GILLETTE

Jim Kilts Is an Old-School Curmudgeon

(Continued, page 2)

Current and former colleagues fall back on the same adjectives when describing the Chicago native. Words such as "disciplined," "demanding," and "intense" come up over and over again. "I've never worked so hard in my life," says Dave Rickard, CFO of CVS, recalling his years working for Kilts at General Foods, Kraft, and Nabisco. Kilts's budget reviews were grueling, he says. No matter if an item cost $5 million or $5,000, "he would go over just about every nickel being spent."

Indeed, anyone who's worked with Kilts will tell you that he's strict, he's tough, and he demands results. If you can't deliver them, he'll find someone else who will. "He never forgets," says Doug Conant, Campbell Soup's top executive, who worked for Kilts turning around Planters Nuts at Nabisco. "If you tell him you expect to get a 69.6 share three weeks from now, he'll call you in three weeks and say, 'I thought you were going to get 69.6.' "

Kilts's management rules can be equally demanding: At the beginning of each quarter, for example, direct reports must present him with a list of written objectives they expect to achieve. Each week they have to write a one- to two-page memo outlining what kind of progress they've made on those objectives. Then, at the end of the quarter, Kilts grades them from one to 100. Your pay, your promotions (and yes, your job) depend on your grades. Anything consistently below 80 is unacceptable.

At his first staff meeting at Gillette he used an overhead slide presentation to lay out his rules for, well, running a staff meeting. "Attendance required; on time; no substitution without prior Kilts approval," one bullet point read. A slide titled "Behavior" said, "Pay attention: No sidebar conversation or secondary tasks ... really listen." Yet another read: "Jokes, fun--okay."

"He's very demanding," says Louis Camilleri, CEO of Philip Morris, who worked under Kilts briefly while he was head of international foods at Kraft. But as tough a boss as Kilts may be, those who've worked for him insist that if you're able to survive under him, you'll thrive under him. "Everything I do today, I learned from Jim," says Roger Deromedi, co-CEO of Kraft, who worked for him for 18 years. Rick Lenny, CEO of Hershey, who worked for Kilts at both Kraft and Nabisco, still calls him for business advice. Bob Eckert, Mattel's chief executive, worked under Kilts for ten years and helped him turn around Kraft cheese. On hearing the news about his taking over Gillette, Eckert promptly went out and bought the stock. "He doesn't need to come to my kids' birthday parties, but when it comes to helping them go to college someday, he'll deliver the results for me as a shareholder," he explains. Rickard of CVS also bought Gillette stock after Kilts came in. Still, he says, "I laughed when I saw he was going to Gillette, because I thought, 'They have no idea what's about to hit them.' "

Six weeks before officially taking over Gillette--even before receiving his first paycheck--Kilts launched an exhaustive investigation into the company and its troubles. He scoured past annual reports, Wall Street research, industry reviews. He logged hundreds of miles on the road. He traveled with Gillette salespeople. He visited stores. He inspected warehouses and manufacturing plants. He studied Gillette advertising and pored over consumer feedback reports.

During a visit to one of the company's big retail customers, a buyer told him bluntly that he always waited until the last week of the quarter to order anything from Gillette "because I know you will always cut a deal." As Kilts discovered, Gillette's salespeople were heavily into a pernicious business practice known as trade loading. To hit their numbers each quarter, they were willing to do anything--offer cut-rate deals, rearrange product packaging--whatever it took to make a sale. There is nothing illegal about trade loading; it's common in many industries. But it's not often a smart business move--and it wasn't for Gillette. "At the end of the quarter, you could tell that there was a panic to get their numbers," says Chris Darmody, vice president of Shaws, a New England supermarket chain. "They'd come to us with deals we hadn't seen all year."

To Kilts that was a clear symptom of the company's bigger problems. "Desperation is a pretty good word for it," he says flatly. The company had gotten itself into what Kilts likes to call the "circle of doom." It's a catch phrase he uses often, in speeches, in slide presentations, at board meetings, at business school lectures. He's even produced a pamphlet titled "Escaping the Circle of Doom." The concept is basic: Businesses get themselves into trouble by setting unrealistic targets and then, in attempting to meet those targets, they make bad decisions. In Gillette's case, the company had gotten into trouble trying to keep up with increasingly unrealistic sales growth targets.

In many ways Gillette has been a victim of its own success during the 1990s. Its biggest seller--razorblades--is arguably the most profitable consumer product in the world. And nobody markets razors better than Gillette: It sells five times as many blades as anyone else. Some 78 million men use its Mach3 brand. About 71% of American women who use razors use Gillette's Venus brand--and the profit margin on all those razors is close to 40%. That's astounding when you consider that other grocery products, such as deodorant, yield margins of 7% to 9%.

But Gillette's success had allowed it to paper over bigger problems. Duracell, for one. Gillette bought the battery division, which now makes up 24% of sales, for close to $8 billion at the end of 1996. The unit has been a catastrophe. Price wars with Energizer and Rayovac, as well as a failed marketing strategy, led to 21 consecutive months of market-share decline between 1999 and 2001.

