This week’s move by federal antitrust regulators to block the merger of shaving startup Harry’s and the nation’s No. 2 razor maker has direct-to-consumer brands rethinking strategy and timing for potential exits.
Though the setback will not slow the robust DTC movement, experts say entrepreneurs dismayed by the FTC action are re-evaluating next steps.
The FTC announced on Monday that it would file suit to halt the $1.37 billion acquisition of New York-based Harry’s by Edgewell Personal Care, the Shelton, Connecticut-based parent company of Schick and Wilkinson razor blades. The FTC said: “The loss of Harry’s as an independent competitor would remove a critical disruptive rival that has driven down prices and spurred innovation in an industry that was previously dominated by two main suppliers, one of whom is the acquirer.” The other supplier is market leader Procter & Gamble, maker of Gillette razors.
DTC brands are rethinking three areas:
- Retail strategy: As the FTC complaint cites Harry’s mainstream moves onto the shelves of Target and Walmart stores and major grocers like Kroger, Meijer, Hy-Vee and Wegmans, DTC brands may eschew brick-and-mortar and stick with e-commerce channels instead.
- Exit strategy: While the debacle of Blue Apron’s 2017 initial public offering soured many on IPOs, companies may once again reconsider going public as more palatable than acquisition.
- Timing: Early exits – selling a challenger brand before it captures too much revenue and market share – may be a safer, though less-lucrative path than risking regulatory scrutiny triggered by planned acquisitions.
The FTC’s lawsuit to block Edgewell’s merger with Harry’s comes nine months after the cash-and-stock deal was announced, and just one month before it was expected to be finalized. The FTC complaint states: “Proposed acquisition would neutralize ‘one of the most successful challenger brands ever built,’ eliminating head-to-head competition between Harry’s and Edgewell, and removing the independent competitor that disrupted Edgewell and P&G’s longstanding and stable duopoly.”
Market share of Harry’s, which launched the Flamingo shaving line for women in 2018, was 2.6% before the deal with Edgewell was struck, according to Euromonitor figures cited by The New York Times. At 13.6% share, Edgewell’s Schick razor brand trails U.S. leader Procter & Gamble’s Gillette, which claims 47.3% market share, according to Euromonitor.
“This is raising questions on ‘when’ is the right time to sell,” said Fahim Naim, founder and CEO of eShopportunity.com and former Amazon executive. “Does it make sense to sell earlier on to avoid antitrust rulings — potentially before achieving 1% to 2% market share?” Naim said the DTC brands he advises are concerned about the precedent the FTC ruling may set.
Forrester VP and principal analyst Sucharita Kodali said she was surprised by the FTC’s move this week. “I would think that CPG companies will think twice about acquisitions,” she said. “That isn’t good for the money-losing DTCs that need exits.” Kodali questioned why the Harry’s-Edgewell deal drew regulatory scrutiny while Procter & Gamble’s planned acquisition of women’s grooming brand Billie has not.
Consumer goods giant Unilever did not have a major shaving brand prior to its 2016 acquisition of Dollar Shave Club, another DTC digital brand.
The FTC trial date for Harry’s and Edgewell is June 30, 2020.
“Skipping way forward, I don’t know what Harry’s or Edgewell can put on the table that would ameliorate the [regulatory] concerns,” said Taft Stettinius & Hollister LLP senior counsel Eugene Zelek in an interview. “They could say, ‘We’ll hold our prices steady for five years.’ But how could you do that? Even then, what happens after five years?
“This is not going to quash innovation,” Zelek added. “Lesson here: Once your startup matures and shows a significant effect, then it may be more difficult to sell to the companies you are disrupting.”
Chris Baker, founder and managing director of digital agency Totem, agrees that DTC momentum will continue. “Barriers to entry aren’t what they once were,” he said. “New DTC companies will continue to spring up with new ideas, get traction with customer segments through social and digital media, and scale through e-commerce.
“There is also a dynamic with consumers now, where they are seeking brands out that match their specific world view. So, while product and service innovations are important, a big part of the DTC movement is about the shared sense of purpose between brands and audiences.
“In this context,” Baker added, “the consolidation of Harry’s by a large player like Edgewell only opens the door for a new DTC player to step in.”
Moiz Ali, founder of Native, the natural deodorant brand acquired by Procter & Gamble for $100 million cash in 2017, sees no long-term impact of the FTC move to block Edgewell’s acquisition of Harry’s, whose cofounder Jeff Raider also cofounded Warby Parker.
“This won’t have a material impact on DTC,” Ali said. “Few DTC brands get large enough to command billion-dollar valuations, and I think the razor blade category is unique in terms of the duopoly that exists. Other industries — luggage, skin care, mattresses — have tons of competitors,” he said.