US sales of Gillette are beginning to fall off. For years what has been one of the most powerful Mass Consumer brands, now seems to be suffering from a new competitor entering the market. In this case, the new competitor isn’t a product but is actually a new type of new business model.
Many of you will have seen the accompanying video which has become famous in the last couple of years. I remember sharing it with participants in an ESADE workshop, using it as an example of a new business model. And as always, when something so different is shown, it raised all kinds of questions and doubts. How will they do it? Will they make money? There doesn’t seem to be a strong brand concept… The brand name isn’t very glamorous, and don’t even mention the advert which appears to be a YouTube joke video…
In the US, Gillette has clearly been shaken by the Dollar Shave Club which has grown rapidly since 2012 and already has an 8% share of the $3bn market.
The company, which has over two million subscribers, has gone from sales of $4 million to $140 million in barely 4 years and has grown exponentially. In addition, there are other “Shaving Clubs” which are also competing for a share of the market, albeit to a far lesser extent. For this reason, in December 2015, Gillette filed a patent copyright complaint against Dollar Shave Club (DSC).
It’s worth remembering that Gillette is one of the largest mass consumer brands and a company with high repeat business thanks to its ‘closed’ blade system (the blades only work with its own razors). Indeed, its business model based upon this closed system has made it a very profitable and, seemingly, stable business.
Gillette currently belongs to Procter & Gamble but for many years it was an independent company – stable, best of its kind and with strong growth that was the subject of, and turned down, various takeover bids. The company was cited in various sources (e.g. “Good to great” by Jim Collins) as one of the best examples of a consumer business. It appeared to be a solid company, innovative and with a high degree of technological secrecy that made it very competitive. Finally, with this brand, P&G had created for itself a very stable business model. And yet now, recent results from Gillette can explain, at least in part, the negative performance of P&G’s value.
The appearance of the Dollar Shave Club is also an indication of another big business change in the Mass Consumer or FMCG sector, a sector that seemed one of the more remote from business model innovation or digital transformation.
Perhaps one of the world’s best-known examples of business model innovation is Nespresso. But the fact is that this model from the Swiss multinational took more than 15 years before it became profitable and highlights the difficulty in defining a new and profitable business model outside the traditional channels for consumer products.
The new idea from the Dollar Shave Club is very clear and simple. For a fixed monthly fee, of between $1 and $9, a shaving set will be delivered to your house for the entire month. A good product with a home delivery service seems to have been a winning formula in the US. And how have Gillette responded? Well, Gillette is trying to respond by changing its business model and offering the consumer a very similar deal to that of its competitor: Gillette Club. For $5 a month they will deliver to your home all your shaving requirements.
Gillette’s proposal has been formulated via an agreement with local online mass consumer retailers (i.e. currently in Spain, with Ulabox) who are responsible for delivery of Gillette Club’s shaving products to the home.
In this case, it’s about an alliance between a producer and a distributor in response to a threat from this new competitor. Gillette’s idea is to respond in the US and to use this model to out-manoeuvre Dollar Shave Club’s international expansion plans. The fact is that Gillette is proactively pushing this model, in spite of the impact it could have on their profit margin, because they realise that DSC poses a real threat and “the shaving club” is a well-received concept by the consumer.
The example of the Dollar Shave Club is yet another illustration of sector disruption or transformation. As we frequently see, many sectors are undergoing major changes. It provides a further indication that a successful innovation of a business model is a powerful strategy that changes the competitive outlook of a market.
In the past 15 years, we have seen how different sectors have suffered from the digital revolution in one way or another. From music, books, photography until, more recently, luxury watches. The question now is, What will be next? Or, Who will be left standing if their sector doesn’t adapt?
As an article in MarketingNews about a study published in IBM recently reflected, “Two thirds of marketing directors (CMOs) at global level believe that the biggest business challenge that they are facing today is sector convergence, as new technologies are breaking previously existing entry barriers thus allowing the arrival of new “start-ups” in the face of which traditional companies are finding it more difficult to compete (a phenomenon known as ‘uberization’, an allusion to the famous transport company Uber)”.
The fact is that digital channels are changing the commercial outlook over a wide range of areas and consumer products are no exception. Without looking too far, Amazon is increasingly selling more consumer products and it now has projects such as Amazon Dash which is competing with the supermarket retail trade. And it’s doing this without relying on on-line platforms devised by supermarket chains or with specialised services like Ulabox.
More specifically, within the mass consumer sector, we should be asking ourselves whether this strategy which Gillette has adopted could also be a viable option for certain mass consumer products that have a high purchase value, possibly more that €10, with significant repeat business. For example, it could be applied to baby’s nappies or other kinds of products which are bulky items and where expenditure per transaction is important, high and repeated.
The case of Shave Dollar Club should give pause to consider that many sectors which seemed safe and presented stable business models, could be undermined in a relatively easy way.
For years, the Mass Consumer sector has focused on basic improvements to “the product dimension”, dismissing other forms of innovation. Perhaps the moment has arrived to re-think this model.
The Mass Consumer categories must open themselves up to new business models. As much as they cannibalize the margin, it can’t be that the paradox of Clayton Christensen ends up being true, not only for the grocery on the corner but, rather, for the Hypermarkets too.
A few years ago, a good friend and colleague, from a well-known company selling refrigerated products, suggested during an innovation workshop, “And what if we put a ‘flat rate tariff’ for the consumer, using the example of telecom companies, how could we sell a food product on a tariff plan? The idea was received with surprise and bewilderment, and rejected. The proposal of a flat rate tariff didn’t seem like something that you could apply either to mass consumption or the food industry… But is this true? It could be that we are already here.
“Flat rate tariffs in mass consumption.” What seemed like a crazy idea only a few years ago is now an example of innovation, and tomorrow could be the industry standard.
Whatever the future holds, the case of Gillette vs Dollar Shave Club is interesting to follow and may provide relevant lessons in the short term for other consumer categories.
Posted by Xavier Lesauvage, executive, consultant and lecturer with 20+ years experience in marketing and innovation challenges within large consumer markets, aimed at delivering outstanding growth results.