention.

Keeping that in mind, Ford built the best race car in the world which beat the reigning champion Ferrari grabbing eyeballs and making headlines.

"That was my first race, and it brought advertising of the only kind that people cared to read," Ford wrote. He became known nationwide.

The attention was enough to raise money from investors and Ford Motor Company was formed eight months later.

That is the power of sales. To put it bluntly, everything is sales.

Actress Gloria Swanson turned down a US$ 1 m movie contract back in 1927. The studio was stunned and asked her the reason for the same.

"I would have been the second or third person in movie history to sign a million-dollar contract, but I was the very first to turn one down," she said.

That remark made headlines and helped her become even more famous, which, I assume, was the point.

Again, to put it bluntly, everything is sales.

Another real-life example on the importance of sales and perception is the story of US President John F Kenndy (JFK)

JFK and his wife, Jackie Kennedy, didn't have a great relationship. In 1955, two years after their marriage, Jack told his father, Joe Kennedy, he wanted a divorce.

Joe responded: "You're out of your mind. You're going to be president someday. This would ruin everything. Divorce is impossible."

Jack reiterated that he and Jackie weren't happy.

His father shot back: "Can't you get it into your head that it's not important what you really are? The only important thing is what people think you are!"

The marriage endured.

Everything is sales.

For a pharmaceutical company, the amount it spends on research and development, determines its sales trajectory.

In the same way, for an FMCG company, the amount spent on sales, marketing, and distribution, determines the sales trajectory.

After all, for an FMCG product, all that glitters is gold.

To understand the importance of sales and marketing, I ran a basic screener for companies with the highest selling and marketing expenses as a percentage of revenues in the past 5 years.

Sales, Marketing, and Distribution Expenses as a Percentage of Revenues

Company	2018	2019	2020	2021	2022
Gillette India Ltd.	15%	14%	14%	18%	17%
Colgate-Palmolive (India) Ltd.	15%	16%	16%	17%	16%
Hindustan Unilever	11%	13%	14%	16%	16%
Godrej Consumer Products Ltd.	14%	13%	14%	15%	15%
Procter & Gamble Hygiene and Health Care Ltd.	15%	17%	14%	13%	13%
Marico Ltd.	13%	12%	12%	14%	13%
Jyothy Labs Ltd.	13%	14%	13%	13%	12%
Nestle India Ltd.	9%	10%	10%	11%	11%
Havells India Ltd.	8%	7%	8%	10%	10%
Dabur India Ltd.	10%	11%	12%	11%	10%
Tata Consumer Products Ltd.	11%	12%	10%	11%	10%
Britannia Industries Ltd.	8%	8%	8%	9%	10%
Raymond Ltd.	6%	6%	6%	8%	9%

Source: Ace Equity

The thumb rule for FMCG companies is that higher the sales and marketing expenses, higher the market share and revenues going forward.

Now, only if things were so easy at Dalal Street...

Gillette and Colgate are the top two FMCG companies with the highest spends on sales and marketing followed by HUL.

So, sales should grow faster as both these companies are increasing their sales and marketing spends, right?

Gillette revenues for the last six years from FY17-22 (Gillette follows financial year ending June) have grown at a CAGR of 4.9% while operating profit has grown by 4.5% for the same period.

Net profit for the same period has grown by only 2.6% which is dismal.

What about HUL?

HUL registered a 11.3% revenue CAGR for FY18-23. Its operating profits grew 13.5% CAGR.

Net profit grew at a faster pace of 14.2% CAGR in the same period.

Gillette generates a revenue of Rs 22 bn while HUL is a giant with Rs 606 bn.

Despite Gillette and Colgate spending a high proportion on advertising, sales have been muted.

Over the past couple of years, there has been a lot written and argued over valuations and the whole concept of buying good quality companies at any price or what is famously known as BAAP (Buy At Any Price).

A lot of old-time investors, who have made a fortune in MNC companies, have been advocating the concept of 'MNC Premium'.

Basically, what they want to say is that an MNC company for reasons like good corporate governance and strong parentage along with brand support will always have valuation premium compared to their Indian counterpart.

Well this was true 20 years ago as domestic companies were small and many of them were plagued with corporate governance issues.

The only time a company can get a premium multiple relative to its peers and industry is for 'consistent, above average growth'.

There should be no reason why companies like Gillette and Colgate enjoy an MNC premium for a 2-3% profit growth.

Perhaps there should be a growth stagnating discount given to such companies.

Take Gillette for example...

It ticks all the boxes for analysis.

1. Market leader
2. High ROCE and ROE
3. High cash reserves
4. Steady dividends
5. Very strong brand

However, there is a problem. The question is, if Gillette has a pile of cash reserves and financial muscle, why are sales stagnating?

Apart from small companies like Bombay Shaving Company and the Man Company which are metro cities dominated, backed by private equity players, there is a shift in industry.

The biggest competitor of Gillette is Phillips with its range of electronic trimmers.

In simple words, though it may not be apparent, the problem is advancement of technology.

Shaving with an electronic trimmer is faster and much easier which has led to the shift.

While a lot of people believe market penetration is a problem, the real problem is technology.

To end this, it again boils down the trade-off between valuations and growth.

What do you do with a return on capital employed in excess of 50% when profits are barely growing at 2-4%?

Can Gillette go the Nokia or Blackberry way five years down the line?

If the stock prices of these overvalued MNC were any indicator, the writing is on the wall. They haven't even outperformed the Nifty.

It's something to think about.

Happy investing.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)

Aditya Vora (Research Analyst) Hidden Treasure has 7 years of experience in the markets as an equity research analyst. He is a Chartered Accountant by qualification and worked with some of the big names on Dalal Street like Motilal Oswal, CRISIL, and IDFC securities. He follows a rigorous process of financially screening stocks. At the same time, Aditya believes an investor's edge lies in capturing qualitative factors. His forte is bottom up stock picking. However, he is also a firm believer in the importance of market cycles. Especially identifying emerging themes at an early stage.

Equitymaster requests your view! Post a comment on "Gillette Investors: The Best a Man Cannot Get". Click here!

Thank you for posting your view on Equitymaster!

Comments are moderated by Equitymaster, in accordance with the Terms of Use, and may not appear
on this article until they have been reviewed and deemed appropriate for posting.

In the meantime, you may want to share this article with your friends!

Post another comment

1 Responses to "Gillette Investors: The Best a Man Cannot Get"

winfred nelson

Aug 17, 2023

Great Analysis of Gillette. The investors who bet on Gillete shares, should start growing beard.

Like (9)

  

Equitymaster requests your view! Post a comment on "Gillette Investors: The Best a Man Cannot Get". Click here!

Thank you for posting your view on Equitymaster!

Comments are moderated by Equitymaster, in accordance with the Terms of Use, and may not appear
on this article until they have been reviewed and deemed appropriate for posting.

In the meantime, you may want to share this article with your friends!

Post another comment