Duracell International Inc. Business Information, Profile, and History

Company Perspectives:

Through the Duracell Technology Center, comprised of scientists and engineers from around the globe, the company continues to invest in ways to enhance the performance of its alkaline and specialty batteries.

From its long history of innovation and its focus on best serving the needs of the consumer, Duracell continues to set the standard for portable power.

History of Duracell International Inc.

Duracell International Inc., owned by The Gillette Company, is the world's leading manufacturer and marketer of high-performance alkaline batteries. Known as P.R. Mallory for decades after its founding in 1935, the company took on the Duracell name in 1978 when it was acquired by Dart Industries. Subsequently, the battery maker was involved in numerous acquisitions and mergers, including one of the largest leveraged buyouts (LBOs) of the 1980s. Duracell's distinctive copper and black color scheme has been around for more than three decades. In addition to its alkaline batteries, the company sells primary lithium, zinc air, and rechargeable nickel-metal hydride batteries as well as a line of flashlights. Gillette--parent to Duracell since 1996--was in line to be purchased by Procter & Gamble in 2005.

Mallory Charging Up with Duracell: 1935-77

P.R. Mallory and his basic business tenets of "invest in research" and "the customer is King" laid the groundwork for Duracell back in 1935. Independent inventor Samuel Ruben entered the picture in 1944 and with Mallory introduced the world's first mercury battery, forerunner of the alkaline battery. The innovation allowed the U.S. military to replace poorly performing zinc carbon batteries used in their equipment during World War II, according to Gillette.

The battery component of Mallory's business grew steadily throughout the post-World War II period, reflecting the booming economy and the rapidly growing market for consumer durables and electronic consumer goods, some of which would require battery power. The first hearing aid button cell used Ruben's mercury battery technology.

During the early 1960s, the company introduced its AA size and AAA size alkaline batteries. The Duracell brand name was adopted in 1964, and the Copper Top graphic came on the scene early in the 1970s.

Although revenues were growing, the company also closely tracked the business cycle because sales of many of its products were at the mercy of consumer buying power, itself a function of wages and earnings. From the early 1960s into the mid-1970s sales grew strongly (the average annual rate was 5 percent from 1963 to 1972); however, company profits reflected the recession of the mid- and late-1960s, with earnings per share hitting a peak of $2.34 in 1966 before falling sharply with the recession. With the beginning of the deep recession in mid-1973, company earnings began to fall sharply.

Mallory's profit margins were respectable in that price-competitive climate, but were under constant pressure. The boom of 1972 allowed the firm to boost sales of electrical and electronic items to industry, complementing consumer sales. Specifically, makers of appliances bought Mallory components to satisfy the growing retail demand for household items, such as laundry units, electric and gas ranges, and dishwashers, among other consumer durables. The company saw this expansion of consumer durables, in particular, as a basis for long-term growth.

The strong growth in consumer durables generated an expanding volume of sales and, thus, economies of scale in production, meaning lower unit costs, higher profit margins, and some insulation from price wars. Therefore, even as the U.S. economy left the fast-growth path of the 1960s and Mallory's margins fell, it was able to weather the downslide of demand that accompanied the recession of 1973. The company's debt load was small, and, although most of its market was domestic, it was well positioned to take on the foreign firms using their low production costs to make headway into the U.S. market in the late 1970s.

In 1977, Fortune magazine ranked Mallory as the 507th largest company, with $323 million in sales and profits of $10 million (which put it in the 170th position). Most of the company's sales were to individual consumers and to makers of consumer durables. Industry accounted for the rest of Duracell's sales, mostly electrical contacts, welding products, and special metals for the automotive, power generating, aerospace, and communications industries. Mallory was also a supplier of batteries of all sizes to the military, and its Duracell batteries were used in everything from hearing aids to military communications equipment. Brand building was essential during this time; the company's ad campaign focused on the use of batteries in toys, and the "copper-top" image it created would be very successful in promoting the "long life" of Duracell batteries.

The battery was essentially an undifferentiated product, and niches in the market were primarily established through advertising. To a certain extent, before the 1980s, the technology included transistor batteries and photo and watch batteries. But with the advent of the 1980s, however, Duracell and competitor Eveready began to primarily sell general purpose batteries where image was the only means to promote differentiation. Furthermore, the decade would see a shift in electronic technology. Duracell would have to adapt to the "cellular age," adjusting its products to meet the demand for smaller and smaller cells.

