the Dollar Shave Club and Unilever

Unilever has made a $1 billion offer to buy the Dollar Shave Club, an online razor blade (and other grooming accessories) business started from scratch in 2011.

Media reaction to the deal is that this is a story about the power of the internet   …which it partly is.  The big traditional makers of razors and blades, Gillette and Schick, ignored the possibility of alternate distribution channels despite almost two decades of strong evidence of the “creative destruction” power of the internet.

But that’s not the whole story.  Two other, more traditional factors are involved:

–over the past ten years or more, razors and blades from Gillette and other manufacturers have become more complex and much more expensive.  “New and improved” (read: higher-priced) models have been introduced with greater frequency.  This has also been happening at a time when the overall market is stagnating as fewer men are shaving every day.  I can’t help believing that this behavior is at least in part as a way to justify the $54 billion Procter and Gamble paid to acquire Gillette in 2005.

No matter what the cause, however, the result has been to make the ground-level mistake of creating a pricing umbrella under which an online competitor–which, after all, will have higher unit production and distribution costs–could prosper.

–A fundamental rule of marketing is that self-cannibalization of a product market is always preferable to having an outsider grab market share from you.  Gillette et al. should have responded to the emergence of services like DSC by aggressively creating similar online products.  Yes, this may mean that total profits may end up being only 75% of what they once were.  And it means abandoning the illusion that the prior market structure will magically be restored.  But having the 75 for yourself is better than you having 50 and a new entrant having 25.

Pretended that this new competition doesn’t exist won’t make it go away.  Nevertheless, the sad fact is that the first strategy of the status quo is almost always denial.  In the short term, this protects bonuses and perks.  But allowing new competition to flourish is invariably a long-term disaster.

Amusingly, DSC investor David Pakman’s blog offers this strategy tidbit:

  • Choose categories where the CEOs of the incumbents are professional CEOs, not founders (thus are far less-likely to cannibalize existing businesses and adopt new business models).

That says it all.

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