Assignment 1 - Unilevers Big Strategic Bet on the Dollar Shave Club

Introduction/Context
On July 19, 2016, Unilever, a multinational consumer goods company, announced that it had
purchased the Dollar Shave Club, a company that delivers razors and other personal grooming products to
consumers by mail, for a total price of $1 billion dollars. On July 28, 2016, the Harvard Business Review
published the article Unilevers Big Strategic Bet on the Dollar Shave Club, that discusses potential
reasons for this acquisition which, given that Dollar Shave Club is valued at $630 million and is
unprofitable, appears unreasonable.
The first rationalization is that Unilever is attempting to expand its brand portfolio. In the past
few years, the company has been adding to its personal care products, which already include Dove Men +
Care and Axe and Clear, among others. In fact, according to the article, Unilever is now officially
classified on the major stock indexes as a personal products company. The second potential reason for
this acquisition is that Unilever is looking to absorb a disruptor, an innovation that creates a new market
and value network, displacing established leading firms. In the case of Dollar Shave Club, Unilevers
goal would be to break into the industry from the low-end to lift market share from more expensive
brands like Gillette and Phillips.
The third rationale for this change is that a fundamental shift in the industry may be underway due to the
emergence of online subscription programs, not only by Dollar Shave Club, but through several of its
rivals. These changes, as well as an acquisition priced well above the companys estimated value,
strongly signals that companies across the industry are rethinking their strategies, particularly when it
comes to their digital relationships with customers.
Finally, with the acquisition of Dollar Shave Club, Unilever is in a good position to not only
expand globally, most notably into China, but also increase its sales of high-margin products, which will
become markedly easier with the data gathered through online sales.
1. Visit Unilever website and review their 2006-2015 financial data (under Investors Relations) and
make relevant comments concerning its strategy and performance.
According to the statistics available on its website, Unilevers operating profit, which is
expressed in euros in its financial statements, was 7,515,000,000 in 2015. This was slightly down from
its peak in 2014, when the company reporting profits of 7,980,000,000. Before 2014, profits had steadily
climbed from 6,420,000,000 in 2011; 6,977,000,000 in 2012, and 7,517,000,000 in 2013. It is
interesting to note that Unilever separates its percentage of total operating profits by product area. In
2011, foods made up 42% of the companys profits, followed by personal care at 39%, refreshment at
11%, and home care at 8%. In contrast, in 2015, personal care constituted 48% of profits (a 6% increase
from 2011), followed by foods at 31%. Refreshments and home care, at 11% and 10%, did not change
dramatically from 2011 to 2015.
Unilever makes several other profitability ratios available to the public that may be used to
analyze the firm in relation to its acquisition of Dollar Shave Club. The companys profit margin

increased between 13.8 in 2011 and 16.5 in 2014, before falling to 14.1 in 2015. Diluted earnings per
share following a similar pattern, swelling from 1.42 in 2011 to 1.79 in 2014, before dropping to 1.72
in 2015. Finally, the companys cash dividend was 3,331,000,000 in 2015, a figure that steadily
increased from 2011, when it was 2,485,000,000.
Accordingly to data made available by the Financial Times, Unilever reported total assets for
2015 of 52.30 billion. Assets in 2011-2014 ranged from 45.51 billion to 48.03 billion. Total debt in
2015 was also up to 14.52 billion, from a range of 10.10 to 13.62 billion in the previous four years.
The companys 2015 current ratio, which divides current assets by current liabilities and is a commonly
used measure of a companys liquidity, was 0.6337 in 2015. Its quick ratio, which is similar to the current
ratio, but which takes into account only cash, marketable securities, and accounts receivable in its
numerator, was 0.4976. Finally, Unilevers total debt to total equity was 1.13 in 2015, whereas its total
debt to total capital was 0.5201.
Given that this essay examines Unilevers acquisition of Dollar Shave Club, it is necessary to
look at the companys rate of acquisitions and disposals during the time period in question. In 2011, the
companys acquisition spend peaked at 3,098,000,000, which is most likely attributable to the global
financial crisis of 2008-2010 and the availability of inexpensive companies for purchase. This number
significantly decreased to 133,000,000 in 2012, but slightly recovered to 142,000,000 in 2013 and
313,000,000 in 2014.

