Consumer packaged goods (CPG) conglomerate Unilever has announced that it has sold Dollar Shave Club to a Private Equity fund, Nexus Capital Management.
Dollar Shave Club is often mentioned as an example of a direct-to-customer business being acquired by an incumbent. Terms were not disclosed at the time of the acquisition in 2016, but various media publications had the exit price as $1b.
Dollar Shave Club used subscriptions and virality to grow revenues quickly, and post-acquisition, it almost felt like Unilever did not know what to do with it. Marketing spending was stopped, and the brand withered into irrelevance. It is important to recognize that Gillette filed a patent infringement lawsuit before Dollar Shaving Club being acquired.
Gillette’s suit says Dollar Shave Club has 2 million members and about 10% of the U.S. market for men’s razor cartridges. Gillette estimates it has 70% of the razor market worldwide.
Why did this acquisition fail:
- At the time of the acquisition, the e-commerce sector was in peak direct-to-customer, venture capital was easy to access, and the belief was that these businesses would take market share away from incumbents such as Unilever, Proctor & Gamble, etc. Little did we know what companies to be disrupted would eventually acquire these startups.
- The direct-to-customer business model was venture capital created and spent millions If not hundreds, of millions on customer acquisition costs. Dollar Shave Club worked on a five-year customer live time value - an anomaly that should have been a red flag for Unilever.
- Unilever waited too long before entering retail; when Dollar Shave Club entered Target, it competed with Harry’s, who was in the store for at least two years longer. Wholesale has emerged as a critical part of revenue generation for direct-to-customer brands.
- As of Q4 of 2023, we are yet to see a profitable direct-to-customer business, which points to structural challenges with the fundamentals of this business model. Companies that have raised little to no venture capital and have leveraged marketplaces like Amazon and wholesale are seemingly better performing than the initial class of DTC startups.
While Unilever retains a 35% minority share in Unilever, it has written off $200m and takes a large L on this acquisition. Nexus Capital Management will likely reduce the number of products Dollar Shave Club has in the market and try to turn the business around.