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Tagging Wal-Mart

By Larry Dignan  |  Posted 2005-02-01 Print this article Print

Newfound mass will give Procter & Gamble pull with the retail giant on technology.

Procter & Gamble's $57 billion purchase of Gillette will make waves, but not just for the obvious reasons.

Sure, Warren Buffett says the merger will create "the greatest consumer products company in the world." But he's not putting the companies together.

A lot of elbow grease will go into combining the companies' information systems. But the combination may rewrite how—and how fast—Radio Frequency Identification (RFID) technology spreads.

P&G CEO A.G. Lafley says the merged companies can save $14 billion to $16 billion a year and deliver sales growth of 5% to 7% on $60 billion of annual sales. That's up from P&G's previous 4% to 6% outlook.

But the deal is about more than bottom-line numbers. P&G now will have the size to push back on Wal-Mart Stores, which usually dictates terms to suppliers. It also has the girth to enter new countries while cutting marketing costs and boosting research and development.

According to Lafley, the combined companies could see operating margins of 24% to 25% in a decade, up from P&G's 19% to 20% today. How P&G manages two key technology challenges will be critical to hitting those targets.

Radio Frequency Identification tagging.

In recent years, retailers have pushed new technologies to suppliers, which really haven't had much of a choice when it came to adoption. When Wal-Mart says it wants RFID by Jan. 1 and a supplier has more than 10% of sales at stake, what choice is there? Many suppliers adopted a "slap and ship" approach to RFID tagging to keep Wal-Mart happy at the expense of return on investment.

A bulked-up P&G may change that equation. Why? Size. Individually, P&G (Wal-Mart accounts for 17% of sales) and Gillette (13%) weren't going to risk losing sales by challenging Wal-Mart's mandate.

Once the deal closes, P&G will have an even more extensive product lineup and roughly 16% of its sales tied to Wal-Mart. That is almost $10 billion—a sum even a $278 billion-a-year retailing giant considers real money.

So, P&G starts to have some leverage. Can the retailer really not carry any Tide, Gillette razors or Crest? Maybe. But it will think a lot harder about it.

"With P&G, there's a much stronger voice on technology standards on the supplier side," says Forrester analyst Christine Spivey Overby. "I think all suppliers will benefit."

Meanwhile, Overby says both P&G and Gillette are leaders in RFID and global data synchronization, an effort to standardize product information such as weight, dimension and height. The combined companies should push those efforts along among consumer product companies, she says.

The performance of Hewlett-Packard and IBM.

Listening to P&G executives tell it, integrating the systems of the two companies should be relatively simple.

After all, both P&G and Gillette use SAP, says P&G chief financial officer Clayton Daley Jr., so even if the flavors of the software are different, the systems are roughly the same.

Executives also touted P&G's Global Business Services structure, which centralizes global functions such as information technology and human resources and outsources anything that doesn't directly relate to products. That setup should make for a rapid integration, according to Daley.

Nevertheless, P&G and HP's project management skills could be tested.If P&G and its outsourcing partners can pull off a successful and quick integration, it will further validate the company's structure. If not, watch out.

One positive: Gillette's products have little overlap with P&G's. That means Gillette will get central services from P&G, but essentially operate as usual since products and manufacturing systems won't be immediately consolidated.

"We know we can combine overlapping infrastructure and get the synergies," says Gillette CEO James Kilts, who will oversee the integration.

We'll be watching.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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