Interestingly, acquisitions again spiked in 2015 with a total spend of

1,897,000,000. Disposals, on the other hand, have taken an even more haphazard path, potentially
illuminating the companys oft changing strategic approach.
Finally, in examining Unilevers acquisition of Dollar Shave Club, it is essential that we review
the companys competitive position, including its many strengths. Firstly, the company is well known
globally, with presence in more than 170 countries and registration on various international stock
exchanges. This global presence allows Unilever to benefit from economies of scale, access to global
resources, and synergy of resources and operations.

Secondly, Unilever has established strong

relationships with retailers by offering superior margins and incentives, allowing the company ease in
reaching its consumers. Additionally, Unilever is an innovative firm that has, over time, invested millions
of dollars on research and development of new products and brands. As a result, the company has created
high entry barriers to the global consumer market. In order to accomplish this, Unilever has developed a
strong management team in every country in which it operates, a strength that helps the company
understand and manage the local needs of its stakeholders. Finally, as mentioned above, Unilever has a
long history of mergers and acquisitions, allowing it to overtake competitors and gain market share.
2. Do a web research (you can also use UML library) and discuss Shaving Industry size, trends,
major players & their market shares and industry drivers. Be sure to support your responses with
hard data.

The Shaving Razor industry is a distinct category of the Beauty & Personal Care sector.
Regardless of the period of growth the industry, valued at 523 million, has benefitted from in recent
years, Mintel (2009) suggested that sales of shaving and depilatory products had dropped by an estimated
3%. (Lee, 2010) proposes the industry faces cash-conscious consumers who may be seeking to reduce the
cost of expensive razor blades or ensure they last for a longer period of time. However, (Bottomley, 2010)
suggests a different reason for the decrease, even the most gadget- obsessed male is likely to question the
value of on-board microchips and precision trimmers, when there are simpler, high-quality products
available for a fraction of the price. Another point of view from (Jefferson, 2010) who suggests perhaps it
is the functional approach that companies within this industry present to customers, connecting with
customers on a more emotional level will remedy the predictable perceptions of 'two blades are better
than one, three blades are better than two' and so on.
The Shaving Razor industry take advantage of around a 4750% mark-up according to (Poulter,
2009) who suggests that insiders have revealed that replacement razors blades cost only 5p to make yet
are sold for around 2.50 each. This extortionate mark-up on compatibility costs has caught the attention
of the Office of Fair Trading who are currently investigating the issue. (The Office of Fair Trading, 2010)
refers to this type of issue under the name compatibility costs, these purchase decisions 'lock' a consumer
in with inexpensive original equipment (durables) in order to purchase follow-on products which a
substantial profit is made on (consumables). The high value-to-size ratio offered by the Shaving Razor
industry has triggered the products offered by Shaving companies to become the worlds most shoplifted
product according to (The Telegraph, 2003; BBC News, 2010). Kopalchick and Monk (2005, p.70)
proposed this caused several companies in the Shaving Razor industry to take action and incorporate
Radio-Frequency Identity (RFID) tags, which automatically tracks the products location when it is
removed from the shelf. However, with the technology available today, e.g. GPS systems; it would be
possible to track the product from leaving the shelf to its eventual disposal, which has led to ethical
disputes regarding personal privacy according to (The Star Phoenix, 2006).
3. Using Porters Five Force Model, assess the profitability potentials of the Shaving Industry. Treat
Dollar Shave Club as a new entrant in discussing your response. Use Table 1 (below) to analyze
Competitive Force Model
Threat of New Entrant
The level of threat from new entrants to the Shaving Razor industry is established by; economies of
scale, investment requirements, customer switching costs, access to industry distribution channels, access
to technology, brand loyalty, chances of retaliation from existing industry members, government
regulations. In the Shaving Razor industry, (Mintel, 2009) suggested there are high levels of brand loyalty
present. This makes the industry very unattractive for new entrants, as they would be directly pitting
against several major competitors in an oligopoly. To minimizes the threat from new entrants by efficient

