Dollar Shave Club and the Disruption of Retail
Yesterday it came out that Unilever is acquiring Dollar Shave Club (DSC) for $1 billion in cash for what is probably the biggest exit so far for a direct-to-consumer brand. Garnering a 5x revenue multiple, capturing 5% market share, and achieving unicorn status in a relatively small market all make DSC a notable success story. Here’s a closer look at what I find interesting about the DSC deal, their approach, and a few other companies with similar dynamics.
5x Revenue Multiple
Last year Dollar Shave Club had revenue of $152 million and was projecting $200 million in 2016, making the $1 billion deal 5x their 2016 revenue. That revenue multiple is much higher than what other ecommerce companies received in the past. When Amazon acquired Zappos for around $1.2 billion in 2009, for example, Zappos already had $1 billion of revenue the year before, a multiple of only 1.2x. Etsy is currently at a 2x revenue multiple ($558 million in revenue last year, and a current market cap of $1.1 billion.)
What makes DSC more valuable than other ecommerce companies?
One must assume that the effectiveness of their recurring revenue model combined with a strong brand enabled DSC to command a premium.
5% Market Share
Men’s shaving products is a $3 billion industry in the U.S. First, it’s notable that a $3 billion market is actually on the small side of what most startup founders and investors would choose to go after. But what’s impressive is how much of the market DSC has been able to corner since it was founded in 2012: 5% by 2015 revenue, and 15% by unit (i.e. number of razor blades sold), according to Venrock partner David Pakman who is a DSC investor and board member.
Even small markets can provide a breeding ground for unicorns.
The DSC formula
Dollar Shave Club set out to resegment an existing market as a low-cost entrant (as Steve Blank might say). They pulled it off by offering their product direct to consumers and spreading the word through social media (you remember their viral launch video, no doubt) and other online channels. Both tactics enabled them to undercut the competition (namely Gillette) who rely on traditional retail sales channels and expensive broadcast media, which inflate prices. In a word, DSC competes on price, convenience, and brand.
David Pakman has a great post on How Michael Dubin Created A Massively Successful Company and Re-Defined CPG that is well worth the read.
5 Other Companies to Watch
There are a number of other direct-to-consumer startups that are rapidly achieving scale. Here are five:
- Most similarly, Harry’s (another razor company and DSC competitor that competes more on quality design) raised $75 million in 2015, purportedly valuing the company at $750 million. (That means we’re on the verge of not just one but two unicorns in what’s only a $3 billion market.)
- The Honest Company, which sells its own brand of worry-free baby and household cleaning products as subscription bundles, raised $100 million in 2015, valuing it at a wopping $1.7 billion, a 10x revenue multiple from their $170 million revenue from the year before.
- NatureBox delivers healthy snacks every week, two weeks, or month. They had $50 million in revenue in 2014 and have raised $58.5 million in funding, though at an undisclosed valuation.
- Birchbox ships a monthly collection of sample beauty products to over 1 million subscribers, generating revenue of $125 million in 2014. The company has raised $72 million in funding, most recently at a $485 million valuation in 2014 (a 3.9x revenue multiple). But earlier this year layoffs were reported.
- Warby Parker — the only company in this list that doesn’t have a subscription component—sells their own designer eyeglasses for $100. They raised $100 million last year, valuing the company at $1.2 billion.
And of course there are many more; Lightspeed VC Nicole Quinn has identified a list of 17 ecommerce companies generating strong returns, and CircleUp has compiled a list of 25 innovative consumer brands.
Some direct-to-consumer startups compete on price (DSC and Warby Parker), others on quality (Honest Company, NatureBox), and still others on variety (Birchbox), while all capitalize on convenience and building strong brands that resonate with their (often young) audience.
My own direct-to-consumer startup Crema.co competes on both quality and variety—offering better, fresher single-origin coffee beans than customers can access at the supermarket.
One of many
While Dollar Shave Club may be the first notable exit in the direct-to-consumer category, there will undoubtedly be many more to follow as a new generation of startups disrupt how goods are bought and sold. In short:
Consumer retail is being disrupted by a new breed of digital-first startups offering personalized convenience through strong brands with an authentic voice.