Procter & Gamble’s $57 billion purchase of Gillette will make some interesting information technology waves in the months to come, but two stand out—radio frequency identification tagging and managing the systems integration.
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 information systems of the two companies.
P&G CEO A.G. Lafley says the combined companies can deliver cost savings of $14 billion to $16 billion a year and sales growth of 5% to 7% on a $60 billion base. That’s up from the company’s previous 4% to 6% outlook.
But the deal is about more than numbers—it’s about scale. This gives P&G the scale to push back on Wal-Mart Stores, which usually dictates terms to suppliers. The scale to enter new countries. The scale to cut marketing costs while boosting research and development. And the scale to make gobs of money.
Lafley says the combined companies could see operating margins of 24% to 25% in a decade, that’s a big jump from P&G’s 19% to 20% today.
And how it manages two key technology challenges will be key to getting there.
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, however, P&G will have more than 16% of sales to Wal-Mart and an even more extensive lineup of products. It suddenly becomes a two-way street.
Can the retailer really not carry any Tide detergent, Gillette razors or Crest toothpaste? Maybe. But it will think a lot harder about it. If it ceases being the emporium where you not just find “always low prices” but “all the products” you really want to buy, its business model starts to wither.
“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 considered leaders on RFID and global data synchronization, an effort to standardize product information such as weight, dimension and height.
Ultimately RFID tags would incorporate this master data. “So far the industry response to RFID and global data synchronization has been tepid,” says Overby. “With this merger I expect a heightened awareness among consumer product CEOs.”
Bottom line: Overby says P&G could wind up using technology to squash rivals such as Unilever and Colgate.
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 that 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, says Daley.
“HP and IBM are already ahead on their cost savings targets and quality of service has improved worldwide,” says Daley. “We can integrate faster.”
At the very least, the integration could be a test of P&G and HP’s project management skills. HP couldn’t comment on the P&G merger or integration. As reported in Baseline’s August issue, P&G and HP took the first year of their outsourcing arrangement slow, but so far the results of the deal have been solid. Nevertheless, HP reported on Aug. 12 that its third quarter results were hurt because an SAP integration was “more disruptive than planned.”
If P&G and its outsourcing partners can pull off a successful and quick integration, it will further validate the company’s structure that allows it to cut costs and outsource as needed. If not, watch out.
One positive is that Gillette’s products have little overlap with P&G’s. That means Gillette will get some centralized services from P&G, but essentially operate as usual since products and the systems that manufacture them won’t be immediately consolidated.
“There is tremendous commonality to what we do. We have virtually the same retail customers,” says Gillette CEO James Kilts, who will oversee the integration. “We know we can combine overlapping infrastructure and get the synergies.”
We’ll be watching.
