Online retailing and the Dollar Shave Club
Unilever and the Dollar Shave Club, can either one make the other grow?
In March 2012 Dollar Shave Club (DSC) started selling subscriptions for monthly shipments of razors and blades. Within 4 years of its launch DSC had managed to reach $150 million in revenues, capturing 5% share from the $3 billion-dollar male grooming market [1][2]. By implementing an online direct to consumer business model, DSC took by surprise CPG giants P&G (in control of 60% of the total market with Gillette [3]) and Energizer (with Schick). Their insights were clear; blades are expensive, men don’t know when to replace them, competitors are bound by their relationships with big retailers.
The business model
DSC offers an online subscription for replenishment every month a new set of four blades and additional male grooming products. Each subscriber that logs into DSC’s web page is asked to choose the frequency of the delivery, and one of three different types of razors; one with two blades, one with three, and one with six. The razor is given for free in the first shipment, and a set of four blades is shipped every month to be changed on a weekly basis [4]. Additionally, the company offers anytime cancellation for the subscription without additional charges. DSC’s success is rooted in:
- Trial barrier elimination: The first month of the subscription costs $1 for any kind of razor and $2 for shipping and handling. The new user can try whichever razor/blade combination without having to pay for the razor at a very low cost compared to traditional razors. Gillette fusion’s retail price is at least four times higher.
- Blade replacement: How often blades are changed greatly affects the quality of the shaving experience. One of the key challenges for companies like P&G had been educating its consumers on the frequency of blade replacement. By doing monthly replenishment of 4 blades DSC is successfully training its subscribers to change blades weekly, and by doing so, increasing the perceived quality of the shaving and of the blades themselves.
- Online retail: the most important success factor for the model was reaching consumers directly and taking the purchase of blades from the store to the web. Online retail enabled the customers to receive by mail their products without having to worry about going to the store. Additionally, it became a competitive advantage for DSC; the shaving market was a category that existed mostly in stores, a space restricted to big competitors with sophisticated demand forecasting and inventory management, broad retailer relationships, and generous marketing budgets. DSC grew without any of those capabilities by eliminating the retailers from the supply chain. Gillette and Schick could not react immediately, given the risk of the portion of their businesses sold in traditional retailers, who resent vendors bypassing them.
The operating model
The supply model for DSC is relatively simple. DSC sources from different contract manufacturers in China and South Korea [5] and manages in one distribution center small inventories, eased by a “built-in demand forecast” based on the known demand from subscribers. The only significant source of variability in volume comes from the calculations of new users signing subscriptions. It has been reported that DSC charges its subscribers as much as 3 times more for blades and razors as it would cost them to purchase directly from DSC’s suppliers [6]. The resulting high gross margins over low cost blades, and the savings from not paying for retailers front margins, makes DSC financially feasible.
What next?
In July 2016 Unilever announced the purchase of DSC for $1 billion, adding the shaving business to its personal care portfolio in the US, and enhancing the breath of competition with P&G [7]. Not only is Unilever going after one of the largest profit pools of its main competitor, but is also gaining capabilities in online retailing, where the main industry players have seen themselves surprised by startups. As strategic as the purchase may seem, the company will face two challenges:
- Can Unilever scale the Dollar Shave Club brand in its current set of customers? To use the scale of Unilever to fuel DSC’s growth the brand could be listed across US retailers. It would come with a challenge on how to deliver the convenience and blade replenishment that made it successful, and how to avoid brand erosion and cannibalization
- Can Unilever scale the online retailing model of DSC to the rest of its brands portfolio? The likes of Walmart, Target or CVS, longtime partners of big CPG companies, don’t favor suppliers that bypass them reaching consumers directly. In a market still dominated by brick and mortar stores, Unilever would be facing a tremendous risk with its channel partners expanding the model to other brands. The same reason why DSC succeeded, could be the one reason to limit Unilever’s ability to continue growing it.
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References:
[1] Bloomberg. Why Unilever really bought Dollar Shave Club. July 2016. https://www.bloomberg.com/news/articles/2016-07-20/why-unilever-really-bought-dollar-shave-club
[2] Forbes. Blade runners start up Harry’s bold plan to go after Gillette and Dollar Shave Club. September 2016. http://www.forbes.com/sites/stevenbertoni/2016/09/14/blade-runners-start-up-harrys-bold-plan-to-go-after-gillette-and-dollar-shave-club/#1041526b3cb7
[3] Fortune. Gillette shaving Club wars. October 2015. http://fortune.com/2015/10/23/gillette-shaving-club-wars/
[4] Dollar Shave Culb. Company Web Page. https://www.dollarshaveclub.com/how-it-works?rel=header-how-it-works
[5] The Economist. Blade Runners. March 2012. http://www.economist.com/node/21551497
[6] Market watch. Does Dollar Shave Really Save? April 2012. http://www.marketwatch.com/story/does-dollar-shave-really-save-1334930885394
[7] Bloomberg. Unilever buys Dollar Shave Club with $152 million in sales. July 2016. https://www.bloomberg.com/news/articles/2016-07-20/unilever-buys-dollar-shave-club-with-152m-in-sales
Great post, Pablo! There are few things that make people cringe more than buying ludicrously overpriced razor blades. Dollar Shave Club recognized this pain point and developed a creative model to address it. Many people I know shifted to DSC feeling that the traditional CPG razor companies were solely in the business of gouging them. To your point, I think it will be interesting to see how customers perceive the DSC brand moving forward now that it is controlled by one of the big CPGs. Naturally, DSC has seen increased competition too with others like Harry’s rapidly entering the space. Moving forward, Unilever must continue to leverage the creative branding and marketing that made DSC so successful, which could be challenging since it is quite different to Unilever’s traditional approach to marketing.
