Got Biccked ...
Consumer Franchise? Check.
Market Leading Position? Check. Jack Welch’s requisite of 1st or 2nd in every industry? Check.
Plungers are glowing bright…..
Consistent Return on Equity averaging 15%? You’re Goddamn Right.
By now all Warren Buffett’s disciples are salivating, and so was my plunger, until I realised I got biccked.
You see, despite ticking all the boxes in terms of a great company, as investment has been terrible for investors. Annualised returns since 2000 have been abysmal.
Returns can be decomposed of Capital Returns or Share Price Increases and Dividend Returns:
For 18 years BIC would have given you about 0.43% appreciation, while dividends provided you on average with an average yield 1.3%, presenting you a total annual return of 1.73%.
I am a sucker for branded, simple products with market leading shares, thus naturally I was interested in this company.
BIC has three breadmakers :
Writing Instruments – 39% of Sales
Lighters – 35% of Sales
Razors – 22% of Sales
All 3 segments, share a common characteristic of being short-term experience goods, frequently purchased, and where BIC uses it’s brand as a central selling point. Inexpensive, reliable, profitable.
Founder Marcel Bich in the late 50’s was into something when he utilised cheap plastic and economies of scale in the production for the three main segments. But that was not all there was, you see these 3 products have an important characteristic that made BIC not only able to carve out a Top 3 Position in Razors but dethroning Gillette in Stationery and Lighters.
1st Key to Success - Types of Good –
Our interaction with a product/service function defines the relationship we have with them. This relationship can be described as an experience that shapes our view on their effectiveness and quality.
A Short-Term experience product or service is one that the User can ascertain the effectiveness of the product rather quickly. The effectiveness of the product is quick to show itself -a lighter either combusts or not, a pen either flows ink evenly or not, and a razor provides a smooth shave or it doesn’t. But quality emerges within the useful life of the product/service, as we use them over time.
In BIC, an important point arises on its three products – they are used multiple times over its useful life – a lighter is reportedly to have 3000 flames, it’s pen produces 1.2miles (2km) of ink, and a razor promises 30 shaves of quality.
When we purchase, we do not know if any of these attributes are true and there is some uncertainty as to the claims Companies make leading to the emergence of Brands, giving a quality assurance to the buyer. A Brand embodies those attributes and diminishes uncertainty – and in this we have a Long-Term experience good.
BIC’s branded products are purchased rather frequently. For stationery and lighters we tend to have many, and we tend to lose many too, adding to frequent purchases as we need a cigarette lit, we need a pen for school like it or not.
A purchase is forced.
So quality assurance and high frequency purchasing allow the brand to offer a continuity – the repeat purchase knows what he is getting. No Surprises – and that in some sense is priceless for a business when it becomes paired with the habit loop.
The habit loop is when the customer has ingrained in his own mind specific products/services they need to perform a function that they need or desire, and within that loop the customer hardly changes brands often once the first purchase is done.
You can see this in in particular in Shaving where customer remain with the same brand over a long period, and to some extent with lighters & stationery. Loyalty means $.
Marcel Bich was a smart man : ↑ Frequency Product + Long-Term Experience Good + Habit Loop made the seeds of an Empire.
2nd Key to Success - Distribution -
If you are in a high volume, continuity business, then distribution is more important than advertising. Quality and loyalty are ingrained in the continuous buying process – what is needed is the product’s reach– and that means a distribution is key.
To be part of that habit loop eventually you need to be the first to offer when the need emergences. BIC’s products benefit more on a push marketing level, where promotions predominate in order to initiate a purchase. And that has network effects with distribution – the higher my exposure to points of sale, the more product I can sell - creating a continuous profitable loop.
Distribution expenses have contributed over 14% of total sales on average – an impressive sum.
Bic’s constructed its Business around 3 product categories that were disrupted by cheap technology – Plastics – and adding a quality and reliability to the masses that was non-existant prior to BIC entrance to the market. From stationery, lighters to shavers its mass production allowed competitive pricing as we will see. Adding a good distribution system with factories scattered around the world, these easy to transport goods allowed BIC to rise and be consistently profitable.
Grab a coffee, some Pen & Paper and let’s analyse each segment in depth and see how we got biccked
The Razor Business
Hair grows. Clean shaved face for work. Sharp Blades required for comfortable shave. Frequent Loyalty Purchase.
