$1 Billion for Dollar Shave Club: Why Every Company Should Worry
The deal anecdotally shows that no company is safe from the creative destruction brought by technological change. The very nature of a company is fundamentally changing, becoming smaller and leaner with far fewer employees.
Dollar Shave Club was a phenom in the men’s grooming industry. The online business was founded in 2011 by Mark Levine and Michael Dubin to combat the high cost of razors. The idea was rather simple. Instead of paying $10 or $20 a month at a store for disposable razors, a Dollar Shave Club subscriber could go online and set up a regular order to be shipped to his home monthly at a fraction of the retail cost.
The experiment was a brave one. Until that time, Gillette dominated the razor business and was in an arms race with itself to add yet more blades and other features to its razors. Gillette was so dominant in advertising and shelf space that Procter & Gamble paid $57 billion for the company in 2005.
Everything changed in 2012, when Mr. Dubin’s comedic free ad posted on YouTube. Within 24 hours, the new business had more than 12,000 orders, more than it could handle. The ad went on to get over 20 million views and rocket Dollar Shave Club to over $240 million in revenue.
From there, the start-up investor community came in and Dollar Shave Club soared, raising $160 million in venture capital. It captured about 8 percent of the market in only a few years. It also expanded into other personal care products like “One Wipe Charlie,” a wet wipe to replace toilet paper.
The company’s rise was captured by the Unilever purchase announced last week.
The wealth will be spread among a few. Dollar Shave Club has over three million subscribers but only about 190 employees. Its razors were made in South Korea by Dorco. Distribution was initially handled in-house but eventually was contracted to a third-party company in Kentucky. What remained was a terrific design, marketing and customer service shop; and a business that was easily expandable to meet demand and that had a good niche with men who do not like to shop. These super-successful companies with few employees should worry an America struggling with inequality.
That is the way things roll these days. It used to be that if you wanted to sell razors, you needed a factory, a distribution center, a sales force, a research and development team and a marketing budget. Keeping all of these functions under one roof lowered transaction costs and made operations more efficient. In part this was because of communication structures — having telephone and mail together was a necessity.
But the internet, mass transportation and globalization destroy everything. If you do not believe this change is about brand, experience and disruption, know that you can buy razors directly from Dorco, presumably the same brands sold by Dollar Shave Club.
Now it is possible to leverage technology and transportation systems that never existed before. Dollar Shave Club used Amazon Web Services, a cloud computing service started by the online retailing giant in 2006 that encouraged a proliferation of e-commerce companies. Manufacturing now is just as much a line item as is a distribution apparatus. This is the business strategy of many other disruptive companies, including the home-sharing site Airbnb, which upends the idea of needing a hotel. The ride-hailing start-up Uber could never have been possible without a number of inventions including the internet, the smartphone and, most important, location tracking technology, enabling anyone to be a driver.
It means that the riches will be split among the select few who have the education and skills to be at the heart of the new decentralized company. The Korean razor company that manufactures Dollar Shave’s razors will not be sharing the $1 billion deal price with its employees. It was not even an investor (the investors here will also profit, with returns of up to 20 times their investments).
This is a scary time for a company. But the state of play creates the potential for mass and creative disruption. Again, in the past, challenging Gillette would have been impossible. It would have required billions of dollars to invest in a distribution network and advertising to get the product on store shelves.
No more. Now you can get free advertising through YouTube, easy distribution through the mail system and low-cost sales through the internet. Factories and distribution can be bolted on throughout the globe.
This means all companies should be fearful, but not all is lost. In this world, intellectual property and unique assets — like Facebook’s more than one billion users — become paramount. Unique technology means you have a right that cannot be taken away or commoditized. Gillette sued Dollar Shave Club for patent infringement, but it is hard to patent a simple razor.
David Pakman at Venrock, the initial lead investor in Dollar Shave Club, noted its uniqueness on a blog post celebrating the sale. Mr. Pakman said that most subscription services fail, particularly because Amazon looms. But Dollar Shave Club was able to build brand loyalty and fight off Gillette, which was dependent on distribution through retail outlets.
Other smaller brands are building on Dollar Shave Club’s success in consumer goods and food as consumers prefer new, innovative and small. In the food space, for example, TechCrunch wrote “big brands lost share to small brands in 42 of the top 54 most relevant food categories in the past five years,” citing research by the investment bank Jefferies.
Dollar Shave Club may be an uncommon event. But it is no doubt the wave of the future. Expect more start-ups in disruptive areas. Expect more old-line companies to find themselves on their back feet, compensating by paying outsize, sometimes incredulous sums for breakthrough competitors. And expect more enormous investment in all things new as the old companies without unique assets struggle to compete.