A strategic assessment of one of last year’s most talked-about acquisitions.
Note: Originally written 23rd September 2016 and distributed to colleagues via email.
1. It opens a new, expanding front in Unilever’s ongoing battle with P&G
The first reason, of course, is that by buying Dollar Shave Club, Unilever has taken 16% unit share of the U.S. razor cartridge market in one fell swoop, making it the second player in the market after Gillette — which globally is worth $7 billion. As analysts at Jefferies stated,
“Unilever are parking their tanks on P&G’s lawn in one of their most profitable categories.”
Two things are worth noting here (I’ll take about a third one later on).
First, The total U.S. shaving market is projected to stay stable at around $3 billion. The traditional shaving market is shrinking while the online market is growing fast ($0.8 billion, or about 25%, created in about 5 years) — and Dollar Shave dominates c. 60% of that online market. Despite its market share growth being tempered in 2015 by the launch of Gilllette’s own shaving club and the growth of other competitors, the company’s rapid growth is formidable: using the power of internet marketing, it spent a fraction of P&G to establish far stronger relationships with 125 million me, and took a massive bite out of it’s business. Unilever will seek to take on Gillette by extending Dollar Shave Club’s first-mover advantage in the U.S. and expanding it into new markets.
Second, by acquiring Dollar Shave Club Unilever is making significant inroads into the wider, and increasingly lucrative mens grooming market. According to Bloomberg, sales of men’s grooming products like face creams and scrubs are expected to grow 4% this year in the States, and 3 percent globally YOY through 2020. Crucially, a lot of the growth will be driven will be driven by the online segment. As discussed in a previous essay, Dollar Shave Club’s business model, strong brand and its 3-million-strong community of enthusiasts make it easier to cross-sell adjacent toiletry products, such as it’s Man Wipes. This is the contrary of Gillette, whose irritatingly high prices and retailer-mediated, digitally out-of-touch brand are not conducive to upselling other products. Or at least not without spending hundreds of millions of dollars on advertising.
2. It tactically wards off others from buying Edgewell Razors, and potentially sets up Unilever to swoop for them at a later date in order to increase scale.
Prior to the announcement of DSC’s acquisition, it was rumoured that Unilever was in the market to buy Edgewell Razors, the company behind Edge and especially Schick — which trailed Gillette as 2nd in the U.S. (before falling behind Dollar Shave Club last year). Analysts say that the Dollar Shave Club deal makes Edgewell less attractive for other consumer goods giants, such as Henkel, Colgate Palmolive, and Johnson and Johnson, because they would now have to compete against both P&G and Unilever — who will probably start a bitter fight. In turn, say Canaccord Genuity analysts, Unilever still see Edgewell as a potential target to increase their market share — although Unilever could just go after Shick and Gillette by fully embracing Dollar Shave Club’s digital, outsourced-manufacturing business model. Whatever scenario plays out to be true, as analyst David Bernstein reckons:
“This was a smart tactical move by Unilever in that it puts up barriers to others who might want to acquire Edgewell, while leaving it as an option to come back to and build scale,” Bernstein said.
3. It reflects a realignment in Unilever’s strategy away from the foods segment towards the personal care segment
The growth of the mens grooming sector mentioned above is indicative of a wider growth in the global personal care segment. Paired with the relative stagnation of Unilever’s other core business, packaged foods, and P&G’s leadership in almost all personal care categories, this has prompted a company-wide shift in strategic focus from foods to personal care. In fact, according to Bloomberg the revenue share of its Foods unit has fallen from 35% in 2008 to 26% in 2014, while share of its Personal Care unit has grown from 28% to 37% over the same period.
The signs of this shift started a couple years ago when the company stated that cash generation from the Foods business would be used to finance expansion in its Personal Care unit. More subtly, but importantly, Unilever’s listing on the stock markets also recently changed from FOOD to CRE.
Any doubts regarding this strategic shift were cleared last year, when CEO Paul Polman alluded to acquisitions in the premium personal care segment last year. True to this, in the past year or so Unilever has pursued inorganic growth in the personal care category through acquisitions of REN Cosmetics, Murad, Dermalogica, Kate Somerville, the Camay and Zest soap brands, Dollar Shave Club and most recently Seventh Generation natural detergent.
4. It illustrates Unilever’s diametrically opposed strategy to P&G in the war for consumer goods domination
Unilever’s spree of acquisitions in the personal care segment reflects it’s strategy to catch up with P&G through inorganic growth of its brand portfolio.
Conversely, P&G is undergoing a massive consolidation process, selling off 80–100 lower-performance brands and splitting others into separate businesses. Post consolidation, it will own only 65 brands across 10 product categories. The rationale behind this is essentially the Pareto Principle: according to Forbes, about 80 of P&G’s 200 brands account for 86% of its total sales and over 95% of its net profit.
Cutting loose the dead wood will free up massive resources to put behind its key brands, revealing a strategy based on defending and extending the position of its already dominant incumbent brands. On the other hand, Unilever’s strategy to expand its portfolio with new, disruptive brands bets on the continued ascent of new entrants.
