Berkshire Hathway Inc.’s decision to buy the Duracell batteries business from Procter and Gamble Co. (P&G) should be good news for P&G’s Indian unit. Gillette India Ltd runs the Duracell business in India. In the year ended June, Gillette India’s batteries business’ sales rose 21% to ₹ 85.2 crore but its segment profit was a mere ₹ 2 lakh. Even in the previous fiscal, its profit was only ₹ 42 lakh.
Now, low profitability in a nascent business that is being built up is understandable, but the batteries business has proved a tough nut to crack. Duracell competes in a market that not only has Indian makers selling cheaper zinc batteries but also faces stiff competition from Chinese imports. The company has a premium position in the market, and it has become more aggressive in recent years, adopting a value for money proposition, expanding distribution and promotional activities. That has helped sales growth but it has also put pressure on profits.
In the past five years, Gillette’s batteries business has made losses in three years but the past two years have seen these losses recede. Still, Gillette would need to continue investing to grow this business into one that becomes big enough to matter and profitable at the same time.
Meanwhile, Gillette has also entered toothpaste, as part of the parent’s plan for increasing its share of the personal care market in India. In the year to June, for example, its oral care business incurred a loss of ₹ 101.7 crore, compared with a loss of ₹ 37.1 crore in the preceding year. But it was accompanied by sales in fiscal 2014 jumping by 31.2%.
Now, if both businesses are loss-making, why would retaining one be superior to the other? The answer lies in size. The oral care business sales are already at ₹ 434.2 crore, or about a quarter of sales, while batteries contributed to only 5%. The oral care business has a much better chance of not only becoming a substantial contributor to growth, but also to become profitable since it will begin to earn benefits of scale.
Getting rid of the batteries business will allow Gillette to focus its energies on its two businesses with most potential. The flagship shaving products business has been doing well, and both sales and profits grew in the year to June. Of course, even after the sale, Gillette may continue to distribute these products for a fee, till it becomes big enough for Berkshire of thinking of going it alone. That will suit Gillette fine, as it will no longer have to absorb the losses of growing this business.