Gillette and Schick Should Be Very Afraid

Dollar Shave Club is upending a century-old profit gusher

   
Gillette and Schick Should Be Very Afraid

More than 100 years ago, Gillette figured consumers would pay a premium price for its razor blades if the price of the razor handles were kept low. That principle has guided now-Procter & Gamble-owned (NYSE:PG) Gillette’s and Energizer Holding’s (NYSE:ENR) Schick multibillion-dollar male-grooming businesses ever since — until now.

Dollar Shave Club, a quirky website founded by ex-improv comedian Michael Dubin, may have figured out a way to upend one of the oldest business models in America. Customers pay a monthly fee of $1, $6 or $9 (depending on the product) and receive 3 to 5 razor cartridges per month. The $9 one has a pivot head, six blades and aloe vera strips. Shipping is included.

Razor blades are probably one of the most profitable consumer products ever invented. Cincinnati-based Proctor & Gamble earned $2.2 billion of its $22.13 billion in fourth-quarter revenue from its grooming business, which includes razors. Energizer earned $564.4 million of its $1.2 billion in sales from its personal-care business during the latest quarter.

These companies have added all sorts of useless technologies to their products, such as “low cutting force blades” and “enhanced lubrastrip” that our forefathers were able to do without to no noticeable ill effects.

“Dollar Shave Club is doing the same thing the music-, video- and book-download people did — cut out all of that wasteful bricks, mortar, packaging and handling that added no value to the product,” wrote management consultant Bill Waddell on the site Evolving Excellence.

DSC already has investors feeling uneasy. Shares of P&G, also parent of Tide detergent and Pampers diapers, have barely budged this year. Energizer, best known for its battery business, is down nearly 8%. One blogger called DSC P&G’s “worst enemy.” That’s an exaggeration, but not by much.

DSC, which has gotten $1 million in seed funding from Kleiner Perkins Caufield & Byers and Forerunner Ventures, among others, has created a loud buzz in a relatively short time. Its potential for growth is huge.

The company is charging prices that are far cheaper than retail prices for Gillette and Schick razor blades, which range from about 73 cents to nearly $4. The secret of DSC’s success — besides clever marketing, such as the video on its site — is that it buys its products directly from manufacturers in China and Korea.

DSC is small — Advertising Age reports that 12,000 people joined the site in the 48 hours after the debut of its video, and it continues to gain traction thanks to its 20,000 Facebook fans and more than 10,000 Twitter followers. Worse still for the incumbent razor makers, people seem to like DSC’s products.

“It works just as well as any other razor, but it’s much better because you don’t have to pay north of $30 per month on razor blades,” wrote Matt Lynley in Business Insider.

If DSC can commoditize razors, the margins of brand-name razor makers will be crushed as the companies are forced to compete more aggressively on price. Gillette, the market leader, already is responding by promoting “value” in a recent advertising campaign for the Fusion ProGlide, which shows a man using the same blade for five weeks, according to Advertising Age.

“We haven’t talked about value as much as we’d like,” said P&G spokesman Damon Jones in an interview with the publication. “We know we have to be much more competitive in that space.”

That may be the understatement of the year.

Jonathan Berr does not own shares of the companies listed here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/gillette-schick-should-be-very-afraid/.

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