Washington - The
razor business is all about the blades.
Get consumers
hooked on your razor, and they buy the highly profitable refill blades forever.
That seemingly
indestructible, high-margin revenue stream is what made Warren Buffett once
fall in love with Gillette, which dominates the global razor business with an
estimated 50 percent market share. Buffett became one of its largest
shareholders and added to his humongous fortune when the razor king was sold to
Procter & Gamble for $57 billion in 2005.
But Gillette's
dominance is now at risk, with lower-priced, private-label upstarts like Dollar
Shave Club and Harry's eroding market share that Gillette built over more than
a century.
Last week,
Gillette began across-the-board price cuts averaging 12 percent in an attempt
to halt the inexorable surrender of its men's razor business to the newcomers.
The Boston-based company, now a division of P&G, has seen its market share
drop from 70 percent in 2010 to 54 percent in 2016.
Barclays analyst
Lauren Lieberman said Gillette's moves are too late.
"We are not
assuming that there's any material change in the long-term trajectory of the
Gillette business as a result of these cuts," Lieberman said in an
interview Wednesday. "There is something about Dollar Shave and Harry's
... we are in a consumer environment where people like feeling they are making
a differentiated personalized choice. Small and niche is in vogue."
Gillette said
Wednesday its price offensive is hitting every part of its portfolio "as
we speak."
"We want to
be available at all price points that men are looking for and give them the
best shaving experience in that category, regardless of what they want to
spend," Gillette spokesperson Barbara Diecker said.
Diecker said
refill blades for the Gillette Fusion, for example, will drop from $4.99 to
$3.74 per blade, a savings of around 25 percent.
The company is
also recharging its longtime "18th Birthday Program" initiative, with
a goal of putting a Gillette razor handle and cartridge blade against the cheek
of every American male turning 18. Parent P&G has a strong relationship
with Amazon.com, which also helps the company's online sales, according to
industry observers.
"We are
fully aware of the challenges we are facing as a North American business,"
Diecker said.For decades, Gillette was focused on a trade-up model similar to
how General Motors encouraged its customers to start with Chevrolet and
eventually buy up to Cadillac. Gillette prided itself on every seven years or
so inventing new - and pricier - razors that would offer an even better shave.
"Gillette
was the only game out there for high-quality shave," Lieberman said.
"The idea was if you were a (Gillette) Sensor user, when they launched
Mach3, to get Sensors to trade up to Mach3. Then trade up from Mach3 to Fusion,
an even better shave. "That business model was always in place."
Rival Schick
disrupted Gillette's cycle several years back with its own innovations such as
the Quattro. Then along came the Dollar Shave Club, Harry's and even smaller
players such as 800razors.com.
"This is
not a new issue," Lieberman said. She said Gillette realized they needed
to emphasize lower price products, but they waited too long to launch them.
"If I go back to 2012, they were already losing share and it was before
the advent of the Dollar Shave Club."
The Wall Street
Journal, in a report this week on Gillette's price changes, said Gillette's
refill razors are $2 to $6 a cartridge when not in bulk, compared with $2 to
$2.75 for Schick per cartridge. Dollar Shave Club's cheapest refill razor cartridge
is 20 cents.
Publicly traded
Edgewell Personal Care Company, last year began selling a compatible refill
blade that fits Gillette's Mach3 handle after the Mach3 patent expired. The
refill is a fraction of the price Gillette charges.
Phil Masiello,
who founded 800razors.com and built its sales up to $2 million before selling
it to ShaveMob last year, said Gillette's strong online presence could help
halt the erosion if it is able to be price-competitive with its rivals.
"Gillette
makes a great shave," Masiello said. "Nobody has ever complained
about the great shave of Gillette and Schick. People only complained about the
price. You take the price difference out, all of a sudden they are back in the
game."