End-of-the-Line-onomics: How Gillette and Wilkinson Died by the Cuts of a Thousand Blades

TL;DR VERSION: end-of-the-line-onomics occur when innovation stops in an otherwise innovation-driven industry +++ cartridge razor sales by name brands have fallen dramatically due to competition by online start-ups +++ consumers demand new distribution channels and customized products when lacking innovation lowers switching cost +++ investment opportunities lie in start-ups and their suppliers +++

Is this a post on the obscure subject of “steady-state economics” (or “zero-growth economics”)? No! I will not waste your time on a subject that has infested the otherwise reason-driven field of economics like an aggressive brain parasite causing a no-nonsense middle-age tax accountant to suddenly switch from a grey tie to a flamboyant pink spinning bow-tie. Instead, I will talk about a topic that divides business people into those, who do not want to talk about it, because they believe it is purely speculative and those, who do not want to talk about, because they fear it is not.

I am talking about a situation, when innovation becomes impossible in an otherwise innovation-dependent industry. What happens after a product cannot be improved any further or be replaced by a superior product? I will use the example of cartridge-type razors to show that the answer to this question are the two defining features of end-of-line-onomics – revolutionized distribution channels and industrialized customization.

The Fall of the House of Gillette

Let’s talk shaving. Razors have been around since 18,000 B.C., however, up until the 18th century only the privileged few had the means and desire to shave regularly. Dirty commoners could not trust shady barbers putting sharp metal to their throats – at least if spaghetti-western movies are to be trusted. Shaving really became a daily routine during WWI when many soldiers had to make the unpleasant experience that a King-Willhelm-style Prussian mustache may make a great flea hotel, but provides poor insulation against mustard gas while wearing a gas mask.

Savvy business men like King C. Gillette, a devout socialist who planned for the U.S. economy to be run by a single company (his own?) and for the entire U.S. population to be housed in one mega-city powered by the Niagara Falls, saw a new trend approaching. Gillette pioneered two things that would shape or rather trim the grooming industry until today. His first and best known innovation was the affordable safety-razor that prevented even the clumsiest morning grouches from brutally mutilating themselves.

Fewer people know that Mr. Gillette also pioneered the business practice of “loss leader” which implied selling the razor handle at a loss and generating profits from the sale of replacement blades – a tactic widely adopted by mobile carriers and drug dealers. In the 1960ies Wilkinson Sword introduced the first stainless-steel blades right at the time when cartridge-style razors had their debut.

In many Western countries, this type of razor dominates the wet shaving market (apparently 75% of men prefer wet shaving ). Considering raw profit margins on the replacement blades of up to 98%, producers are very fond of this product type as well. However, before you call your bank to apply for loan for your own razor business, you might want to consider how producers are able to maintain such unheard-of margins. Branding and innovation are both the key to success and the Achilles’ heel of this industry.

Like so many b-school students, I was at least once confronted with a Gillette case study that made a strong point about Gillette being some sort of marketing prodigy (so much so that I suspect foul play and a great idea for another post). Common wisdom has it that Gillette maintains its sharp competitive edge by listening to their customers and being an innovation leader. More level-headed people have suggested that Gillette measures innovation in the number of blades added to their cartridges, but where is the limit to razor blade innovation? What will shaving be like 100 years down the road? Is laser shaving the future? Waxing? Genetic engineering?

Whatever the future holds for facial hair, today, the consensus seems to be that adding more blades to razor cartridges is just a lazy surrogate for truly innovative ideas. Then again, people thought the same a decade ago. After Gillette introduced the battery-powered three-bladed Mach3 Power and Schick/Wilkinson responded with the four-bladed Quattro, The Onion published an article titled “Fuck Everything, We’re Are Doing Five Blades”, mockingly – and probably to their own surprise correctly – predicting Gillette’s five-bladed retaliation. In 2005, Philips joined the ridicule by advertising its electric shavers by contrasting them to the fictional 15-bladed Quintippio (part of the featured image).

When Gillette actually released the five-bladed Fusion in 2006, even the more reserved folks at The Economist took it out on the grooming industry, predicting that “the 14-bladed razor should arrive in 2100”. Since then, however, razor manufacturers seem to have run in to trouble. It appears, after Gillette’s most ludicrous product introduction – the five-plus-one-bladed electric-wet-shave-hybrid monster that is the Fusion ProGlide Styler – innovation has almost come to a standstill. Did Gillette reach end-of-the-line-onomics?

Quite frankly, the answer appears to be yes. Remember that companies like Gillette (a part of Proctor & Gamble since 2005) and Schick/Wilkinson (a part of Edgewell Personal Care since 2003, itself rumored to be acquired by Baiersdorf soon) must be innovation leaders to justify their ridiculously large profit margins. After all, technological advantage is literally the only entry barrier to the cartridge razor industry. Surely, my word alone is hardly enough to convince you, so let’s look at hard facts.

Gillette Sales Analysis in R

For our analysis, we will use sales data from Gillette. Unfortunately, Gillette was acquired by Proctor & Gamble, causing data discontinuity between 2004 and 2007. The data frame downloaded in the script below contains both the raw grooming segment revenue data from the respective financial statements (raw) and my attempt to interpolate and reconcile the time series of revenues (razor.s).



Structural change analysis (provided by the strucchange package) requires an underlying model to determine the break dates. Usually the model is simply the arithmetic mean, however, I have opted for a linear model regressing revenue growth on lagged U.S. retail sales growth (retail1). I have also tried regressing on GDP growth (gdp1), but lagged retail growth provided the best model fit.

