Procter & Gamble (PG) recently announced the U.S. launch of its Gillette Fusion ProSeries skin care product line for men.
The launch makes a lot of sense for P&G, which can now use Gillette's dominant male grooming brand to enter men's skin care, a booming niche within the rapidly expanding skin care market.
We expect the Gillette Fusion ProSeries line to expand Gillette's total market, producing about a 1% upside to our $84 estimate for P&G's stock price. Our analysis follows below.
The global male skin care market was only worth about $193 million at the end of 2009, but is growing at about 16% annually. By contrast, the overall personal care market is expanding at less than 4% annually.We expect the Fusion ProSeries line to enlarge Gillette's target market of shaving and allied products to $17 billion in 2010 and $25 billion by the end of our forecast period. We expect Gillette's share of this enlarged market to total 47.3% in 2010, rising to 51.3% by 2016. You can modify the trend-line in the chart below to create your own estimate for Gillette's share of the global male grooming market and see how it impacts P&G's stock price. We expect P&G to realize an EBITDA margin of about 26% on Gillette men's skin care products. This is comparable to P&G's Olay cream's margin but much lower than Gillette's 35% EBITDA margin, mainly because skin care products are somewhat less profitable than Gillette's existing products. We expect Gillette's overall EBITDA margin to decline to 34.6% between now and 2012 before recovering as skin care sales volumes increase from 2013 to 2016, the last three years of our forecast period.
Why P&G entered the male skin care market
- Leverage product expertise: P&G has developed significant skin-care expertise and manufacturing capacity through the Olay brand. As a result, the company can use existing manufacturing facilities, supply chains and technical know-how to build its male skin care line.
- Leverage Gillette's brand: Skin care is a natural complement to Gillette's core line of shaving products. P&G paid $57 billion to acquire Gillette in 2005. Today Gillette is a $7 billion-plus business that commands about 50% of the global market for male grooming products. Because Gillette's brand is so strong, launching a new Gillette line requires little new advertising and media spending to create awareness. And Gillette can cross-promote skin care products with its shaving portfolio.
- Broaden portfolio: Gillette has famously pursued an "up-tiering" strategy based on continually releasing new product versions at higher price points in order to compensate for the slow growth of its consumer base. The classic example is Gillette's multiple blade shaving systems (Mach 3, Fusion et al).
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