UL Unilever PLC

By Sharon Terlep 

Unilever PLC's decision to pay $1 billion for the trendy-but-unprofitable Dollar Shave Club Inc. is evidence that simple, low-price razors have upended a global business long-built on adding blades and raising prices.

"To say we didn't come out of the gate with a bull's-eye on Gillette would be disingenuous," Michael Dubin, the 37-year-old founder and chief executive of Dollar Shave Club, said in a recent interview.

Dollar Shave Club, which has 190 employees, doesn't make any of the products it sells. Unlike market leader Gillette, owned by Procter & Gamble Co., which has 110,000 employees and uses 18 factories around the globe for its grooming products, the Venice, Calif., startup shook up the razor market with a direct-to-consumer model. It signs up customers with clever online marketing and low prices, and relies on third parties to manufacture its products.

"We can't help but wonder if this is a bold statement that technology and product quality has reached a level where it is doesn't matter as much as channel and business model," Barclay's analyst Lauren Lieberman wrote in a note.

Now, the upstart will be backed by the deep pockets and vast scale of Unilever, a European consumer-products giant with annual sales of nearly $59 billion. The deal also gives Unilever, whose brands include Dove soaps, Ben & Jerry's ice cream and Lipton tea, entry to the razor business, adding a formidable rival for Gillette and Schick, owned by Edgewell Personal Care Co.

P&G fought back with its own Gillette Shave Club, which it unveiled in 2014, but has failed to stem a lengthy market-share decline that accelerated when Dollar Shave Club and other online razor services like Harry's Inc. came on the scene. Gillette commanded about 59% of the U.S. men's razor and blades business last year, down from 71% in 2010, according to Euromonitor. P&G had no immediate comment.

Sales for P&G's grooming division, which includes razors and blades, fell 10% to $1.6 billion in the most recent quarter despite price increases, as volume declined by 6%. Sales for Edgewell's shaving division slumped 5.1% in the first three months of the year, and profit for the segment tumbled 22%.

P&G has invested heavily over the years in high-tech offerings with ever-higher prices, such as its five-bladed Fusion and the FlexBall handle. But greater acceptance of stubble in the workplace and a shift to online shopping has made those devices a tougher sell. Dollar Shave Club focused on selling disposable blades that cost between $1 and $9 a month, and saved shoppers a trip to the store.

The four-year-old service has been popular -- attracting 3.2 million subscribers -- but has also been unprofitable. Dollar Shave Club has been losing money as it spends heavily to attract new customers and market new products, people familiar with the company said. The company had revenue of $152 million last year and is on track to exceed $200 million in 2016, according to Unilever.

It is unclear whether Dollar Shave Club would have continued to thrive on its own. Barclays's Ms. Lieberman estimates Dollar Shave Club has a dropout rate around 25% and said the company could use more marketing heft to improve the numbers.

Mr. Dubin said he was talking with Unilever about an investment before deciding to sell the business. The company was in talks with potential investors in part because it realized it needed additional funds to continue its expansion and branch out into other regions and categories, according to one person familiar with the matter. Another person familiar with the company said it was on track to turn a profit in the fourth quarter.

The deal also leaves Edgewell -- which also owns Wet Ones wipes and Banana Boat sunscreen -- out in the cold. Wall Street viewed the company, which has also lost share in recent years, as a prime target for Unilever. It is possible Unilever could still attempt to acquire Edgewell, which has a market value of about $5 billion, though analysts said the move now seems less likely.

"This was a smart tactical move by Unilever in that it puts up barriers to others who might want to acquire [Edgewell] while leaving it as an option to come back to and build scale," Bernstein Research analyst Ali Dibadj wrote in a note.

Shares of Edgewell dipped 1.5% Wednesday, while P&G's shares slipped 0.3%.

In addition to Gillette and Schick, the company faces competition from Harry's, which has raised more than $375 million in venture capital and debt financing, in part to purchase and expand the German-based factory where it makes its razors. A funding round last summer valued Harry's at $750 million, according to people familiar with the deal.

Rolfe Winkler and Paul Ziobro contributed to this article.

Write to Sharon Terlep at sharon.terlep@wsj.com

(END) Dow Jones Newswires

July 20, 2016 16:13 ET (20:13 GMT)

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