August 7, 2016


Unilever's Big Strategic Bet on the Dollar Shave Club (Bhaskar Chakravorti, JULY 28, 2016, Harvard Business Review)

Absorbing a disruptor. Dollar Shave Club is an interesting illustration of the theory of a disruptor breaking into a highly profitable and over-served industry from the low-end; it's not unusual for incumbents to seek to absorb these rivals when they're still relatively small.

Thanks to the momentum Dollar Shave Club created, the online market for razorblades has grown from essentially zero to $263 million, according to estimates from Slice Intelligence, a market research firm. While disruption has become an over-hyped and misunderstood idea, particularly in the tech industry, it is still relatively novel in consumer goods whose products may be "fast moving," but with far more slowly evolving business models.

Despite all this, it is hard to rationalize paying such a high premium for a small player, no matter how disruptive, with a low margin business model, focused on a zero-sum game of taking business away from an incumbent. This would be particularly at odds in a time when Unilever's corporate strategy is focused on re-balancing in favor of higher margin categories and brands, with growth potential. At the very minimum, the company would be sending a confusing signal to its shareholders.

A fundamental shift in the industry.  A third rationale that builds on the first two, to my mind, is the most compelling one. As I mentioned earlier, a deal such as this - involving an acquisition of a disruptive rival for a five-times revenue multiple -- would feel at home in Silicon Valley. The best explanation for it is that it is, indeed, a "Silicon Valley" play. Unilever's move is a signal of more fundamental changes in the consumer products industry.

Dollar Shave Club has shown that the shaving market can still be transformed - thanks to an online subscription model, a memorable brand, and a strong consumer experience. For more evidence of this, consider that Gillette, still the No. 1 razor brand, saw its market share fall from 71% in 2010 to 59% in 2015. (And for the record, P&G-owned Gillette sued Dollar Shave Club late last year for patent infringement. Dollar Shave Club filed a countersuit in February.)

One of the ways in which P&G managed to slow Dollar Shave Club's encroachment was by responding with its own subscription entry, the Gillette Shave Club. In fact, P&G has extended the idea into new categories, the Tide Wash Club, offering pod refills for a subscription fee. Other competitors, such as Harry's, have also jumped on the bandwagon with its own "shave plans".

In the meantime, the biggest player on the online retail block, Amazon, is growing as a serious competitor to consumer products companies, with its push into private-label goods - diapers, detergents and grocery items -- combined with its "subscribe and save" option for these sorts of staples that require regular replenishment.

The accumulation of these transitions suggests that the classic consumer-products business model is about to be busted across the board, with both retailers and their suppliers gearing up to encroach on each others' traditional positions along the value chain using a digital connection with the consumer.

Shaving is a mug's game in the first place.
Posted by at August 7, 2016 8:15 AM