Model 1 Model 2 Model 3 B CI p B CI p B CI p (Intercept) 0.00 -0.02 – 0.02 .887 0.01 -0.02 – 0.03 .609 0.00 -0.02 – 0.03 .875 retail1 0.56 0.17 – 0.96 .007 0.58 -0.06 – 1.22 .072 gdp1 0.71 -0.00 – 1.43 .051 -0.04 -1.12 – 1.03 .933 Observations 25 25 25 R2 / adj. R2 .273 / .242 .156 / .119 .273 / .207

After performing a supF-test, which suggested the presence of at least one breakpoint, I decided to assume two breakpoints, which seems to provide a fair balance between BIC and RSS. The two estimated break dates are 2008 and 2012. Surprisingly, the acquisition by P&G does not pose a break in the time series. Less surprisingly, the economic recession of 2008-2012 forms its own specific period. Prior to 2008, Gillette’s sales growth had no correlation with retail growth (β = 0.016). During the crisis, however, sales growth correlated almost perfectly with retail growth (β = 0.902).

In recent years, Gillette’s sales have completely disconnected from retail sales, showing a negative correlation (β = – 1.694). However, this should be taken with a grain of salt, since Gillette had negative sales growth since 2012, while retail growth was exclusively positive in the same period.

To summarize the quantitative analysis: Around 2012, name brand razor blade sales have disconnected from general retail sales and started a strong downward trend. There are basically two reasons for that, which constitute the cornerstone of end-of-the-line-onomics: revolutionized distribution channels and industrialized customization, of which the former impacted the razor industry the most recently.

Rise of the Mailorder of the Blades

Start-up companies like Harry’s and Dollar Shave Club in the U.S. and Morning Glory and Boldking in Europe have embraced what I like to call the “Netflix economy”. They rely on a business model based on monthly subscriptions with no strings attached. After signing up, customers receive a company proprietary razor handle for a one-time fee and regular shipments (the frequency of which is flexible) of replacement blades for a monthly fee. Both the razor handle and the replacement blades are usually much cheaper name brands, while promising the similar quality.

Many industry observers have concluded that those companies are responsible for the fall in traditional cartridge razors, even though Gillette has made haphazard attempts to copy the distribution model with their Gillette Shave Club. However, Gillette is largely outpriced by its more tech-savvy competitors. Furthermore, consumers seem to be in a “stick-it-to-the-man” anti-corporate mood and prefer a lower-quality blade that they can replace cost-effectively more frequently.

The second feature of end-of-the-line-onomics, industrialized customization, relies on the notion that when products are not defined by innovative features anymore, customers become indifferent and will instead look for different characteristics to base their purchase decision on. What follows might seem like a regression into pre-industrial production routines, but is actually far from it. While King C. Gillette pioneered industrialized production of safety razors and thereby pushed smaller production outlets out of business, this new generation of companies will utilize the availability of industrial production facilities to push traditional companies out of the market by offering products tailored to specific customer needs.

Want your razor handle in glorious Nautilus blue? Harry’s is the place to go. Want to trim both your stache and your ecological footprint? Boldking takes back used blades for free and recycles them. Shaving nowadays is about more than just tungsten-reinforced steel and a vibrating handle. Naturally, this trend tends to lead to a less monopolistic market and lower prices for consumers, but what does this mean for investors?

The first reflex of many investors might be to get in on the Netflix-style razor action. However, most of the mentioned start-ups are still in the early phases of development and as of the publication of this article none is listed on any stock exchange or was bought out by a listed company. Harry’s and Dollar Shave Club, the most likely candidates for an IPO in the foreseeable future, have both recently completed their sixth financing round, racking up total invested capital of USD 263M and USD 164M respectively.

Other start-ups are still in earlier stages and, therefore, mostly out of reach for ordinary investors. Morning Glory, a European start-up, still offers seed financing via companisto and has thus far gathered about EUR 140,000 from over 250 small private investors.

Investors might also get the idea to whip some cream on their portfolios and shave traditional razor producers out of their asset allocation, however, both Gillette and Schick/Wilkinson are part of larger diversified conglomerates (although Edgewell is less diversified than P&G). A slow decline in razor sales will most likely be reflected in the stock price once the market concludes that those lost customers are not coming back. Those companies might also try to buy out one of their new rivals.









There is, however, a more obscure way for more sophisticated investors to profit from this industry shake-up. By applying the trusty Five Forces approach to the industry, we observe the following facts: Threat to entry, bargaining power of consumers, and competitive rivalry increase as consumers face much lower switching costs, due to the lack of innovation and the no-strings-attached subscription model. However, the big smiling winners are suppliers, who see their bargaining power rise due to continuing fragmentation of the market.

Conclusion

Therefore, my recommendation is to explore investment opportunities in actual blade manufacturing businesses. They are likely to profit from the higher volume of blades pushed by the new subscription services and unlike their downstream customers, they are much more defined by the quality of their product and their production infrastructure, thus, keeping the entry barriers to their industry high.

American Cutting Edge, a division of CB Manufacturing, would be among the first companies I would approach for a possible investment. Another example is Dorco Co Ltd., a private Korean company manufacturing the razors for Dollar Shave Club. There are also many Chinese manufacturers, who might accept outside investments.

Since undercutting name brands is like cutting out the middle man, actual razor blade producers will also most likely be more involved in product design, which they can in turn tailor more appropriately to their production. Vertical integration seems ever more likely. Harry’s, for example, bought its own blade manufacturer in Germany. That would complete the circle and the industry would be back where it started about a century ago, except for the fact that there would not be one King C. Gillette, but dozens of them.

At this point, you might wonder which other industries might be subject to end-of-the-line-onomics. At least two come to my mind: computer processors due to the end of Moore’s law and the advent of cloud computing and men’s underwear, because how are you going to improve on that any further?

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