High Voltage Deals: 1978-90

P.R. Mallory was bought by Dart Industries in 1978, becoming Duracell Inc. and kicking off what would be a tumultuous two decades of mergers and acquisitions. Many deals transpired in the 1980s, including one of the largest leveraged buyouts in history.

The 1978 takeover was launched by Dart CEO and President C. Robert Kidder, who had come to Dart from Ford. Mallory fought the takeover but eventually settled on Dart's offer of $46 per share, making the total acquisition worth $215 million. At the time, Mallory was being hit hard by competition from Energizer and Panasonic. Kidder had joined Dart as vice-president of Planning and Development and made the recommendation that Dart acquire Mallory in order to add more consumer business to Dart. After gaining control over Mallory, Dart divested several of Mallory's subsidiaries but kept and promoted Duracell.

Shortly thereafter, Kidder joined Duracell as a vice-president based in Europe, where company growth was slower. Within one year, Kidder was promoted by Chairman Pete Viele to vice-president of sales and marketing for Duracell U.S.A. Kidder would be credited with the forward-looking strategy of creating the "cordless Duracell home" of cellular phones and pocket computers and, most importantly, recognizing the need to capture this market. This market shift pointed to the unique, and perennial, technological parameters of a profitable battery business--companies could not just invent new battery products without an established application for their use. Thus, Duracell's success would be highly dependent on energy technologies, especially in the 1980s and 1990s, built into cellular telephones, camcorders, pocket computers, and other innovations.

By 1980 the company was again on the market, this time as part of a deal between Kraft Inc. and Dart. Kraft, which was owned by Phillip Morris at the time, merged with Dart, owner of Duracell. This marriage would last until 1986, when Dart and Kraft split, with Kraft keeping Duracell.

The battery business, meanwhile, kept with its long-held tradition of introducing value-added features. Duracell began placing "freshness dating" on alkaline battery packaging in 1987--the first consumer battery producer to do so.

In 1988, Duracell was taken over by the investment banking firm of Kohlberg Kravis Roberts (KKR) in what would be one of the largest leveraged buyouts of the 1980s. The central players, Jerome Kohlberg, Jr., Henry R. Kravis, and George R. Roberts, raised $62 million to buy out 35 companies between 1976 and 1989, including Duracell. The purchase price for Duracell was $1.9 billion in 1988. Kidder and the management team that organized the buyout from Kraft became 30 percent owners, Kidder was named president and CEO of Duracell, and the new Kidder team devised a particular marketing and restructuring strategy for the newly independent firm.

At the time, the KKR buyout was viewed as very successful in that, compared to other LBOs, there were no assets sold and no large layoffs. Increased research and development spending, prudent debt management, and cost-cutting measures led to an increased market position for the KKR-controlled Duracell. The buyout was hailed by some as KKR's most successful LBO. Of course Duracell also benefited from the increase in battery demand in the United States as well. Duracell and its major rival, Eveready, together controlled 75 percent of the $3 billion a year market. Another key factor in the success of the LBO was the fact that most of the growth of the business had shifted to long-lasting alkalines (from zinc batteries) so that alkalines accounted for 80 percent of Duracell's revenues in 1989.

In addition, the new marketing strategy for the streamlined company emphasized marketing the Duracell brand around the world, including such new products as Lithium Manganese Dioxide batteries and the Copper Top Tester, a package that allowed consumers to test the power of batteries. These marketing commitments were part of the buyout agreement. The commitment to the fierce mass marketing campaign paid dividends as Duracell distribution became vast. "We're in mass merchandising, food, drug, jewelry, and hardware stores, catalogue showrooms, 7-Elevens, and the Price Club, to name a few," said Kidder.

The LBO firm KKR had a reputation for piling on debt as part of its takeovers, and the future of Duracell was uncertain in spite of its strong marketing position. To maintain a healthy cash flow, and as part of the takeover agreement, they sold two plants. Further, shortly after the buyout, KKR took Duracell public in May 1989, and the share values rose from $15 to $20 in the first hour of trading. KKR made a $1.1 billion paper profit, and Kidder made a handsome paper profit as well. KKR still controlled 61 percent of the company's stock while institutions held some 36 percent. Operating profits in the second quarter of 1990 rose 13 percent over the previous year to $194 million.

