Why Unilever Really Bought Dollar Shave Club

(Bloomberg) -- Dollar Shave Club hit the jackpot when Unilever agreed to buy the online men's razor merchant for $1 billion. Other e-commerce startups such as Birchbox and Stitch Fix can't necessarily expect their own suitor to sweep in with such sweet deals. That's because the key to Dollar Shave Club's appeal is not so much its online prowess but the fact that it built a powerful brand in four years.

In a blog post after the deal was announced Wednesday, David Pakman, a partner at Venrock and an early investor, said he never saw the shaving upstart as an e-commerce company. The key, he said, is how Dollar Shave Club developed relationships with men, many itching to find an alternative to the high-price blades sold by Gillette and Schick. Sucharita Mulpuru, an analyst at Forrester Research, essentially concurs with Pakman's take. "I don’t think this is a testament on 'e-commerce is back,'" she says. "What Dollar Shave built is really unique, and the list is very short of other companies that have assets that are as attractive as they are." 

Dollar Shave Club upended the industry's traditional business model by offering a subscription service that sells blades for as little as $3 a month (including shipping and handling). The day Dollar Shave Club started selling subscriptions in March 2012, the company released a YouTube video starring founder Michael Dubin. He tells viewers the product is f***ing great, "so gentle a toddler could use it." The website crashed, but the blades sold out in six hours. The video has been viewed about 23 million times.

The company learns about its audience and curates messages specifically meant to keep them engaged. With each delivery, customers get a "Bathroom Minutes" magazine. Designed to resemble the funny pages of a newspaper, the little pamphlets feature life and shaving tips, as well as articles answering questions about such important bodily functions as why fingernails grow faster than toenails. The blending of a cheap and convenient product with entertaining content helped the company snatch customers away from traditional razor sellers. That Dollar Shave Club is technically an e-commerce startup? Basically an afterthought. 

Dollar Shave Club subsequently began running television commercials, an expensive tactic tried by very few startups. One made sport of the cumbersome process men go through to buy big-brand razors at a local drugstore. The pricey blades are locked away behind plastic doors that set off a siren when opened without the help of a salesperson. In the commercial, the customer vainly asks for help and tries to grab razors without assistance. He's quickly subdued with a tranquilizer dart. Then Dubin touts Dollar Shave Club as a much better alternative.

The company reached $150 million-plus in sales in 2015, Unilever said in a press release announcing the deal. That despite the fact that the blades lack many of Gillette's high-tech enhancements. Few other e-commerce startups can claim to have built a brand so quickly.  Warby Parker, the spectacle frames company, is one. So is rival blade merchant Harry's. Nor have e-commerce startups attracted $1 billion bids. Nordstrom Inc. paid just $350 million for apparel merchant Trunk Club. Hudson’s Bay Co., which owns Saks Fifth Avenue, purchased Gilt Groupe for $250 million, much less than what the company was valued at by private investors.

Unilever and P&G are masters at traditional marketing, mostly offline, but they struggle with the direct-to-consumer brand-building at which upstarts like Dollar Shave Club excel. These startups conduct authentic-seeming conversations with customers over social media, while the consumer products conglomerates take to Twitter and Facebook mostly to address customer complaints, says Ryan Darnell, a principal at Basset Investment Group, which invests in such e-commerce startups as luggage seller Raden.

He wouldn't surprised if big companies snapped up more of these startups to broaden their brand portfolios and expand their reach in specific categories. But it doesn't mean they'll get a Dollar Shave Club-level premium. "There are two things that drive multiples: the financial metrics and the story," he says. 

Unilever paid about five times the revenue that Dollar Shave Club is expected to bring in this year. Much of that premium stems from the value Unilever placed on the razor seller's brand and customer-relationship skills, he says. E-commerce startups without such a strong brand should expect buyout offers closer to one to two times their annual revenue, he says. 

Why Unilever Really Bought Dollar Shave Club

Of course, Dollar Shave Club's e-commerce bona fides are important to Unilever, which has been promising investors it will get better at selling stuff online. The company will gain access to all the data and analysis the startup has on its customers. Mulpuru says Unilever paid a "heck of a lot of money for a business that's not profitable," but likely did so because it feared other competitors such as Gillette parent Procter & Gamble would make its own offer.  "It's worse to have it in P&G's hands," she says, "than for you to not spring an extra hundred million to get it yourself." 

To contact the authors of this story: Jing Cao in New York at hcao38@bloomberg.net, Melissa Mittelman in New York at mmittelman@bloomberg.net.