That’s the cycle of the razor business and it has made fortunes out of King Gillette’s 1903 original idea of a disposable-blade razor and to one of the best business models I have seen – the disposable blades makes us captive customers at the mercy of the razor company.
So the industry leaders have distinctive capabilities of Innovation and Reputation, the latter formed by aggressive advertising and emanating from Incumbency.
Razor Paradigm Shifts Through History
The First Wave – Bloodless Shave
Technology or Innovation, in whatever way you want to call it shaped this industry. King Gillette was the first to market successfully the disposable carbon steel blades, providing a great improvement of the common blood shaving experience of a single blade often called the Safety-Razor. Gillette’s patent cemented it’s leadership until today.
Shick also came up with the electric razor as an afront to Gillette’s model, though successful, it never caught much of the market.
The Second Wave – Stainless Steel -
The introduction of more blades into a single razor in the search of a less irritable shave experience propelled the industry forward. In the 1960s Wilkinson Sword came up with a real challenger when it marketed the first stainless steel blades, that prolonged the life of each blade, and that made a real a dent on the market and caught Gillette by surprise.
The Third Wave – Plastic Throwaway Razor -
As Gillette & Wilkinson pursed up-branding, the 1970s saw BIC actually going the other way and creating a single blade, throwaway razor, it exploited an opportunity on the low-end of the market. It not only created the category, but became a staple of the Industry until today. The third wave allowed the industry to fully segment their offerings from premium- to-mass-to- cheap, competing in volume (units sold) over value (dollar share).
The Fourth Wave
The joke of the industry is that to raise prices add an extra blade on the razor (we went from a single one to, two, then three, then five and you know where the trend is going).
However the fourth wave was attacked not through the product but how it was delivered to the customer. With the advent of the internet the industry was severely disrupted by Shaving Clubs – subscription based, targeted direct to the consumer (D2C). Via viral ad campaigns that mocked the industry’s monopolistic, high priced strategy, it struck a note on many consumers and created two unicorns – or billion dollar companies -: Dollar Shave Club and Harry’s.
So BIC’s Shaving Segment got biccked by:
The General Decline of Pricing Power
Note: Since 2014 – 2 Price Rises (Women & New-comers Segment) ; 6 price falls ; 2 Price same
This is North America average prices of disposables. I want you to note that 2015 was effectively the major expansion of Dollar Shave Club, and the havoc it has caused to the Industry.
The general decline is evident in all the Fusion & Proglide (premium 5/+ blades), especially in cartridges. Only the women’s shaving segment was able to command some pricing power.
2. Untimely expansion into the 3-blade and 5-blade Segment, just when the industry turned.
Since 2014, the premium segment companies have lost 9.3% on a $3bn dollar industry. And although you see BIC USA gaining share – introduction of the 3 blade and 5 – they have been caught in the tsunami of falling prices.
In terms of dollar share, see how Harry’s stole 2% points at the expense of the Mach3, and how the down-trading led to a gain of over 4% on the private label business. Customers seem to be fed up with the aggressive pricing of previous times for the disposable industry.
Note the huge expansion in share for private and how BIC disposables (one razor) held, whilst the 3 and 2 blades segments fell.
3. The tectonic shift to D2C bypassing its current model
Online sales account for a quarter of the industry’s growth, and BIC is severely behind in social media presence and engagement compared with Dollar Shave Club (8% market share) and Harry’s (2%). Especially Dollar Shave Club has a proposition that is too close to BIC’s on the recently expanded segment.
BIC’s Razor Financials
The profit margin has contracted massively and profits have halved since the peak in 2015. A €40 million contraction equates to between €500 million to €800 million in value that has been wiped out. That’s 20%-30% of the current market value biccked.
The Writing Industry
With all the computers do people still use pens & pencils? Well, believe it or not but people still buy pens and the overall stationery market is worth nearly $18bn USD, and has been growing especially fast in emerging markets. Albeit from a low base of 2008 (Great Recession), it has grown at 4.5% CAGR according to BIC 2019 Company presentation. Within this industry there are a fairly even 7 distinct categories:
BIC is in all of them, as so are the other industry peers.
Something as mundane as a pen or pencil once was considered the tipping edge of technology and it’s value has been immense.
