The Proctor and Gamble Company (PG +1.99%) is known for its many consumer brands. Let's take a deep dive into one of its many brand categories and see what's going on with Gillette and men's shaving.
P&G accounts for its sale of Gillette and other men's shaving products inside a brand category called grooming, which consists of men's and women's blades and razors, pre- and post-shave products, appliances, and other shave care.
When it comes to the razor and razor-blade model of business, Gillette wrote the book. An amazing statistic from the company's 2016 annual report is as follows: "Our global blades and razors market share is nearly 65%, primarily behind the Gillette franchise including Fusion, Mach3, Prestobarba and Venus."
A 65% global market share means, for every three dollars spent, almost two go to P&G!
Image source: Gillette.
Sales are trending in the wrong direction
Despite its high market share, P&G has been losing ground for its grooming products. Its global market share dropped 1.1% in 2016. Loss of share in the United States, a $3 billion market, is far worse. The table below illustrates the problem.
| Metric | 2016 | 2015 | 2010 |
|---|---|---|---|
| U.S. market share | 54% | 59% | 70% |
Data source: Fox Business. Chart by author.
Shave clubs are disrupting the business model in the U.S.
P&G's grooming business provides a disproportionate amount of profit to the company, accounting for 15% of the company's profits and 11% of its $65 billion in sales. That makes executives nervous about tampering with what has been a consistent high-profit generator. Add that to the fact that the company has 65% global market share, and it's no wonder that this segment of the business is attracting competition.
Dollar Shave Club came on the scene in April 2011 with an online business model that allowed shavers to "subscribe" to shaving products. This eliminated the need to stop at a store, traditionally Gillette's stronghold. By undercutting Gillette's price for blades, it wasn't that difficult to steal younger customers who preferred ordering online and having products shipped to their doors. Total sales for Dollar Shave Club were $160 million in 2016.
Harry's, another internet-enabled shave club, launched in March 2013, with razors like Gillette's Fusion selling for half the price. The company went old school when it partnered with Target Corporation in 2016, putting its products in every store to complement its online sales. Total sales for Harry's were $113 million in 2016.
Thrust and parry
To counter the new trend in subscription shave clubs, P&G has started a service called Gillette On Demand. Just like it sounds, it allows U.S. consumers to buy Gillette blades online and have them delivered on a scheduled basis. The big differences are price, and Gillette is only offering the blades and not the many men's toiletry products, as well as pre- and-post shave products offered by the other shave clubs.
Just to spice things up a bit, European conglomerate Unilever Company got in on the action by purchasing Dollar Shave Club LLC for a $1 billion price tag in July of last year. This is a large global company that could help Dollar Shave Club grow its business through further saber rattling with Gillette.
The chart below shows how the prices for blades compare among the three shave clubs.
| Metric | Gillette On Demand | Dollar Shave Club | Harry's |
|---|---|---|---|
| Price for blades | Five for $13.00, every fourth delivery is free | Four for $6.00 | Four for $8.00 |
The mid-level blade on each website was chosen for comparison. Data source: Gillette On Demand, Dollar Shave Club, and Harry's. Chart by author.
Gillette just blinked
Recently, Gillette has announced price cuts to help it compete. This would seem to imply that management is at least getting one message from consumers loud and clear: Its pricing is too high.
The move to online shopping is providing newcomers like Dollar Shave Club and Harry's the opportunity to disrupt the incumbent leader in shaving. Gillette doesn't want to see its high-margin business negatively impacted by the young upstarts. At the same time, it doesn't want to continue to lose market share.
Investors need to take this into account as earnings may be headed lower as Gillette and P&G figure out how to deal with consumers who want to buy online.