Very interesting post Pablo. I had actually seen some of their advertisement on facebook but never really clicked on any.
Speaking from the customer’s perspective, I still see this business as a niche market, mostly because there is significant loyalty to the brand, which means resistance to change.
Nonetheless, I see this model to be quite a significant challenge to Unilever. Operationally speaking, issues such as knowing your customers demand and inventories management are key advantages, but there is a big risk people start perceiving razors as a commodity, which will erode brand equity and perhaps start a “war price”, thus creating additional challenges for the operations team in order to save costs.
Good food for thought here. I wonder if P&G is kicking themselves for not getting their first? (regulatory reasons around anticompetitive bodies?). While DSC has made significant inroads, there is still vast space for others to play in. DSC is for example reliant on a fairly sophisticated supply chain to the end consumer vis-a-vis Gillette. Granted economies around the world are advancing, however, it feels like the likes of Gillette have plenty of time to come up with their own offering and win. There are very few barriers to entry and arguably Gillette is a significantly bigger brand, particularly with a huge amount of penetration to leverage as a starting point. I think they answer may lie in their business model definition, moreso than in their operating model for now. As you say, let’s wait and watch!
This is a great post that shows how disruptors can catch complacent companies off-guard, quickly stealing market share in the process. While I think that Unilver should be able to grow DSC using its scale and resources, I do wonder how changing consumer preferences will impact the shaving industry. A major concern that I have is the declining revenue in this space caused by beard and stubble trends. Though the stats are a bit dated, a WSJ article notes that total razor and blade sales have declined from $3.08 billion in 2012 to $2.96 billion in 2014 (source: http://www.wsj.com/articles/SB12147335600370333763904581058081668712042). I wonder if Unilver executives will have the patience to grow this company given declining market revenues. Moreover, it would be interesting to see how the company tracks customer attrition data, i.e. do these customers stop purchasing razors because they moved to a competitor or did they stop shaving for a period of time. Although it could be challenging to encourage men to shave more frequently, Unilver might consider expanding DSC’s product line by targeting men with beards. Such products could include trimmers, scissors, etc. that could allow DSC to continue their relationship with men who stop shaving. Also, the company could improve on marketing their products to women. Altering DSC’s branding image or creating a sister company may be another way for Unilver to grow in this market.
Great post. I used dollar shave club for a bit, and then I decided to grow a beard…
I share Sam’s concerns above about how they react in an environment in which beards are clearly more in. But I also wonder if much of DSC’s brand equity will fade away after this acquisition. I think one of the reasons I was attracted to this brand was that it felt like a small, little known start up, that was doing shaving a different way. It is for much of the same reasons I tried Harry’s razors. If they are part of a big conglomerate, do they lose part of that brand equity and devoted following? I’m not sure, but it is something to keep an eye on.
Interesting post, thanks Pablo. DSC is definitely leveraging digital to acquire new customers through its subscription model. The startup promises to shave time and shave money by delivering razors and blades in bulk for a fraction of the cost of the grocery-store equivalent. However, in my view, digital is just a smart operational choice enabling to cut costs instead of paying for brick-and-mortar but in now way an essential component of the business model. Indeed, as an e-commerce startup, DSC’s appeal is not so much in its digital prowess but in its ability to create a powerful brand in no less than 4 years. As an early investor puts it in the following Bloomberg article (https://www.bloomberg.com/news/articles/2016-07-20/why-unilever-really-bought-dollar-shave-club), “he never saw the shaving upstart as an e-commerce company. The key, he said, is how Dollar Shave Club developed relationships with men, many itching to find an alternative to the high-price blades sold by Gillette and Schick”. Few other e-commerce startups can claim to have built a brand so quickly, nor have e-commerce startups attracted $1 billion bids. Traditional marketing master Unilever is investing in DSC in order to build on the direct-to-consumer segment, to hone in on customer-relationship skills, to gain access to customer insights, or to preempt competition, but not so much to position itself as a tech-savvy organization.
Great post, Pablo! I imagine part of DSC’s appeal was the perception that the razor industry was woefully over-complicated with its “flex-ball” technology and “every few years let’s add a blade” innovation approach. How many blades is enough? I’m not sure I know lol. Admittedly, I use one of those fancy blades but I did purchase it at Sam’s Club at a pretty steep discount over other channels. My question for DSC is how they can best commercialize the data they’re collecting by going direct-to-consumer. I imagine, assuming there’s a sufficient capacity for customization in the supply channel, that razors could move from one-size-fits-all to a more personalized, custom product by collecting data on performance over-time from users. Not sure if the world requires this level of specificity in razor design, but I could see customization as an interesting path forward to drive further differentiation given the consumer data DSC has compiled.
Great post Pablo. Although I never used DSC, I did use Bevel, which is another razor subscription service. I actually found the monthly replacement overwhelming at times. I would often have razor build-up, as the service recommended changing blades everyday. Nevertheless, what DSC accomplished is nothing short of amazing, disrupting an old boring industry. I’m interested to see how Unilever handles this. Also, will DSC remain cool and hip as it once was?