usage of economies of scale advantages, access to the industry's distribution channels and access to
technology enhancements. Another key factor affecting the threat from new entrants is the risk of
retaliation, which could be substantial and could include mergers or acquisitions. Entry to the Shaving
Razor industry also involves high set-up costs and exit barriers are also high, reducing the probability of
successfully securing finance from external sources, increasing the difficultly for new entrants for this
industry.
Threat of substitute
The level of threat from substitution depends on several factors, the key factors are; relative quality
and price, customer's willingness to substitute and the costs involved with switching to a substitute. In
Gillette's case the main substitutes would be in the form of electric razors, straight traditional razors,
depilatories and the option of not shaving. The threat of substitution from electric razors is minimized by
having an arm in this industry with a successful brand. The (Chain Drug review, 2008) suggests that older
men tend to prefer electric razors; however the younger generation would lean towards purchasing wetshaving products. This could be interpreted that there is a potential reduction of the threat of substitution
with electric razors in the future. Another substitute is the traditional straight-edge razor. This type of
product operates in a very niche market. According to (Smith, 2010) these types of shavers have been
fading in popularity due to their dangerous nature, suggesting the threat from this substitute is minimal.
Depilatories are chemical agents used to temporarily remove hair at the skins surface. The messages
portrayed through these advertising campaigns are manipulated to benefit the company, and draw
customers away from purchasing substitutes.
Rivalry among current players
The intensity of the rivalry from established competition is reliant on; the structure of competition,
industry costs, degree of differentiation, switching costs, strategic objectives and exit barriers. The
industry operates in is already unattractive; it contains many powerful and aggressive competitors who
have high stakes in staying in the segment, due to high exit barriers. These conditions lead to frequent
price wars, advertising disputes, and new, innovative product introductions, making it expensive for
maintain a high market share. The threat from established rivals is limited by the strong image and brand
loyalty maintains. In addition, innovative research and development department keeps the industry
thriving by generating differentiation and technological advances.
Bargaining Power of buyers (identify buyers)
The level of bargaining power from customers relies on; the concentration of competition,
differentiation and unique selling points, profitability of companies, threat of backward or forward
integration into the industry, cost of customers switching to competitor. Buyers in the Shaving Razor
industry possess strong and growing bargaining power. With Wal-Mart as the main retailer for products,
the conclusion drawn could be that the potential profitability can become shortened as has a high reliance
on Wal-Mart and similar large retailers for a large proportion of revenue. The buyer's power increased due

to the fact Shaving Razors represents a significant fraction of the retailer's costs and the products are
undifferentiated. In addition, the buyers in this industry are price sensitive.
Bargaining power of suppliers (identify key suppliers)
The negotiating power from supplies it determined by; concentration of suppliers, supplier branding,
profitability of suppliers, threat of suppliers forward integrating into industry, buyers threat of backward
integration into supply, buyers level of importance to suppliers profitability, switching supplier costs. By
manufacturing its own products, there is minimal effect from this source and maintaining a win-win
relationship with its suppliers of raw-materials as they can be obtained from anywhere and little supplier
switching costs would be incurred. (Evans, 2008) suggested that identifying with suppliers with a proven
ability to meet its specifications. Once a supplier is selected to participate, expecting them to produce a
pre-production planning system to assess the supplier's capability to deliver specifications. This high level
of capability demands from its raw-materials supplier shows that he supplier has little power in the
business relationship and there is minimal threat. In addition, as a large global brand it can establish a
powerful supply-chain management model and global competitiveness enables supplier's prices to be
driven low.
4. Why has Dollar Shave Club been successful? Why did Unilever buy the Dollar Shave Club?
As discussed in the article, Unilevers purchase of Dollar Shave Club allows the company access
to new industries, both based on its brand portfolio and the customers it serves. By acquiring the
companys disruptive innovations, Unilever is in a good place to grow into over-served markets from the
low-end, thus amassing a long-term revenue stream. Additionally, Unilever is looking to increase its
synergy by utilizing Dollar Shave Clubs online tools, as well as its resources technical expertise, in order
to reduce the costs associated with its conventional sales methods and traditional business model. The
data that can be procured from online sales may also be used to break into high-margin products, which
will, of course, result in increased profit margin. Finally, the acquisition allows the company
opportunities to expand on a global basis, particularly in countries that are moving away from brick-andmortar businesses.
As shown in Unilevers firm profile above, the company had total assets at the end of 2015 of
52.30 billion and total debt of 14.52 billion. Given that Dollar Shave Club has historically been a
private firm, its financial statements are not publically available. However, based on the companys
current lack of profitability, we can theorize that its current debts may outweigh its current assets.
Therefore, all other things equal, we would expect to see Unilevers current and quick ratios, which
measure its ability to pay short-term obligations, decrease from 2015 to 2016. It should be noted though,
that according to the article, Unilevers investment in Dollar Shave Club is relatively minor, representing
less than 2% of its total assets. Therefore, decreases in these financial ratios are expected to be relatively
insubstantial in nature.