5. It shows a willingness to sacrifice high margins and destroy value, which aligns with Unilever’s positioning as the most progressive global FMCG company
One of the most revealing facets of the Dollar Shave Club acquisition is that the incumbent willingly bought a startup whose business model is based on selling razorblades at 1/6 of established market prices. That is why Dollar Shave Club has 16% of cartridge share, but only 5% of revenue — because of the discrepancy between the value created by it and Gillette. As Ben Thompson elegantly puts it,
“…buying Dollar Shave Club was never an option for P&G: even if their model is superior P&G’s shareholders would never permit the abandonment of what made the company so successful for so long; a company so intently focused on growing revenue is incapable of slicing one of their most profitable lines by half or more.”
Unilever’s willingness to go down this road is not just due to the absence of its own shaving business, which it would have to cannibalise; it reflects its purpose-driven brand strategy from the past decade, which is based on a twin vision of sustainability and having a positive impact on the health of the global population. Embracing a value-destroying firm such as Dollar Shave club adds one more tile to this house of brands, positioning Unilever as a company that values it customers over margins. This not only positively impacts customer perceptions, but makes Unilever more alluring for disruptive FMCG companies whose main avenue to scale beyond a certain point is often to be acquired. Dollar Shave Club’s CEO Dave Rubin expressed this perfectly in his statement following the acquisition:
“DSC couldn’t be happier to have the world’s most innovative and progressive consumer-product company in our corner. We have long admired Unilever’s purpose-driven business leadership and its category expertise is unmatched. We are excited to be part of the family.”
6. It expands Unilever’s (growing ) portfolio to include a vertically-integrated commerce brand
Dollar Shave Club is the first company of its kind to enter the Unilever orbit: it is what we might call a v-commerce brand, or “vertically-integrated commerce brand”. The term, coined by founder of online fashion company Bonobos, Andy Dunn, refers to a company selling branded physical products through online channels, which have primarily built their brand through digital means. The products sold by these companies range from mattresses (Casper) to clothing (Everlane) to baby products (Honest Company), and many other categories.
Why is this a reason for Unilever to buy Dollar Shave Club? It’s worth diving deeper into the v-commerce term to answer this question. According to Dunn, a V-Commerce brand meets four criteria:
“1. It’s primary means of interacting, transacting, and story-telling to consumers is via the web — desktop and mobile. In almost all cases the V-Commerce brand is born digitally.
2. It’s a brand, and that brand is vertical. The name of the brand is on both the physical product and on the website. It requires the commercialization of an e-commerce channel, but that channel is an enablement layer, it’s not the core asset. It’s not E-Commerce, it’s V-Commerce.
3. The V-Commerce brand is usually maniacally focused on customer experience and on customer intimacy. The experience tends to be three-part bundle of physical product, web/mobile experience, and customer service that collectively become the brand in the consumer’s imagination.
4.While born digitally, the V-Commerce brand rarely ends up digital only. This means the brand can extend offline, eventually. Usually its offline incarnation is through its own experiential physical retail or highly selective partnerships. In nearly all cases of partnerships, the brand controls its external distribution versus being controlled by it.”
I’ve bolded the four highlights from each criteria, which can be synthesized as follows: the brand is born digitally; e-commerce is a channel, not the core asset; the brand is the experience formed by physical product, digital experience, and customer experience; and the brand sells direct-to-customer without being mediated by external retailers.
Dollar Shave Club has almost all of these characteristics (minus the experiential retail side), and collectively they give Unilever an entirely different brand: one that was not built fifty years ago for a TV/ supermarket age and that is bolting digital on in order to catch up; instead, a brand communicated and sold entirely in sync with the modern internet-savvy customer. It’s a company that has worked very hard to build a business and brand strong enough to avoid being “Amazoned” — a major danger in the world of selling consumer products online. And their obsession with delivering delight, value and humour to customers is reflected in the holy trinity of product, experience and customer service — all three of which they control, meaning no dilution of the brand by retailers.
7. It brings Unilever a consumer goods brand formed by a lean, techy, data-driven team
The fourth reason leads neatly onto the fifth and final one. Dollar Shave Club’s obsession with customers is driven by all parts of the company, but what is remarkable is a) how few people make up the company that serves 3 million customers (190) and b) how many of those employee are engineers (45). That’s just under ¼ of a consumer goods company that works full-time on its technology!
Unsurprisingly, the tech stack at Dollar Shave club is formidable. Jason Bosco, Director of Engineering, Core Platform & Infrastructure, writes that
“Although most are familiar with the company’s marketing, this immense growth in just a few years since launch is largely due to its team of 45 engineers.”
This underappreciated yet crucial component of their success is surely a key reason for the acquisition. The marketing team have built a consumer products brand and experience for the 21st century, but the technology team have built a technology stack to quickly and efficiently scale operations from 0 to 3 million subscribers in just four years.
And on one last note, it is worth remembering that the physical product itself — the razors — are in fact outsourced to a Korean manufacturer, and then sold in branded boxes. This allows resources and energy to be focused entirely on marketing, selling and distributing, removing the much of the complexity and costs incurred in manufacturing. And this aspect is surely an interesting one for manufacturer Unilever, although it remains to be seen whether they will keep this setup as they expand Dollar Shave Club.
What is certain, as confirmed by Dubin and Unilever’s statements, is that the 190 employees of this billion dollar brand will all be staying on — including the formidable CEO himself. It is unlikely he will become another brand manager: as he stated in an interview the other week,
“One of the things Unilever says is ‘congratulations Dollar Shave Club, you just acquired Unilever. You now have the resources of Unilever to propel you but we’re not going to tell you what to do.”
I’m looking forward to seeing how his plays out in the coming months and years.