Razor Blade Wars, Part One: Harry's Ends the Safety Razor Cartel
The FTC stopped Schick razor maker Edgewell from buying Harry's. Harry's is now expanding and challenging consumer packaged giants in other segments.
|Matt Stoller||Apr 1||15||4|
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Stopping mergers is good for business. Take a very simple consumer product - razors and razor blades for shaving, or disposable wet shave safety razors.
This is an overpriced product with known excess profits, so much so that selling low-margin razors so you can sell high-margin razor blades in the aftermarket is now a business strategy cliche. Warren Buffett, America’s folksiest predatory monopolist, owned a big chunk of consumer giant Gillette, and he only buys firms with what he calls sustainable ‘moats,’ by which he means market power. Where does this power come from?
The razor business is, like most consumer packages goods products, all about distribution. Prior to the internet, that meant getting into stores. "Shelf space is diamond-encrusted gold. It's exposure to the consumer and everyone wants exposure to the consumer," said one retail analyst.
Gillette’s power was amplified with its merger with P&G in 2005, and the resulting firm was able to leverage its power across a basket of consumer goods to negotiate better terms with retailers. Gillette, now a part of P&G, had so much power that it still controlled 70% of the market in 2010, even though razors as a disposable wet shave razor product are more 50 years old. And the incumbents exploited their power, with yearly annual price increases and nice margins for a commodity product. (This market power insulated P&G from having to compete, so the consumer conglomerate now is a giant sleepy company whose workers don’t really do much work.)
In 2013, Harry’s launched, challenging the duopoly of P&G and Edgewell by going direct to consumer online. A similar firm, Dollar Shave Club, also entered the space. Both firms sold razors cheaper than the giants, but did so only online, which meant that the incumbents maintained much of their power by controlling retail shelf space. However, in 2016, Harry’s got shelf placement in Walmart, Target, and other big box stores. The result is Edgewell and P&G had to cut prices.
Enter the buyouts. In 2016, Unilever bought Dollar Shave Club, in a transaction that should have been challenged by the Obama DOJ, but was not. Still, Harry’s continued putting pressure on the giants. Three years later, Edgewell tried to take out the remaining challenging by buying Harry’s. The FTC, however, filed a case against the merger, and Edgewell walked away from the deal.
Opponents of stronger antitrust laws say that blocking mergers will harm the economy. Is that true? Dan Primack in Axios Pro Rata today published a story today on what happened next. The CEO of Harry’s, Jeff Raider, raised $155 million from Bain Capital Ventures and Macquarie Capital at a higher valuation than Edgewell had offered, with the goal of using this money to expand its product line. As Raider put it: "We had expanded into other standalone brands on our own and were super excited about taking over their portfolio, but when the deal didn't go through we still thought we had come up with compelling ideas."
Today Harry’s product line “includes men's and women's shaving products, shampoos, deodorants, lotions and even fresh cat food.” And Raider wants to expand more. In other words, blocking this merger helped everyone in the market - consumers got cheaper razors, Harry’s owners got more value, and now there’s going to be more competition in consumer packaged goods more generally. The only entities who lost out were P&G and Edgewell.
There is one problem. Raider wants to expand Harry’s through “acquisitions, particularly smaller consumer packaged goods brands that could leverage the Harry's distribution and production network.” That’s not necessary, as Harry’s could either invest to create these products itself, or sign distribution deals. It’s one reason merger laws should be much stronger.
Then we’d have even more competition in this sector, and others.