The Fountain Pen was a technological improvement over the quill which had been used for several centuries – and several patents during the 19th century from the likes of Schaeffer and Parker, it was Waterman who perfected as much as possible the fountain pen with a cartridge, who by 1884 patented it’s fountain pen:
The Fountain pen makers back in the 19th century as Parker, Schaeffer, Waterman are surprisingly still around some 135 years later. Why?
The pen was a long-term experience good. At the time, a pen was very expensive, and there was no way for certain to guarantee that the pen would work tomorrow and that it wouldn’t blotch the paper whilst you used it. And that created brands, a distinctive capability of Reputation, that propelled the name of these pen manufacturers to today as assurers of quality.
Innovation capability was important too, but the fountain pen had two limitations:
Price was high and out of reach for the mass, remaining a niche product
The ink took time to dry, and easily blotched.
It took the genius of two people to take the industry to the next level and propel to the $18bn size it commands today.
The first genius was Laszlo Biro who tackled the burdensome fountain pen with two new innovations:
The ball bearing allowed the pen to work on several surfaces – wood, leather – as well eventually on paper. Also it was a mechanism that an even, controlled flow of ink.
Creation of a thicker ink paste that dried quicker – the same type that we see today on printers.
Today’s ballpoint pens are in one way or another based on this design and patent.
A ball-point pen marketed in 1945 in USA retailed for $12.50 USD or almost $180 USD in today’s money. By 1950s Paper-Mate Co. (founder improving the design over Biro’s patent enough not to infringe it), eventually improved on the ink (faded with the sun) and assured that it would be a long-lasting product, with a reduced price ($3 to $9) competitively priced for a bigger target market.
Marcel Bich, bought Biro’s patent in 1945 and monopolised the European markets, before attacking the US market via a reverse merger with none other than the Waterman Company, and in the 1960s sold a Biro pen for US$.29cents.
In 15 years the price fell 97.5% , whilst quality and reliability improved.
With this strategy BIC conquered 60% of the market, whilst massive consolidation in the industry was done by Gillette Company via the acquisition of Paper-Mate.
Data provided by BIC
From monopolistic positions in the 60s. the stationery Industry in time has been flooded by many private label manufactures as technology became more standardised. Today pens are gifted for free on conventions, hotels, and though they may not have much ink in them to last as much as branded ones, they still do their job.
What has happened to this industry is a paradigm shift from long-term experience good, one that relied absolutely on a Reputation, to one more akin to a hybrid long-term experience good with short-term characteristics – price falls led to a a homogenization of the product without hampering on quality -botching and fading.
The twin attack on the industry – patent expiries led to a flooding of same quality goods in the market, and the huge price deflation caused companies to focus on being the most efficient producers and the best distributors.
Top 7 control only 36.5% of the global market.
And this has forced companies to become more efficient and have distinctive capabilities in the form of distribution networks rather than solely on Reputation. But, in some sense, has limited the potential barriers of entry to the industry.
In these types of conditions there isn’t much space for too many competitors and hence national champions have come to control branded shares of the market.
Hence you see the US Newell & Crayola, from Europe BIC and Faber Castell, from Japan Pilot & Mitsubishi, China M&G.
 Gillette Company sold its consolidated Stationery Business to Newell-Rubbermaid Co.
Profitability – Return on Net Operating Assets
This is my preferred measured of Operating profitability – it takes out Financial leverage that may juice up returns but masks the operating power. I want you to focus on Pilot, Mitsubishi Pencil and Shanghai M&G as they are the closest we have to pure plays.
And it is extremely profitable. A 15% RNOA return is considered a good business, in here we are achieving above that. Why?
 A pure play is a company that has 100% of the revenues from one type of segment.
Prices showcase a lot of things: signals of quality, signals of opulence, signals of desire… but for an investor it signals the key to 90% of an Intrinsic Value calculation. The gross margin, or what you earn from the components you have put together – added value - leaves some hints of pricing power. How much can an ink cartridge, plastic tubes in shape of a pen, and how can I mark it up to the consumer? Have a look:
Stationery seems to be a business that is extremely profitable – components are cheap – and they mark up your average stationery by 2x, reproducing a margin of at least 50% whilst still priced competitively.
