Chinks Develop in Armor All’s Market Share : Auto products: It still commands 81% of segment sales, but its formerly invincible strength has begun to slip in the face of competition.
Almost from the day that it was introduced in 1972, Armor All Protectant has been a hit in the retail marketplace.
Within a few years of its debut, millions of car owners had become convinced that they couldn’t do without the waxy white spray treatment for vinyl, leather, plastics and rubber: a classic case of a product creating its own market.
By 1979, when founder Alan Forman Rypinski sold the company, then based in Irvine, to San Francisco’s McKesson Corp. for $49 million, Armor All Products Corp. controlled 93% of the market in terms of sales dollars.
And since the day that it opened its doors, Armor All, now headquartered in the southern Orange County community of Aliso Viejo, posted nothing but a string of ever-increasing profits.
Until now.
Armor All’s once-invincible grip on the market has begun to slip. The company’s longtime president has resigned. Armor All has admitted that for fiscal 1990, which ends Saturday, it will report the first decrease in annual earnings in its history. And Wall Street has responded by trashing the company’s stock.
The turmoil underscores that Armor All is a textbook example of what can happen when an entrepreneurial company grows up without changing its management style and when success goes unchallenged for too long.
True, the company’s current 81% market share, as reported by A. C. Nielsen Co.’s Market Research Group, is still an awesome position that most companies can only dream of achieving. But it signals to a plethora of would-be challengers that there’s a chink in the champion’s armor.
It is also true that Armor All is reporting only a decline in earnings--not a loss--and that the decline comes in the wake of a major expansion.
But the report of the earnings decline was embarrassing. It came just two months after company President Jeffrey M. Sherman said, after three consecutive quarters of declining profit, that the fourth quarter would pick up and that fiscal 1990 earnings “are expected to be flat to down modestly.”
On March 12, the company repudiated Sherman’s statement and said fourth-quarter and annual profit would be down significantly. At the same time, the company announced the resignation of Sherman, who had been president since 1978.
The events caught market analysts off guard, and the company’s stock promptly lost 15% of its value.
Trading in the days immediately after the March 12 announcements was frenetic. On March 13 alone, 38.8 million shares changed hands--an average of nearly two sales for each of the 20.9 million shares of stock outstanding.
By Friday, two weeks after the announcement, trading had returned to a normal volume of about 10,000 shares a day, but the stock price closed at $14, down 35% from the $20.75 at which it began the year. For its part, McKesson, which still owns 83% of Armor All after selling 17% of the company’s stock in a public offering that raised $41 million in 1986, has raced to reassure investors and customers that the market reaction is excessive and that there is nothing fundamentally wrong with the company.
The first step was to name Kenneth C. Hicken, longtime executive vice president of operations at McKesson, to serve as Armor All’s new president and chief executive.
McKesson and Armor All also have teamed up to communicate their message to institutional investors and to the scant handful of stock analysts who monitor and issue reports on Armor All.
Company officials are being closely questioned in three areas:
* The sudden appearance in the market 18 months ago of a well-financed, determined challenger. Son of a Gun! protectant, from the STP division of First Brands Corp. in Danbury, Conn., is the first of more than 120 Armor All imitators to capture a significant market share, climbing to 10% of the dollar volume in less than two years.
* The company’s ambitious expansion drive overseen by Sherman in late 1988. It generated unforeseen costs and didn’t come across with the promised profit.
* A corporate culture that stressed freewheeling entrepreneurial values and failed to keep close tabs on the nuts and bolts of what had become by early last year a major distribution operation. That style apparently ended with Sherman’s resignation and Hicken’s arrival Monday at Armor All’s new $7-million corporate headquarters.
Some analysts believe that the company’s biggest obstacle is its new, well-heeled challenger.
Jeanine C. Heller, auto products analyst with Stifel Nicholas, a St. Louis, Mo., brokerage, said she based her recommendation at the end of February that clients sell their Armor All shares largely on the push that Son of a Gun! was making.
“You cannot have a competitor spending as much as First Brands has been spending to market Son of a Gun! without it affecting profits,” she said. “They are attacking Armor All with huge amounts of advertising and they are buying shelf space for Son of a Gun!”
Heller said she believes that First Brands will pull back on its advertising to improve profit, “but they obviously think it is worth it. Their presence could wreak havoc with Armor All’s profits.”
Rick Bowen, vice president of marketing for First Brands’ auto products division, said the company spent $6 million last year on Son of a Gun! advertising. In comparison, Armor All spent about $7 million advertising its protectant.
In addition, both companies spend millions on incentives to retailers in an effort to get good displays on store shelves.
First Brands decided to launch a challenge to Armor All’s supremacy, Bowen said, “because we figured that was one of the automotive after-market areas showing growth and with room for us.”
One of First Brands’ strategies has been to price Son of a Gun! considerably below Armor All. A 20-ounce bottle of Son of a Gun! retailing for $2.97 at a Kragen Auto Parts store in Costa Mesa is displayed next to a 16-ounce bottle of Armor All, priced at $4.47.