Unilever would not necessarily issue additional equity as a result of its acquisition of Dollar
Shave Club. However, depending on the reaction of its shareholders and the ongoing success of Dollar
Shave Club, the companys stock value could be affected in both the short and long-term. Unilevers
stock price on July 19, 2016, the day of its acquisition announcement, was 46.98 USD, whereas the
closing price the day prior was 47.63 USD. This moderate decrease may be due to early leakages of and
shareholder uncertainty around the acquisition. In the month since the acquisition, Unilevers stock price
decreased to a low of 45.86 on August 3, 2016 before recovering to 47.01, a price similar to its preannouncement standing, on August 17, 2016. Of course, neither the company nor its investors can be
certain as to what caused this fluctuation, especially given the fact that the entire stock market was still
recovering in July 2016 from major international announcements, including the United Kingdoms
decision to leave the European Union. Regardless, even if this decrease was a direct result of the
acquisition announcement, the price appears to have fully recovered.
Based on the strategies outlined in the article, Unilevers acquisition of Dollar Shave Club will
help the company increase both profit margin and EPS. Although it is a relatively minor mention in the
article, it is an important point that Unilevers ultimate goal is to move into high-margin product
industries. This may seem at odds with its recent acquisition, as Dollar Shave Club prides itself on its
affordability. However, it is impossible for Unilever to break into high-end markets, which tend to be
oversaturated and highly competitive, without substantial data as to how value is created for these
customers. As mentioned previously, this data can be procured from the predictive analytics that have
been developed by Dollar Shave Club and its associates.
According to another article, entitled Unilever Buys Dollar Shave Club, which was published
by the Wall Street Journal on July 20, 2016, just one day after the acquisition announcement, Unilever
management is well aware of these risks. According to the article, Michael Dublin, Dollar Shave Clubs
current Chief Executive Officer, will remain in place for the foreseeable future and the company will
operate as merely a subsidiary of the larger organization. Additionally, Unilever has promised Dollar
Shave Club autonomy within the company and resources, both old and new, to help fuel more growth. It
appears that Dollar Shave Clubs intangible value, represented by the $370 million difference between its
estimated financial value ($630 million) and its sales price ($1 billion) has been recognized by Unilever
executives and shareholders, alike, and will be extracted from the company over time.
Conclusion
It is clear that Unilevers decision to acquire Dollar Shave Club, as well as its 3.2 million
subscribers, is an innovative move for the company and a potentially major game-changer for consumer
goods companies all over the globe.

Many are still questioning whether Unilever will be fully

reimbursed, through long-term growth and increased profits, for its aggressive purchase. However, the
theories presented in the Harvard Business Review article as to why Unilever would acquire the company

well above its current value, including 1) to fill out its brand portfolio; 2) to absorb a low-end disruptor;
and 3) to signal a fundamental shift in the industry, all appear to be supported by the value creation
concepts we have studied as part of this course.

Additionally, the strong need to expand sales

internationally and move into high-margin products, thereby creating not only additional value, but
entirely new markets, supports the companys decision. Unilevers steadily rising stock price following
the announcement of its purchase of Dollar Shave Club shows support by the companys shareholders of
its increased synergy and long-term potential. Given Unilevers sagging 2015 financial data, including its
operating profits, profit margins, and earnings per share, it was both necessary and strategic of the
company to make such a daring move, thereby signaling to the market its intentions for dramatic growth.
In conclusion, while I believe Unilever has made an excellent choice in its acquisition of Dollar
Shave Club, I do see risk in the company continuing to expand at this rate, both through acquisitions and
brand development. My suggestion would be that leadership consolidate its strategic goals, as well as its
number of products, as the company moves forward. As the last paragraph of the article so clearly states,
Making the most of its daring digital deal will require the ultimate walk along a razors edge: how to
grow the digital business without undermining a legacy business founded in the 1880s that now involves
400 brands used by two billion people.
Work cited
http://www.bloomberg.com/news/articles/2016-07-20/why-unilever-really-bought-dollar-shave-club
http://fortune.com/2015/03/09/dollar-shave-club/
https://www.unilever.com/
https://www.dollarshaveclub.com/