What's more, the company had let its spending and overhead get out of control. And Gillette's balance sheet was a mess. Over the years it had become the fastest bill payer in the industry and the slowest collector of debts. As a result, working capital as a percentage of sales--a statistic that indicates how well a company is managing its assets and liabilities--climbed to 36% by the end of the '90s. By contrast, P&G's routinely hovers around 1%, Colgate's at 2.5%.

Financial practices and discipline that are standard at most companies just did not exist at Gillette. The company kept no daily tally of its sales results. It would simply add up its numbers at the end of the quarter. Thus, no one knew with any certainty how well--or how badly--the company was faring until the end of the quarter. And at that point it would be too late to do anything. Another example of Gillette's lack of financial discipline, one that Kilts found particularly appalling: The company had allowed its number of SKUs--industry lingo for the different types of packages the company uses to bundle its products--to explode to 24,000. Many of those packages weren't even selling; they merely sat in warehouses. Worse, by the time Kilts arrived, the company had spent over a year and millions of dollars paying consultants to figure out which product packages to cut back on--but hadn't yet cut a single SKU.

What Gillette needed--and what it got--was a heavy dose of Kilts-style discipline. In his first six months he implemented his grading system, put a stop to trade loading, and overhauled the company's financial reporting system. Now every morning Kilts and his senior management team get a report tallying up precisely how many razors, batteries, and toothbrushes Gillette sold the day before. To instill financial discipline, Kilts also launched a policy he calls "zero overhead growth." Every division head now has to compare its costs with a top industry competitor. Through this process Gillette discovered that its finance division, for example, cost 30% to 40% more to run than competitors' divisions did, while human resources cost some 15% to 20% more. Kilts has left it up to each division to figure out how to get in line with industry benchmarks, but each has to do it. So far the effort is working: Gillette has reduced overhead costs by 4%.

The CEO also overhauled Gillette's supply chain. Prior to his arrival, each division purchased supplies such as cardboard, aluminum, steel, and plastic independently. In fact, until Kilts asked them to add it up, no one at Gillette knew precisely how much the company spent purchasing supplies worldwide. (The figure was close to $4 billion.) The lack of coordination between divisions meant that Gillette wasn't buying in bulk and wasn't getting the best deals. Under Kilts, the divisions have coordinated their buying, yielding some $200 million in savings so far.

Another big change for Gillette is that its CEO has bluntly told Wall Street that the company's double-digit-growth days are a thing of the past. Kilts says Gillette can hit 3% to 5% top-line growth--no more, no less. And while that won't make it an overnight market superstar, Kilts insists that it will help make Gillette stronger over the long term. He argues that realistic targets allow the company to make smarter decisions. Since it is no longer leaching profits through practices such as trade loading, it can devote more of its war chest to new-product launches and marketing campaigns. Recently Gillette rolled out a $50 million ad campaign for Duracell as part of a strategy to reverse losses in market share.

Naturally, Kilts's new discipline has been hard for some Gillette old-timers to swallow. The company has long had a gentle, paternalistic culture, and until Kilts arrived all its top managers had been with the company for decades. Kilts's grading system--which he's implemented throughout the company--made some feel they were being treated like naughty schoolchildren. "When Jim first introduced quarterly priorities, people thought, Isn't this pedantic and unnecessary?" says Ned Guillet, human resources chief and a 28-year company vet.

But Kilts has a simple solution for those who don't like his style: leave. Of his 14 direct reports, ten are new to their jobs. Those who survived the purge say that while Kilts's changes have been drastic, they were badly needed. "If you'd parachuted a whole bunch of new people into Gillette in the early '90s when we were doing just fine, then I think the conflict would have been huge," says Ed DeGraan, a 34-year vet who was acting CEO until Kilts arrived and is now COO. "But if you make that change after there's been a deterioration in our performance, then acceptance becomes easier."

It also becomes easier when the results pay off. Over the past three quarters, Gillette's sales have grown an average of 5% each quarter. In the third quarter profits jumped 20%, to $354 million. Working capital as a percentage of sales has dropped to 14%--still above the industry norm, but a sign that the company's balance sheet is getting stronger. Over the past year Gillette has increased its free cash flow to $1.3 billion, from $815 million. And since 2000 it has paid down $1.8 billion in debt.

Not that the company is out of the woods yet. "The question is, How far is this turnaround going to take us? That's what most people are wondering," says Keith Patriquin, a buy-side analyst at Loomis Sayles. For that reason, investors have been cautious about jumping into the stock. At a recent $30, Gillette's share price is still close to where it was when Kilts took over. To some, Kilts's approach is too conservative to restore Gillette to the successes of its heyday. "He's very careful," observes Al Zeien, who was the company's CEO from 1991 to 1999. But Zeien adds, "It's taking risks, spending money, particularly in a business like Gillette's, that leads to the big successes."

"I'm thick-skinned," Kilts sniffs when asked about his few detractors. "If the stock didn't trade for two years I'd be happy--because we have to do what we've got to do." By his own estimation, Kilts is just halfway through his turnaround. He believes the company needs to go further to cut costs. And Duracell is still troubled.

Kilts, however, has no intention of changing the plan. "Basically you are training an army. We were in basic training. Now we're getting out of our basic training," he says, the tiniest of glints in his eye. "The next step is taking this army to war."

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