Notice how Shanghai M&G Stationery, the leader in China, commands a 25% gross margin or a 1.34x mark-up. They prefer to focus on volume over value. Their pricing of their average product is half of what the others command.
BIC’s Management positioned the Stationery business along many pricing segments and their margins should follow closely those of Pilot. They have carved up the market, called segmentation in polite terms or price discrimination in unpolite terms, between various pricing points:
And this is just in the Pen market which represents 45% of industry sales.
Kid Plunger advice: “So next time you are buying a product, check the price propositions – they give you a lot of insight on the quality of a business and insight into their future return.”
Having agreed that Stationery products have pricing power the problem for the industry overall is actually that growth has been fairly uneven between the top 5 branded companies – something happened in 2016.
Growth had been fairly quick up until 2016 but then major players starting diverging. Pilot (Japan) has stolen market share in the America’s from other players, where sales have grown at the expense of Newell, and to some extent to BIC.
From Cold War to Hot War?
A trend is emerging where competition is starting to encroach on each other, by taking market share from established defined national lines. To the rise of M&G, it has been the Japanese with Pilot who have started expanding with force and new products that have caught the industry by surprise. And they have started their global ambition in earnest in 2015.
Sales have compounded annually since the Great Recession at 3% p.a., but profits have remained below the level of the first year post recession. Sales have increased 38% profits are less 10% on average.
Digging further we find a major culprit - The growth of 3% CAGR came mainly through the 100% ownership in 2015 of Cello Stationery, and Indian company acquired in total for the sum of €314M. Unfortunately BIC does not give us a breakdown of the Stationery Segment of Cello sales, but we do know that consolidation into BIC’s financials happened in 2015, the year they took effective control.
The Indian Nightmare
According to Forbes news source, Cello Pens had sales in 2014 of $100M and the market size was $500M USD and one of the fastest growing. The problem is that BIC overpaid for the acquisition and it has been feeding not through Profits but through Restructuring Costs and Impairments of Goodwill through the years.
This acquisition has been a nightmare. Not only €65M has been written off for the 2015 acquisition and to put that into perspective it is a full year of earnings for the whole of the Stationery segment prior to the acquisition, it has taken a full 4% out of Stationery Operating Margin – roughly €20-€30million of profit that has evaporated.
That translates to more than €300M-€400M in value lost.
Biccked twice now.
This is the company’s’ cash-cow – producing consistently over 2x what Stationery and Razors combined produced in 2018. And it is this segment that is actually keeping the company afloat.
The Disposable Lighter and the Cigarette consumption have been walking hand in hand since it’s creation. You either lit your cigarette with a match or a lighter.
Whomever followed the tobacco companies in the 20th century with products that were related to it made fortunes. Swedish Match Company with Ivar Krueger monopolised the Match industry, whilst lighters were on the luxury segment, provided by the S.T. Dupont company.
Gillette (again…) bought S.T. Dupont in 1970 and by 1972 the company was actively seeking to launch a disposable lighter, especially with the rise of plastics. They eventually launched one, named Cricket but once again Marcel Bich nimble, hungry, company was there to destroy Gillette.
In 1973 BIC launched the disposable lighter in the U.S., and utilised two strategies to take-over the market: Ad Campaign, Low Prices.
The ad campaign with its slogan “Flic my Bic” became viral, especially with its sexual connotations, but the it was by under-pricing of Cricket that it conquered the market – the exact same strategy it pursued 20 years earlier with Stationery. By 1984 Gillette admitted defeat, quitting the market and selling the division to Swedish Match, which had a spectacular fall after the death of its founder, but came back as a tobacco company.
Unlike Stationery, BIC has not let the positioning it had in the 80’s dilute:
It has a 50% global market share, and in the US annihilates competition with over 70% market share.
And that is 50% of €5bn dollar market. As low priced, plastic based, it was prone to competition from private labels, however BIC’s market share is actually higher than Swedish Matches Cricket, and Flamagas’ Clipper, or according to my Croatian connection Djeep.
This is an industry that the leader takes almost all the value – and there are only two branded competitors in a cold war state – where Co.’s respect each others markets and do not engage in pricing, marketing wars to gain market share. Swedish Match has accepted it’s lower positioning in the market and has not sought to enter aggressively where BIC leads.
