For many years Procter & Gamble's (NYSE:PG) Gillette brand had a pretty good deal. It, along with rival Energizer Holding's Schick brand, were in an escalating war selling fancy, expensive razor blades.
By advancing from the traditional one or two blade models to three, four, five, and even six-blade varieties, the companies were able to push prices up. A two-blade Gillette Sensor, for example, can be purchased for a little over $1 per blade (when buying a 10 count package) while the top-of-the-line Fusion ProGlide (8 to a package) costs around $3.75 per blade.
Prices can vary if you buy in larger quantities, but in general, the two major razor blade companies had a near-monopoly until an online disruptor came along.
In 2012 Michael Dubin used a wacky YouTube video to introduce his company, Dollar Shave Club, to the world. The premise was very simple, for $1 a month the company ships members five two-blade razor cartridges (along with a handle on the first order). Pay $6 a month and you get four four-blade cartridges monthly while $9 gets you a four pack of a six-blade option.
Subscribers can also change frequency from monthly to a once-every-two months schedule. It's a very simple offer where prices-per-blade are dramatically lower than those offered by Gillette and Schick.
That easy-to-understand offer, which has grown to include the option to add shaving creme and other men's grooming and personal hygiene products (which can be added to your monthly shipment), has put the company on a growth path. DSC, which began in 2012, had first year sales of $12 million which grew to $19 million in 2013 and $65 million last year, according to Fortune. Early in 2015, Dublin told the magazine he expects that number to continue to grow in 2015.
DSC has been stealing market share, but until recently it felt like the big boys in the field hadn't noticed. Now, however, P&G's Gillette has responded and it's answer is a mix of intriguing, confusing, and perhaps a little misleading.
What did Gillette do?
Gillette has launched its own subscription-based razor delivery service which is clearly meant as an alternative to DSC, but no matter how you look at it, the deal is more expensive. In fact, signing up for the Gillette Shave Club can actually raises the prices you pay if you simply bought your razors on a subscription plan from Amazon.com (NASDAQ:AMZN).
Gillette offers the subscription service through its own site and through some of its retailer partners. Buying direct, a customer would pay $19.49 for four premium Fusion ProGlide blades, about $4.90 per blade compared to the $3.75 price noted above. Joining the club through the GSC link to Amazon lowers the cost $16.90 for a four-pack on a subscription basis $4.25 per blade -- still higher than other offers on the online retailer.
The razor blade maker is running commercials touting the idea that members can spend half as much as what DSC charges for its top-tier razors. The problem is to get to that logic Gillette suggests that customers use each of its blades for a month. Essentially, if you accept that one Fusion ProGlide blade lasts longer than four Dollar Shave Club Executive blades, then you save $4.50 per month.
Of course the problem is that while Gillette has stated for a few years that its blades can last that long, there's no reason to believe the DSC model would be only a quarter as durable. And, as someone with heavy beard growth who shaves daily who has switched between both companies, I'll say that after a week the blades from either brand begin to tug. The idea of using a single blade for a month -- even if I only shaved three or four times a week as Gillette suggests in its example -- I'd be worried about hurting myself after two weeks let alone four.
Why is Gillette doing this?
Though P&G does not break out razor blades as a sales category in its annual report, it did crow about Fusion ProGlide in the 2014 edition.
In the grooming market, premium products generate about 43% of sales. Gillette has an 88% share of this segment. Four years ago, we introduced Fusion ProGlide, priced at the higher end of the premium segment. Fusion grew global share for 31 consecutive quarters, reaching $1 billion in sales faster than any other P&G brand in history.
Those are impressive numbers and the company clearly sees Dollar Shave Club as a threat in that lucrative market. With its own subscription service it's attempting to match DSC's convenience while coming up with a story that makes its deal seem like a good value. Trying to do that without lowering its margins which is a tricky, if not impossible task.
This is doomed to fail
Gillette is fighting a battle it has already lost. DSC is no longer a company that lives or dies based on viral videos and guerrilla marketing. It's a growing player which runs actual television commercials that are rapidly increasing its visibility.
It's impossible to put the genie back in the bottle and DSC has simply lowered the value of a premium razor blade. Gillette has a good product and its problem was never convenience. Amazon has offered subscription-based delivery for years on its blades. The problem is price.
DSC may not be cutting into the company's market share in a meaningful way, but the launch of the Gillette Shave Club with its pointed reference to its emerging rival shows that it could. Gillette is protecting a business that, though glorious for years, will never be the same again. Unfortunately for Gillette, this move won't stop Dollar Shave Club or the decline of razor blade prices.
Daniel Kline has no position in any stocks mentioned. He could shave twice a day and still appear stubbly. The Motley Fool recommends Amazon.com and Procter & Gamble. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.