Mike Dubin did it. In less than 4 years, he built from scratch a serious contender to Gillette, pioneered a new business model, reinvented the blades & razors category and surely created a blueprint for FMCG category disruption. By the end of 2016, DSC will exceed 3m subcribers, reach $200m revenue, will turn its first profit and… will be part of Unilever. Unilever announced indeed yesterday morning that it is acquiring DSC for $1bn.
That’s a historic move in the FMCG industry and very bad news for P&G.
I will not cover here the drivers of DSC success as I largely covered those in previous articles (see links below):
I will focus in this article on the reasons that drove Unilever to spend $1bn on DSC; on the key challenges it will face and on the implications for the whole FMCG industry.
7 Reasons Why Unilever Acquired DSC:
1. A large & structurally profitable category:
The Blades & Razors segment is structurally extremely profitable with average EBIT north of 20% and large globally ~ $30bn retail sales value. If the direct-to-consumer digital disruptors (DSC, Bevel, 800Razors.com, Harry’s) have eroded its structural profitability to gain shares, there is still plenty of space in the P&L to build a profitable business. Furthermore, Unilever will bring its scale in terms of media purchase / cost of goods sold negotiation to improve by few hundreds bps the structural profitability of DSC.
2. A category that is migrating fast online with exponential growth potential in NA
DSC owns already 5% shares of the blades & razors segment in North America. If the online sales represent today barely 10-15% of the category, online will represent 40-50% of the overall category by 2020.
If DSC would maintain its current online shares, it could easily reach by 2020 $1bn sales in North America only and secure 25%-40% market share of the overall blades & razors category in NA by then depending competitive response.
3. A huge growth potential outside NA that could be facilitated by Unilever’s scale up capabilities (financial and organizational resources)
if no statistics are available to confirm it, with DSC/Bevel/800Razors.com/Harry’s, it seems that North America is in advance versus other geographies in terms of online direct-to-consumer business model penetration on blades & razors which indicate a large untapped potential. Unilever, with its global footprint and its financial resources, will help DSC accelerate tremendously its international expansion plans.
While, it is difficult to put a revenue tag on the international expansion, I believe within the next 5-10 years, if DSC succeeds to transpose its level of market share in other geographies, it could achieve an additional $1-2bn revenue.
4. A way to take advantag of the digital direct-to-consumer exponential growth without facing the ‘retailer relationship legacy dilemma’
This acquisition enables Unilever to develop its direct-to-consumer business while protecting its retailer relationships as today Unilever does not operate in this category. It provides Unilever a perfect opportunity to get exposure to exponential growth without having to face retailers pressure and delisting threats that make usually so difficult the direct-to-consumer migration for large FMCG companies
5. Highly complementary business with Unilever (channel and category wise)
Blades & razors and more generally male grooming on-line is the perfect match for Unilever portfolio. it enables them to gain scale on an adjacent category that is highly synergistic with their current portfolio and offer them plenty of cross-selling opportunities (think Dove for men or Lynx). If offering those brands to DSC shoppers seem not to be an option, offering comparable categories (deodorants, skin care…) and/or strenghtening the current DSC offering while leveraging Unilever manufacturing capabilities/scale seem to be a realistic and win/win option
6. An amazing opportunity to learn from a truly exponential business model that could then be reapplied to existing Unilever categories
Beyond the ‘hard factors’ mentionned above, this acquisition is the perfect opportunity for Unilever to learn the ropes of this new business model and reapply the learnings to its other categories (online direct-to-consumer, digital marketing intensive, subscription model, assets light/no manufacturing assets…)
7. An opportunity to hit P&G at heart on one of its most profitable market/category
Last but not least, if I cannot imagine that Paul Polman (Unilever CEO) was only motivated to hit its archrival (and former employer) P&G,
but it is clear that this acquisition touches P&G at heart on one of its most profitable segment (if not the most): Blades & razors in North America. What a symbol and a bold move from Unilever and Paul Polman.
If on the paper everything suggests that this acquisition will be hugely successful, Unilever would have to handle one main challenge:
Structurally, blades & razors have become a low barrier-to-entry category. With the ease to source cheaply blades from external manufacturers, to set-up a webshop, and to market its SKUs through viral online ‘guerilla style’ marketing
it is critical for Unilever to recreate strong barriers-to-entry through investing in strengthening its relationships with DSC consumers. It will be the only way to make this business profitable and differentiate it vs. low cost offering. Undoubtedly, Unilever brand ‘know-how’ and cash resources will help in this journey.
This is a groundbreaking and industry defining moment for the whole FMCG industry. Here are 5 key lessons for any FMCG leaders.
1/ It has never been so easy to enter into new categories through leap-frogging directly to online direct-to-consumer model
2/ Disrupt others before becoming disrupted should become the mantra of FMCG CEOs
3/ Exponential growth in FMCG will come only through business model innovation and entering into brand new categories. Linear growth through new SKUs introduction/new segment segments will not generate enough growth in the digital disruption age to offset disruption from new entrants
4/ Success lies in mastering 2 key skills that are rarely combined: start up & scale up
5/ it might be easier to pioneer digital direct-to-consumer business model on other categories to avoid the ‘retailer relationship legacy dilemma’ and avoid the ‘fear to cannibalize its own business’
This acquisition is just the beginning of many more to come. I would not be surprised to see Bevel, Honest Beauty, Harry’s… being acquired by L’Oreal, P&G, Beiersdorf, Henkel or RB in the next 18-24 months.
The future of the FMCG industry will belong to companies that will succeed to transition from a linear to an exponential business model/organization/culture.
As Gibson used to write: ‘The future is already there, it is just not evenly distributed’ and it seems that for Unilever, this future is already its present.
In the next few weeks, I will focus on developing the theme of the exponential transformation and its implications on strategy/culture/execution.
Frederic
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To discuss more on the above, you can reach out at: frederic@fredericfernandezassociates.com
About the author:
Frederic Fernandez is an expert and thought leader in the FMCG industry. He is the Managing Director and Partner of Frederic Fernandez & Associates a bespoke Strategy Consulting Firm exclusively focused on the FMCG industry. His focus areas are mainly in growth and profit turnaround, restructuring, corporate strategy and digital business model design in the FMCG industry. His passion is to help FMCG leaders to develop, achieve and exceed the potential of their business. He spends his time advising senior FMCG leaders across Europe, Middle East and Africa (EMEA). Before joining the world of management consulting, he spent more than 10 years working with Fortune 500 companies like Procter & Gamble, Reckitt Benckiser, PriceWaterhouseCoopers and Societe Generale in leadership positions across Europe (France, UK, Nordics, Germany, Switzerland, Austria), Central Africa and India.