Duracell International Inc. - Company Profile, Information, Business Description, History, Background Information on Duracell International Inc.

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History of Duracell International Inc.

Duracell International Inc. is the world's largest manufacturer and marketer of alkaline batteries. The parent company of the United States-based Duracell Inc., Duracell International markets the brand Duracell, under the same name, around the world and controls 79 percent of the U.S. consumer battery market. Its only real competitor is Eveready, which, with Duracell, combines for about 80 percent of the alkaline battery market worldwide. Known as P.R. Mallory for decades after its founding in 1935, the company's name was changed in 1978 when it was acquired by Dart Industries. Since that time, Duracell has been involved in numerous acquisitions and mergers, including one of the largest leveraged buyouts (LBOs) of the 1980s. Best known for batteries, Duracell also makes a variety of electrical and electronic components used by manufacturers of consumer durables and many related products bought by industry, various government agencies, and consumers.

P.R. Mallory originated the Duracell brandname in 1935. 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. Later, in the 1980s, as electronic technology shifted to the "cellular age," Duracell would adapt its products accordingly, producing smaller cells to meet this now booming technology.

Although sales were growing, the company's business 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. For example, from the early 1960s into the mid-1970s sales grew strongly (the average annual rate was five 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 is 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. Since the early 1980s, however, Duracell and Eveready have been primarily selling general purpose batteries where image is the only means to promote differentiation.

The company 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 points to the unique, and perennial, technological parameters of a profitable battery business--companies can't just invent new battery products without an established application for their use. Thus, Duracell's success has been 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.

Two years later 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, Inc., 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.

Each year, as part of its marketing strategy, Duracell's higher spending on advertising has 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. Today the consumer battery market is 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 is also a leader in the new alkaline manganese battery, whose longer life--up to six times that of zinc carbon--more than compensates 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 is recyclability, notably in Europe, adding another dimension to the competitive struggle. For example, the throwaway image of nonrechargeable batteries has 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 made the case that the costs associated with recycling outweighed the environmental benefits. In some cases, companies have cooperated to deflect costs--Europile, the consumer battery makers association, includes Duracell, and Duracell's Richard Leveton chairs 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 has 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 exerts continuing pressure on Duracell to innovate and cut costs. As International Management summed up in its April 1993 issue: "The struggle for power shows no sign of running down."

Principal Subsidiaries: Duracell Canada Inc.; Duraname Corp. USA; Duracell Danmark A/S (Denmark); Duracell Finland OY; Duracell Holdings (UK) Limited; Duracell Overseas Trading Limited (United Kingdom); Duracell SARL (France); Duracell Batteries Limited (United Kingdom); Duracell Italia Holdings SpA (Italy); Pile Superpila SRL (Italy); Tudor Hellensens Svenska AB (Sweden); Duracell SpA (Italy); Duracell Technologies A.G. (Switzerland); E.P.C.I. SA (Switzerland); NV Duracell Belgium SA (Belgium); NV Duracell Batteries SA (Belgium); Duracell Batteries Sucursal en España (Spain); NV Duracell Benelux SA (Belgium); Duracell Inc.; Duracell Argentina SA; Duracell Australia Pty. Ltd.; Duracell International GmbH (Austria); Duracell do Brazil Industria E Comercia Ltda. (Brazil); Duracell Chile Sociedad Comercio Ltda. (Chile); Duracell Colombia Ltda.; Daimon-Duracell Gmbh (Germany); Duracell Asia Ltd. (Hong Kong); Duracell International Trading KFT (Hungary); Duracell Batery Japan Ltd.; Duracell SA de CV (Mexico); Duracell Nederland BV (Netherlands); Duracell New Zealand Ltd.; Duracell Norge A/S (Norway); Daimon-Duracell (Pilhas) Ltda. (Portugal); Duracell Caribbean, Inc. (Puerto Rico); Duracell (SEA) Pte. Ltd. (Singapore); Duracell Svenska AB (Sweden); Duracell-Hellesens Inc. (Switzerland); Duracellven CA (Venezuela).

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Further Reference

"Duracell Uses Packaging to Sell Lights," Packaging, December 1983.Erickson, Julie Liesse, "Perrin Leads Duracell's Charge," Advertising Age, June 26, 1989.Farnham, Alan, "What's Sparking Duracell?" Fortune, July 16, 1990.Huhn, Mary, "Batteries and Boxer KO the Competition," AdWeek, November 12, 1990.Lazo, Shirley A., "Speaking of Dividends," Barron's, March 1, 1993.Levine, Bernard, "Dart-Mallory Accord Seen Mirroring Cap Firms' Woes," Electronic News, December 11, 1978."Mallory's Profits Sparkle," Financial World, November 7, 1973.Oliver, Joyce Anne, "Duracell CEO Charged Up About His Company," Marketing News, November 11, 1991.Shipman, Alan, "Power Struggle: The World's Battery Makers Are Fighting Over an Expanding Market as Consumer Demand and Environmental Concerns Put the Combatants on Their Mettle," International Management, April 1993.Tilsner, Julie, "Duracell Looks Abroad for More Juice," Business Week, December 21, 1992.

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