And while officials at Armor All say the challenge has not forced them to lower prices, they have increased the fluid weight of its most popular size. A new 20-ounce bottle of Armor All Protectant now shouts “25% Free. 4 Oz. Extra” at the top of the label. At a Chief Auto Parts store in Santa Ana, the new size was priced at $4.49 versus $3.99 for the Son of a Gun! 20-ounce bottle.
Hicken, in his first interview since taking over at Armor All, acknowledged that First Brands’ challenge was forcing his company to spend considerably more on advertising and marketing.
He said some of the costs will likely show up in the fourth quarter but warned that others could be delayed until the first quarter of the company’s fiscal 1991.
“The board of directors hasn’t even seen our proposals yet,” he said. “They get them on Monday. But basically, we have increased spending for advertising and can either take the costs in the fourth quarter, when the ads were made, or in the quarters in which they run. It depends on whether the board wants to take all the hits in 1990.”
Hicken also agreed with analysts that the company has lost the confidence of the investment community. But restoring it is perhaps the easiest of the tasks facing him.
“I feel comfortable that, for 1991, the numbers we are generating are good numbers. We intend to regain our lost face with the Street by doing operationally what we say we are going to do.”
Hicken said that while fiscal 1990 earnings will fall below the $27.1 million posted in 1989, the “stumbles” that led to the decline won’t be repeated in 1991. In fact, new management and financial control measures already being instituted will result in a profit increase for fiscal 1991, he said.
“It is not a gloom-and-doom projection for 1991,” Hicken said. “Earnings growth will be above 1990, although probably not above 1989.”
While declining to discuss his predecessor or the specific reasons for Sherman’s resignation, Hicken characterized the Armor All of just a year ago as “a tremendous company that was doing hellaciously well with a bunch of go-go entrepreneurs at the helm.”
But in late 1988, Armor All acquired the Borden Co.’s car-care products group, consisting of Rain Dance and Rally lines of car waxes and the No. 7 line of polishes and additives and also launched its own Armor All line of waxes and washes.
With that $29-million acquisition, Armor All became a multiline distributor, and the original entrepreneurial managers “suddenly found themselves in an arena they did not have much experience in,” Hicken said.
“Armor All was not this little whizzing company anymore, it was a substantial corporation.”
Several analysts suggested that Armor All’s management team dropped the ball with the Borden acquisition. (Sherman did not respond to requests for interviews.)
“They needed to diversify because having a one-product company is risky, but Borden didn’t work out as well as they hoped,” said analyst Heller. “With the Borden products and the new Armor All line of wax they came out with last year, they have about 30% of the car wax market, and that can be good,” she said.
Hicken acknowledges that Armor All was hurt immediately after the Borden acquisitions. He says it was because retailers had overstocked in anticipation of a price hike by Borden and they virtually stopped buying for the next quarter.
“This was their first acquisition,” said Heller, “and they missed that.”
But Hicken disputes claims that a more experienced or less complacent management would have seen that Borden poured product into the pipeline and would have negotiated a different deal to account for it.
The wax and chemicals buyer for a major automotive parts chain offers one more reason for the revenue deficiencies from the Borden acquisition. Armor All “didn’t push the products very hard and they were priced too high,” said the buyer, who asked not be be identified because of his company’s ongoing business relationship with Armor All.
“A lot of buyers just backed off,” the buyer said. “We thought Armor All just bought the Borden brands to eliminate a competitor to the waxes it was bringing out under its own name.”
That misconception has now been corrected, with Armor All positioning its own brand of waxes in a middle range between Rain Dance and Rally and pushing hard for sales of all three brands.
Pushing hard for sales is what Armor All has done best in the past, Hicken said. It is also at the root of the financial problems he is now charged with curing.
Even as the company outgrew its entrepreneurial roots with its 1988 expansion, he said, Armor All’s management kept stressing what it had always done best--sales and marketing. Scant attention was paid to the unexciting but all-important accounting department, where a significant problem was developing.
In its entrepreneurial phase, Armor All “had one basic product and a dozen SKUs,” the product codes denoting product type and package size. Now, Hicken said, “there’s a dozen products and more than 160 SKUs to keep track of.”
The company has cooperative advertising pacts with hundreds of retail chains and each quarter must estimate the next quarter’s outlay for reimbursing the retailers.
“There is a tremendous delay between the time the retailers earn the cooperative monies and the time they send in their bills,” Hicken said, “Because things grew so fast, we had much bigger fourth-quarter outlays than anticipated. Several were more than $1 million each, and every million dollars subtracts three cents from our per-share earnings.”
As part of the new, corporate management style that he is bringing to Armor All, Hicken has hired Mervin McCulloch, former Deloitte & Touche regional managing partner, to serve as chief financial officer.
No other management changes have occurred and none are planned, Hicken said. “We feel this is a very good team, but the train got a little derailed because the controls couldn’t keep up with the frantic pace of growth,” he said.