Back in the battery market, Duracell was closing the gap on market leader Eveready Battery; Eveready held 60 percent of sales in 1986, but by 1989 Eveready's share had fallen to 42 percent and Duracell made a significant gain, to a 36 percent share. Duracell challenged Germany's Varta internationally and in 1988 captured almost half of Europe's alkaline market, despite aggressive advertising by European battery makers, who spent $25 million on advertising that year.

As part of its advertising strategy, Duracell hired the high-profile advertising agency Ogilvy & Mather to promote its new battery tester product. Whereas previous Duracell ads focused on the toy market, these television spots showed people, for example, at a bridal shower, unable to capture the event on film or operate any appliances because their batteries were dead. Of course, had they purchased the Duracell's Tester, they would have known beforehand that the batteries were dead. Promoted as "another Tester-monial," the spots used nonactors in everyday situations where batteries are essential. The spots were very successful.

Established As Power Player: 1991-95

Each year, as part of its marketing strategy, Duracell's higher spending on advertising continued to pay off. Worldwide sales in 1991 were close to $1.5 billion and netted a 43 percent share of the U.S. alkaline market. As of the early 1990s, Duracell was outsold in the U.S. market only by Ralston Purina and was challenged in Europe only by Varta, which is Europe's one major rival to the North American heavyweights.

As Duracell moved into 1993, the unbridled growth of the modern "cellular society"--telephones, computers, compact disc players, and power tools--brought double-digit growth to the battery industry and to Duracell. The consumer battery market had become one of small batteries with more power than ever, with narrow, smaller penlite-type and mini-penlites taking over two-thirds of the market, squeezing out the traditional C and D battery lines.

Duracell was also a leader in the new alkaline manganese battery, whose longer life--up to six times that of zinc carbon--more than compensated for its higher price. Zinc-chloride batteries seemed to be ready to take over the market in the early 1980s but were overcome by the longer-lasting, lower-cost alkaline cell.

As the market for zinc and alkaline cells began to reach its limits in a global market, new challenges faced Duracell in its battle with the largest players in the battery industry. According to International Management in 1993, this intense struggle showed no sign of slowing down. One issue that surfaced was recyclability, notably in Europe, adding another dimension to the competitive struggle. The throwaway image of nonrechargeable batteries provoked concern about the environment, with the European Commission, in 1989, giving battery makers a choice: eliminate dangerous metals (notably cadmium and mercury) or collect batteries for recycling. Although some companies, such as Varta, moved to make batteries mercury-free, some argued that the costs associated with recycling outweighed the environmental benefits. In some cases, companies cooperated to deflect costs; Europile, the consumer battery makers association, included Duracell, and Duracell's Richard Leveton chaired the Europile environment committee.

The rechargeable market was also revived, with companies trying to balance the higher costs of new technology with the potential gains from new markets. Duracell, for example, began supplying nickel-metal hydride cell phone batteries to Fujitsu and launched a consumer version of the same product in the early 1990s. Although Duracell had cooperated with other industry leaders on such issues as recyclability and the environment, intensified competition continued in the core markets. In one effort to reap the benefits of new product development, Duracell entered into a joint research project with competitor Varta (Germany) and Toshiba. The company hoped to expand into new products and new geographical markets, especially in Asia. In any case, the ever present competitive warfare of the industry exerted continuing pressure on Duracell to innovate and cut costs. As International Management summed up the situation in its April 1993 issue: "The struggle for power shows no sign of running down."

Duracell International Inc., parent company of Duracell Inc., was firmly established as a power player in the early 1990s. The company controlled 79 percent of the U.S. consumer battery market. Its only real competitor was Eveready, which, with Duracell, combined for about 80 percent of the alkaline battery market worldwide. Although best known for its batteries, Duracell produced a variety of electrical components used by manufacturers of consumer durables and many related products bought by industry, various government agencies, and consumers.

During 1994, Duracell moved to strengthen its international presence: establishing in India a joint venture to make and market alkaline batteries; spending in China $70 million to build factories to manufacture alkaline batteries; and striking an alliance with Toshiba Battery Co. of Japan and Varta Batterie of Germany to manufacture rechargeable batteries in the United States. In 1996, Duracell acquired Eveready South Africa. But on the European front, the company was planning a restructuring, in response to the economic slowdown which had limited growth for several years.

