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Unilever's $1 Billion Acquisition Puts Competitors on the Defensive

Unilever (NYSE: UL) recently agreed to buy U.S. start-up Dollar Shave Club for $1 billion in an all-cash deal. Dollar Shave Club sells razors and blades directly to consumers via online subscriptions and currently controls 60% of the "shave club" market which it helped create.

Image Source: Dollar Shave Club

What does this surprising move mean for Procter & Gamble's (NYSE: PG) market-leading Gillette brand and Edgewell Personal Care's (NYSE: EPC) Schick?

The new business of razors and razor blades

Prior to Dollar Shave's arrival in 2011, an online market for razor sales barely existed. But the growth of Dollar Shave and its rival Harry's -- which arrived two years later -- forced Procter & Gamble to launch the Gillette Shave Club in 2014.

Gillette offers three types of razors for its subscription plans. The Mach 3 Turbo has three blades and a lubricating strip, and its subscription plan includes five cartridges for $16.99. The Fusion ProGlide has five blades and a bigger lubricating strip, and its subscription includes four cartridges for $21.45. The Fusion ProShield includes five blades and a lubricating "frame" (which applies lubrication after each stroke) instead of a strip. That plan includes four cartridges for $22.45. Customers can choose the frequency of the shipments (every 1 to 6 months) based on their personal shaving habits.

Gillette razors. Image Source: Gillette

Dollar Shave Club also offers subscriptions for its three blades -- the Humble Twin quad-blade razor, the 4X quad-blade razor with a 90-degree pivot head, and the six-blade Executive -- which all come with lubricating strips. The Humble Twin subscription includes five cartridges each month and costs $1 per month plus $2 for shipping and handling (waived the first month for new customers). The 4X subscription includes four cartridges per month and costs $6, but shipping is free. The Executive subscription also includes four cartridges but costs $9 per month.

Directly comparing Gillette Shave Club to Dollar Shave Club is difficult. Gillette's razors are supposed to last about a month, while Dollar Shave Club's are designed to last just a week. Gillette lets customers dictate the frequency of shipments, while Dollar Shave Club ships a set number of blades monthly. But if we compare both companies' entry-level options (with the assumption that Gillette customers change their blades monthly), Dollar Shave Club's $3 monthly fee is still slightly lower than Gillette's average monthly fee of $3.40.

How does Unilever's purchase change the game?

Unilever purchased Dollar Shave Club, because it doesn't own a major razor brand. Therefore, the acquisition wouldn't cannibalize Unilever's own products, but it could help it disrupt P&G and Edgewell's grooming businesses.

On its own, Dollar Shave Club generated $153 million in revenue in 2015 and expects that figure to hit approximately $200 million this year. Last year, the start-up claimed to have 2.2 million subscribers, which helped it overtake Schick as the second best-selling razor cartridge brand in the U.S. -- although those numbers haven't been independently verified.

Dollar Shave Club isn't profitable yet, due to its pricey marketing campaigns, but Unilever will likely use its deeper pockets to scale up the business. By expanding, the cost of production will decline and enable Dollar Shave Club to offer even more competitive prices to challenge Gillette.

That might spark a fresh price war between the two rivals, which previously fought a margin-crushing battle over hair care products three years ago. This would be bad news for Procter & Gamble, which reported a 5% annual decline in organic volume, 1% dip in organic sales, and a 10% drop in reported revenue at its grooming segment last quarter. That business generated $1.62 billion in sales during the period and accounted for 10% of the company's top line. Dollar Shave Club won't join Unilever's top "billion euro" brands, but it could eventually evolve into one if the company dramatically expands its business.

So what's next for these industry leaders?

Unilever's purchase of Dollar Shave Club could herald the beginning of a additional consolidation across the razor cartridges market. Harry's, which had a valuation of $750 million after its last funding round, could be a lucrative takeover target for Unilever, P&G, or Edgewell -- which is clearly being left behind in the shave club wars.

However, Unilever could also buy Edgewell, as many analysts have speculated, to add Schick and Edge to its shaving portfolio and boost its market share against Gillette. P&G could also try to beat Unilever to the punch and similarly make a bid for Edgewell to prop up its grooming business.

Regardless of what happens, the purchase of Dollar Shave Club indicates that the battle for the online shaving market is heating up, and consumers could benefit from even lower prices on shaving subscriptions. However, investors in Unilever, Procter & Gamble, and Edgewell should be wary of a pricing war which could hurt these companies' near-term profitability.

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Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Procter and Gamble and Unilever. 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.