How to Make a Billion (or more)
Dollar Shave Club is a textbook example of how the new Internet economy will destroy value in incumbent industries.
Capital Thinking • Issue #733 • View online
Probably the most important fact when it comes to analyzing Unilever’s purchase of Dollar Shave Club is the $1 billion price: in the world of consumer packaged goods (CPG) it is shockingly low.
After all, only eleven years ago Procter & Gamble (P&G) bought Gillette, the market leader in shaving, for a staggering $57 billion.
To be sure Gillette is still dominant — the brand controls 70 percent of the global blades and razors market — but there is little question that Dollar Shave Club is a much better deal, in every sense of the word.
Understanding why Dollar Shave Club was cheap means understanding why its blades are cheap, and understanding that means understanding just how precarious the position of P&G specifically and incumbents generally are in the emerging Internet economy.
Dollar Shave Club and the Disruption of Everything
The P&G Formula
No great company — and P&G is one of the greatest of all time — is built on only one competitive advantage. Rather, the seemingly unassailable profits and ceaseless growth enjoyed by P&G throughout its history — amazingly, the company basically doubled its revenue every decade from 1950 to 2010 — was driven through multiple interlocking advantages that created a whole even greater than the sum of its impressive parts.
- Research and Development: P&G has long lived by the maxim articulated by former CEO Bob McDonald: “Promotions may win quarters, innovation wins decades.” To that end P&G has always outspent the competition when it comes to R&D: $2 billion in 2014, double Unilever, their next closest competitor, and the company employs over 1,000 Ph.D.’s and a host of ethnographic researchers. This has allowed P&G to consistently come up with new products and brand extensions and charge a premium for them.
- Branding and Advertising: As inspiring as that McDonald quote may be, P&G also dominates advertising: in 2014 the company spent $10.1 billion in global advertising, 37% more than second-place Unilever. This is hardly a new trend: the company invented soap operas in 1933 to help hawk the cleaning products it was built on, and invented the idea of a brand manager who had a holistic view of products from research to creation to advertising to distribution.
- Distribution and Retail: P&G’s huge collection of brands and products not only gave the company massive scale efficiencies in manufacturing, but more importantly led to a dominant position in retail. P&G built strong relationships with retailers that let them dominate finite shelf space, the scarcest resource for an industry producing relatively bulky inexpensive products.
P&G leveraged these resources in a simple formula that led to repeated success:
- Spend significant resources on developing new products (more blades!) that can command a price premium
- Spend even more resources on advertising the new product (mostly on TV) to create consumer awareness and demand
- Spend yet more resources to ensure the new product is front-and-center in retail locations everywhere
In a world of scarcity this approach paid off time and again: P&G grew not only because its markets grew, but also because it continually justified price increases due to its innovations.
The Gillette Distillation
Small wonder the company was willing to pay a fortune for Gillette; “More blades for more money” was perhaps the purest distillation of P&G’s growth strategy, and Gillette opened the door to the men’s market that P&G had to that point largely ignored.
To be sure, that distillation was easy-to-mock; in 2004 The Onion famously wrote an article entitled Fuck Everything, We’re Doing Five Blades:The market? Listen, we make the market. All we have to do is put her out there with a little jingle.
It’s as easy as, “Hey, shaving with anything less than five blades is like scraping your beard off with a dull hatchet.” Or “You’ll be so smooth, I could snort lines off of your chin.”
Try “Your neck is going to be so friggin’ soft, someone’s gonna walk up and tie a goddamn Cub Scout kerchief under it.”
I know what you’re thinking now: What’ll people say?
Mew mew mew. Oh, no, what will people say?! Grow the fuck up. When you’re on top, people talk. That’s the price you pay for being on top. Which Gillette is, always has been, and forever shall be, Amen, five blades, sweet Jesus in heaven.
That’s exactly what had happened with the Mach 3, Gillette’s previous top-of-the-line model: Gillette increased blade and razor revenue by nearly 50% with basically no change in underlying demand, easily making back the $750 million it cost to research and develop the razor, simply through its ability to charge a premium for new technology, create awareness and demand through advertising, and capture consumers through retail shelf dominance.
Surprisingly, though, when the Onion’s satire became reality — Gillette launched the five blade Fusion with a 40% price premium in 2006, after being acquired — sales were slower than expected: many customers decided that three blades were good enough. Still, things weren’t that bad for Gillette and P&G: customers just kept buying the Mach 3. No business model worth $57 billion falls apart just because one component hits a soft spot!
The Dollar Shave Club Disruption
There was another product launch in 2006 that I’m sure no one at P&G even noticed: Amazon Web Services. Even if they did notice, I doubt the executives focused on the Fusion launch appreciated that P&G’s seemingly unassailable advantages were on the verge of declining precipitously.
Ben Thompson
Feature photo credit: Photo by Sander Sammy on Unsplash