Sharp New Owner: 1996-2005

Successful international marketer Gillette entered into its biggest deal to date when it acquired Duracell in 1996 for more than $7 billion. Batteries immediately became its second leading product line, behind razors and blades. Gillette planned to funnel Duracell's products through its marketing channel which spanned more than 200 countries across the globe. According to Fortune, Gillette had been looking for a strong addition to its consumer products business during the first half of the 1990s. Gillette also sold Braun electrical appliances; Right Guard and Soft & Dri personal care products; Parker, Paper Mate, and Waterman pens; and Oral-B toothbrushes. All were strong products and Duracell appeared a good match, garnering fiscal 1996 sales of $2.3 billion, with room to grow globally. Gillette's 1995 revenues were $6.8 billion.

The Duracell Ultra was introduced in early 1998, and the company turned its attention to promoting that enhanced performance, higher priced line. Duracell revenue growth, which had averaged about 10 percent annually from 1995 to 1997, dropped off in 1998 and 1999, falling to 4 percent and 6 percent, respectively. Gillette had envisioned a world in which better, more expensive batteries would be embraced as had their shaving innovations. "Consumers [globally] are not trading up to the alkaline batteries as much as I expected," Gillette stock analyst Tony Vento of Edward Jones, told the Boston Globe in April 2000. "I think a lot of that is the result of these economic difficulties around the world in the last few years."

While Duracell's Ultra sales did grow in 1999, it was at the expense of their regular alkaline sales, resulting in a net loss of overall market share. Moreover, Duracell, unlike Gillette, had a major competitor pumping out product to match its innovations. Energizer had introduced its own high-end battery to go up against Ultra for use in "high-drain" electronic products. Duracell's cause was not helped much either when Consumer Reports concluded the added cost of Ultra batteries outweighed performance benefits.

In 2000, Duracell brought in nearly 30 percent of overall Gillette sales but the battery maker's operating profits had fallen off by 28 percent. The departure of Gillette's top executive in the fall of 2000 was due in part to Duracell's performance, according to the Boston Globe. For 2001, Gillette planned the relaunch of its mid-priced Copper Top line, complete with improved performance, new packaging, and the return of TV ads.

Other factors contributed to Duracell's woes in 2000. During 1999 batteries flew off the shelves, driven by the much publicized possibility of power blackouts related to Y2K computer glitches. In 2000 those batteries by and large were still stockpiled in the homes of consumers. During the year, competitors turned to discounting to drive up sales and gain market share.

Promotional spending continued into 2002. Duracell sponsored the World Cup tournament and launched the "Trusted Everywhere" campaign. The company also implemented price cuts in the light of intensified competition. Despite these tactics, Duracell's market share dropped to 45 percent in 2003. Energizer and value-priced Rayovac were beneficiaries.

The unprecedented hurricane season aided Duracell in 2004, as Floridians and others in the Southeast suffered with wave after wave of damaging storms. Demand for digital electronic products improved the outlook of batteries introduced for that segment of the market. The disposable Duracell CP 1 primary prismatic battery, for example, was integral to some new digital cameras. "With devices getting smaller and smaller it becomes harder for manufacturers to incorporate disposable and rechargeable power into digital cameras," Kara Salzillo, manager of grand communications, told Chain Drug Review in early January 2005. "With a flat shape and high-power chemistry our new battery fills a void in the market, so we are very optimistic about its possibilities."

In late January 2005, Procter & Gamble Co. (P&G) announced plans to buy Gillette. The combined businesses would create a company with more than $60 billion in annual revenue. The sale was expected to be completed in the fall of 2005. "For Gillette, P&G's broad reach will help it sell more razors and batteries in huge developing markets like China," Jessica Wohl wrote for Reuters.

Principal Competitors: Energizer Holdings, Inc.; Varta Aktiengesellschaft; Beghelli S.p.A.; Exide Technologies.

Chronology

• Key Dates:
• 1935: P.R. Mallory founds Duracell's predecessor company.
• 1944: Inventor Samuel Ruben joins forces with Mallory, kicks off battery business.
• 1966: Earnings per share hit $2.34 before falling off with recession related drop in consumer spending.
• 1972: Sales of electrical and electronic items to industry are boosted.
• 1978: P.R. Mallory is acquired by Dart Industries.
• 1980: Dart merges with Kraft Inc.
• 1986: Kraft retains Duracell portion of business after split with Dart.
• 1988: Kohlberg Kravis Roberts takes over Duracell during leveraged buyout spree.
• 1989: Duracell goes public.
• 1996: The Gillette Company acquires Duracell.
• 2005: Procter & Gamble is set to buy Gillette.