Have a look at Swedish Match’s Lighter division (in Euros):
Sales and profitability have declined gradually over a decade.
If Branded labels are not a threat, what about Private labels?
Private Labels & Non-Compliance
Competing mainly on volume, with a price that is 50% below the Branded lighters, they have taken a huge chunk of the market. And they have been a headache for BIC.
It has fought back with the EU in 2018, with he alleged non-compliance of ISO 9994 Safety Standards, a ligther specification directive focused on the Tobacco lighters in specific, in order to combat the combustion danger of the Lighter – explosion and limiting ease of use to children.
The problem is, that the price differential is quite considerable and this market will always exist, and in the mind of the consumer, especially the one utilising the product for Tobacco – they wont walk the extra mile to get a branded lighter.
And so this is the current structure of the market.
Lighters and Cigarettes, they go way back.
In fact today 2/3rd of usage is related to cigarettes, whilst Candles and other uses account for 1/3rd and therefore we need to be aware of the development of the cigarette market – this really is what drives frequent purchases. But the trend of smoking prevalence is worrying:
BIC claims a worldwide 50% (excluding Asia) leadership, and extremely monopolistic levels in North America (>70%) and in Latin America (>65%), and less than 30% in Europe. Here are the quick facts:
Smoking Rates are in Worldwide Overall Decline– 8% fall since 2011
Developed Markets declined faster than Emerging
Asia, Middle East and Africa have declined the least
Developing Markets is still a Huge Potential
If we analyse the Consumption of Cigarettes per stick:
Of the Top 5 Consumers of Cigarettes, BIC’s Lighters are present in only one (U.S.), and of the Top 10 is a market leader on two (U.S. & Brazil) reassuring a healthy 300bn+ cigarrette annual potential lights annually of which they take 65% of the market at least.
That equates to 195bn flics per annum just on it’s top markets.
But you wouldn’t be reading this if you weren’t going to get biccked:
Concentrate on volumes as we need to concentrate on usage. If we take the US market, as a model for the Developed Market trends, Electronic Smoking has grown alarmingly fast over the last 5 years, growing in usage by over 3-fold and representing over 36% of smoking consumption and accounting for all the growth in the Smoking segment.
Price has been a key tool for regulators to make Cigarettes an unattractive consumer proposition. Not only that, but e-cig attacked the market with a price proposition at least 26% lower.
The Branding proposition is that Prices command value for the customer:
Price Premium - Safety Compliant Standards –
Value Proposition – more flames per lighter than private labels.
I love businesses that can price higher and still sustain market share and BIC Lighter’s price positioning in entrenched markets is astounding. It commands premiums over branded-competition of over 100% in the US, 16% in Europe whilst providing a lighter that is 40% more efficient on average.
The China market BIC has chosen a strategy reminiscent of the 70s, where it undercuts branded competition. Unfortunately we don’t know the sales or the profits of this division.
But no matter. The key point here is that Lighter Industry has immense price power: whomever commands price premium commands value. And that is what makes the investment plunger glow.
Lighters in general, and if you are a smoker you may relate, is the frequency of which it is rarely utilised to its full lifecycle. We either lend it to other smokers who forget to return, we lose it or misplace it with frequency, or we tend to forget it at home and need to buy it when we need to light a cigarrette. This particular effect is actually quite a powerful pull on the product repeat purchase of either a Branded one or a non-compliant one, a smoker will at least have more than one – hence benefitting all the industry.
Whomever has the biggest distribution, has the biggest market grab potential and no wonder you see such monopolistic levels in certain markets.
Monopolistic levels + Pricing Power = Outstanding Business
The numbers speak for themselves but I would like to point to two things:
It has a pre-tax margin of at least 36%
Since 2015/16 (the same period we saw a decline in the other segments), growth has slowed by more than half, and is 1/3rd of the proclaimed average.
What happened to the decline in 2015? The table of Smoking By Category above can shed us some light: Electronic Smoking Devices and Cigarettes Trends.
Firstly, it may be attributed to electronic smoking devices, but then again they only happened to explode in 2018, and were fairly even until then.
Secondly, cigarette volume trends in the US market have declined 10% or 120M cartons (200 cigarettes per carton).
In mature markets and with new offerings and trends on other forms of cigarettes, namely Vapours and the Heat-not-Burn devices – none of the new category trends, no