Gillette / Procter & Gamble
Company Overview
Gillette was the world's dominant shaving products company before its 2005 acquisition by Procter & Gamble. Founded in 1901 by King Camp Gillette, the company built its competitive position on a model that has become the archetype for platform businesses: give away the handle, charge for the blades. This model, combined with relentless product innovation and global brand building, made Gillette one of the most profitable consumer companies in history.
Investment Story
1989: Preferred stock investment. Gillette needed capital to fend off a hostile takeover bid from Ronald Perelman's Revlon. Berkshire invested $600 million in convertible preferred stock paying 8.75% annually, convertible into common stock at $50 per share. This defensive capital helped Gillette resist the bid and gave Berkshire a large stake in a company Buffett described as among the best businesses in the world.
1991: Conversion to common. When the preferred was converted, Berkshire held roughly 11% of Gillette's common stock — one of its three or four largest equity positions.
The business case. Buffett's enthusiasm for Gillette was precisely articulated in multiple letters: every night, hundreds of millions of men go to sleep knowing they will use Gillette products the next morning. The daily ritual of shaving, embedded in male grooming habits across 200+ countries, created near-permanent demand for Gillette's blades. The pricing structure (hardware sold at cost or below, blades sold at high margins) created enormous consumer inertia — switching from Gillette required finding, buying, and adapting to a new razor system.
1990s: Compounding excellence. Gillette launched the Sensor, SensorExcel, MACH3, and Fusion razors during the 1990s and 2000s — each premium product commanding higher prices and higher margins than its predecessor. Market share in premium shaving held above 70% globally.
2005: P&G acquisition. Procter & Gamble acquired Gillette for $57 billion (approximately $54 per share), giving Berkshire approximately $5 billion for its stake — roughly 8x the $600 million preferred investment made in 1989.
Buffett's Own Words
July, we purchased $600 million of The Gillette Co. preferred with an 8 3/4% dividend, a mandatory redemption in ten years, and the right to convert into common at $50 per share. We next purchased $358 million of USAir Group, Inc. preferred stock with mandatory redemption in ten years, a dividend of 9 1/4%, and the right to convert into common at $60 per share. Finally, late in the year we purchased $300 million of Champion International Corp. preferred with mandatory redemption in ten years, a 9 1/4% dividend, and
Capital Cities, Salomon, Gillette, USAir and Champion. Last year we said we had a special interest in large purchases of convertible preferreds. We still have an appetite of that kind, but it is limited since we now are close to the maximum position we feel appropriate for this category of investment. * * * * * * * * * * * * Two years ago, I told you about Harry Bottle, who in 1962 quickly cured a major business mess at the first industrial company I controlled, Dempster Mill Manufac
*General Dynamics Corp. ........ 14.1% -- 11(2) -- The Gillette Company .......... 10.9% 11.0% 38 23(2) Guinness PLC .................. 2.0% 1.6% 7 -- The Washington Post Company ... 14.6% 14.6% 11 10 Wells Fargo & Company ......... 11.5% 9.6% 16(2) (17)(2) -------- -------- -------- -------- Berkshire's share of undistributed earnings of major investees *
Federal Home Loan Mortgage Corp. 8.4% 77 The Gillette Company............ 8.6% 73 McDonald's Corporation.......... 4.3% 38 The Washington Post Company..... 15.8% 27 Wells Fargo & Company........... 8.0% 84 ------ Berkshire's share of undistributed earnings of major investees.. 661 Hypothetical tax on these undistributed investee ear
*The Gillette Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,590 1,727,765 The Washington Post Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,595,180 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,540 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,683 5,135 Total Common Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Investment Lessons
Daily-use consumer habits are among the most durable competitive advantages. Men shave their faces every day or every few days for their entire adult lives. Gillette's brand became embedded in this ritual across generations and cultures — creating consumer loyalty that required no advertising to maintain in existing customers, and that spread naturally as sons observed fathers and young men formed their first shaving habits. Habits built over a lifetime create a form of consumer captivity more durable than rational preference.
The handle-and-blades model creates customer captivity through physical integration. A customer who purchases a Gillette Fusion handle is effectively committed to Fusion blades for the useful life of the handle — which is years. Switching requires purchasing a new handle system and adapting to a new form factor. This physical integration creates switching costs that reinforce brand loyalty: the 'free' handle investment locks in the high-margin blade revenue stream.
Crisis-defense investments can generate exceptional returns. Berkshire's 1989 investment was structured as defensive capital — preventing a hostile takeover Gillette's management wanted to resist. From a purely financial perspective, the 8.75% preferred yield plus conversion rights plus the company's subsequent excellent performance produced approximately 8x returns over 16 years. Defensive crisis investments — where the counterparty needs certainty that overrides price sensitivity — often produce better financial returns than passive market participation.