Can Internet Sensation Dollar Shave Club Cut into Gillette and Schick's Amazing Razor Blade Margins?

Dollar Shave Club was founded in 2011 but didn't start taking customers until last week. Over a short period of time, the company has popped up all over the internet with articles talking about whether the company can survive and to discuss the hilarious commercial made by the small five employee company.


It seems easy these days thanks to Netflix (NFLX) and Amazon (AMZN) that anyone can create an idea of something through the mail to make life easier for consumers. Netflix after all, was founded with convenience of the consumer in mind so they did not have to make trips to the movie store and could save money and time by receiving movies in the mail. Dollar Shave Club has utilized Netflix's model well by offering both convenience and money saving to its customers. If you haven't watched the video go to the company's website and check it out. Dollar Shave Club spent $4500 to make the video, which has over three million views across all sites. The video has over one million views on Youtube alone. The company is beginning to take advantage of social media as it saves its advertising dollars. The company has over 15,000 Facebook fans and 11,000 Twitter followers.
Three different price tiered plans are offered by Dollar Shave Club:
-The Humble: Twin Razorblade, $1 a month plus shipping and handling ($2), 5 cartridges a month

-The 4X: Four Blade Razorblade, $6 a month (shipping included), 4 cartridges a month
-The Executive: 6 Blade Razorblade, $9 a month (shipping included), 3 cartridges a month
All three plans come with a free razorblade handle. Customers are allowed to change plans any given month up or down in price.
The real question is whether Dollar Shave Club can cut into market share of Gillette, owned by Procter and Gamble (PG), or Schick, a subsidiary of Energizer Holdings (ENR). The 12,000 customers reported recently were all people who shaved before so they likely made the switch from Gillette or Schick razors. The real question is did those customers leave because of the pricing offered or because of clever advertising done by Dollar Shave Club.
The most recent quarter reported by Procter & Gamble saw the Gillette Fusion grow global market share for the 20th consecutive quarter since the product launch in 2006. Could Dollar Shave Club cut into the streak and prevent Gillette from enjoying more share gains during 2012. Gillette after all was the main target of the Dollar Shave Club video advertisement. In the ad, founder Michael Dubin mocks that $19 of the $20 spent on razor blades goes to Roger Federer. As a Gillette consumer, it does become frustrating that the company pays millions of dollars to Tiger Woods, Roger Federer, Thierry Henry, Derek Jeter, Andre 3000, Gael Garcia Bernal, and Adrien Brody to promote the company's products and star in the commercials. Along with spending millions of dollars on advertising, the company also pays to have the naming rights of Gillette Stadium, where the New England Patriots and New England Revolution play. The entire Dollar Shave Club company is based on the idea of not spending a ton of money on advertising and passing the savings on to the consumer. Perhaps Gillette could scale back on advertising. I find the opposite to be true as I think Gillette will actually spend more on advertising to compete with Dollar Shave Club. In a recent advertisement I saw, Gillette promised that one cartridge would last five weeks. Daily Mail, in the United Kingdom, once claimed that razor blades made by Gillette had a 4,750% markup.
Energizer Holdings has been adding products to its brand portfolio could be hurt the most if Dollar Shave Club takes off. The company's Schick, Edge, Skintimate, and American Safety Razor brands could all be hurt. Schick is the number two razor brand, behind Gillette, in the United States. Schick, which enjoys a number one position in Japan, should likely keep its dominance in the Asian country due to Dollar Shave Club's single country presence. Edge and Skintimate help Energizer maintain the number one position in shave preparation category. As Dollar Shave Club expands its brand portfolio, the shaving preparation items could lose market share. Energizer also recently paid $301 million to acquire American Safety Razor to help expand its presence in the wet shave category. The cheaper priced razors could be hurt by Dollar Shave Club.
After the video went viral, 5,000 people signed up for Dollar Shave Club's monthly service. No official numbers have been released but over 12,000 customers are now signed up for the service. Now, $12,000 a month isn't exactly a huge business but this could be just the start. The day the video premiered, many people couldn't access the website due to an overload of people visiting the site. Founder Michael Dubin said it best, "Our servers were not prepared for the bum rush", as he told Business Insider in an interview.
As a Gillette user, I find myself changing the blades less frequent than I should. Buying a new razor with a few blades seems like a cheaper option, even though the big pack of blades is the better value in the long run. It is frustrating to pay so much for something that is needed for personal hygiene. There is a reason that Gillette used to send out a free razor on your birthday. Razor blades have one of the biggest markups in the entire consumer industry. There is a reason it is called the razor blade model after all for any item that sells something cheaper upfront or at a loss and counts on additional spending. Amazon has used this model with the Kindle after all. Phone companies use this with providing phones for a cheaper price upfront to count on monthly revenue.
Also as a Gillette user and someone who changes their blades infrequently, it's hard to compare the cost savings. I did look around on the Dollar Shave Club website and found the middle $6 pricing to be a good value. Shipping and Handling is included and four blades are provided a week. The ability to change my blade once a week could be a benefit.
So as investors what does Dollar Shave Club really mean. I think the company will continue to signup users and could gain traction as it expands into other personal care products. I think the margins of Gillette and Schick will start to drop as the company may have to discount products to compete or at least maintain customers thinking of making the switch. I will be watching conference calls for Energizer and Procter and Gamble closely to see if they make note of the impact. Another option would be for one of the companies to buyout Dollar Shave Club. The ultimate death of Dollar Shave Club would come if either Procter and Gamble or Energizer starts their own by mail model.
What are your thoughts about Dollar Shave Club? How often do you change razor blades? Does the company have a sustainable model? Can the company expand with other products or into women's shaving markets? Share your thoughts on the subject below.