What happened?Consumer goods giant Procter & Gamble announced that its razor company Gillette had filed a patent infringement lawsuit against Dollar Shave Club, alleging that the low-cost, monthly razor subscription service had violated its intellectual property by selling its razors.
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Does it matter?Forbes estimates that Procter & Gamble holds 70% of the blade and razor market, which is also one of the consumer products company's most profitable businesses with 32% operating margins. Personal grooming products like razors accounted for 10% of its $76.3 billion in annual revenue last year and 16% of its $7.1 billion in net earnings.
Privately held Dollar Shave Club, on the other hand, is on track to generate some $200 million in annual sales within the next year, making its position almost a rounding error in comparison to Gillette, but sales have doubled in recent periods and DSC believes it has overtaken Edgewell Personal Care'sSchick brand for the No. 2 position. AdAge also reported Dollar Shave Club outspent Gillette on television advertising, which helped fuel its sales growth.
Procter & Gamble must be feeling the pressure as grooming division sales fell 14% in its fiscal first quarter that ended in September. While that was largely result of a 13% hit from currency exchange rates, they were also inflated 5% by price hikes.
Pricing, of course, is the big selling point of Dollar Shave Club's sales pitch, and Procter & Gamble was worried enough about this upstart eating into its market share to launch its own cut-rate razor subscription service this past summer. The lawsuit suggests it might not be making any headway, even though it says its prices are cheaper than DSC's.
As the company that created the razor-and-blades business model many companies across disparate industries are founded upon, there's no danger that Gillette is about to lose its preeminent position, but with all of its business lines putting up lackluster numbers, Procter & Gamble needs to ensure it shores up its best businesses, even if that means taking the competition to court.
The article Instant Analysis: Procter & Gamble Co Getting Nicked by Dollar Shave Club originally appeared on Fool.com.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. 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.
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