With annual events like Movember, lasting all of november, where men are encouraged to grow a moustache to raise awareness of mens health issues; facial hair is back in fashion. But it wasn't always this way and not everyone fancies a beard or moustache. I was always a clean shaven guy until one movember a few years ago, I decided to participate. I have always wondered why the prices of these blades never seem to come down. Ive been shaving for many decades and since the time I switched from single blade to the plastic Gillette, I've been paying through my nose to keep hair off from under it. I decided to investigate.
Gillettes US share, of the $2.6 billion mens shaving market, was 54% as of 2016, with its competitors Dollar Shave Club at 12.2% and Schick at 15%. India market share for Gillette grew to 49.1%. This isnt too different from the global scenario, where it has a 65% market share and $13 billion in sales, despite being in the consumer goods industry which has typically been a competitive market. What explains this market power?
1998 was when Gillette introduced the 3 blade Mach 3. It transformed shaving by promising a closer shave, closer than a single blade. Single blades from manufacturers, like Topaz, still costs only 5 paise per blade. While each of Mach3 blades costs close to Rs. 100. Even their single blade model for India, the Guard, is Rs. 5 for each cartridge, which is 200 times more expensive than half of the metal blade, which is generally used by saloons. Gillette reported gross profitability of more than 60% before its P&G acquisition. Some reports placed the operating profit from the blades business of P&G at 31%. The pricing is an absolute ripoff.
To understand just how much power they wield, we can use Herfindahl-Hirschman Index for the US blade market. This allows us to understand the competition more effectively using a market concentration rather than just the market share. Gillette with 54% market share has an HHI of 2916 and overall the HHI for the blade industry is 3646
The regulatory agencies generally consider markets in which the HHI is between 1,500 and 2,500 to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated. Any horizontal merger which increases the HHI by 200 points attract antitrust investigations. We can conclude that this is a highly concentrated market. This could be one of the reasons they are able to command the premium in pricing.
All that is changing, the market share of Gillette dropped from 70% in 2010 to the 54% now. The mercyhurst study found 38% of the men wanting to grow facial hair. Aided, by female preferences and campaigns like movember & no shave december, it is causing an overall shift to trimmers and other products instead of blades. This trend could last a decade and can change the fortunes for product lines like blades.
Secondly, new operators are putting up an online fight. Gillette has been traditionally sold in retail under lock & key near the cash counters. The online world rattling its dominance by an aggressive pricing and subscription models for the blades. GIllette is being forced to drop upto 20% on its razors.
Is market concentration in this industry really a problem? For P&G, blade market competitor Harrys was acquired by its biggest consumer goods competitor, Unilever. With an HHI of 2916, for P&G, any inorganic growth to retain its leading position is ruled out as it will raise antitrust attention. It has to instead focus on reducing price and entering more markets. It has made a start with Guard.
There is also a consumption negative externality, with almost the entire product being made of plastic. At 65% market share Gillette alone services 750 million customers. At 2 blades a month per person that translates to 18 billion plastic blades being disposed off annually by Gillette alone, while the earlier all metal solution gave back only recyclable metal blades. Assuming atleast another 30% of the market is the new generation plastic blades it takes the total disposable blades to 28 billion per year. Not considering handles, at 50gms per blade thats approximately 2800 tonnes of plastic waste over 20 years
The public is definitely feeling ripped off by having to pay such premiums for the market position Gillette is in. Gillette innovated and benefitted. For a segment of population with single blade razors, this switch to multiblade razors came at a huge marginal jump in cost. For the rest the lack of competition really made it a Hobsons choice.