But, setbacks like these give companies and anyone in the space a chance to reflect. DTC’s bubble is far from bursting, but the industry is changing—and this week’s developments are indicative of that.
“There are no shortcuts to building brands,” said Sucharita Kodali, an analyst at Forrester. “It takes money over time and takes way more than digital marketing. You see one year of low customer acquisition costs and you think that’s going to hold true forever, and that’s not the case.”
The FTC’s case against Harry’s and Edgewell is an outlier, not the norm
When the FTC sued to block Edgewell Personal Care’s $1.37 billion acquisition of Harry’s on Feb. 3, it left the industry with a lot more questions than answers. But, Harry’s and Edgewell is an outlier for many reasons, and other acquisitions in the space aren’t likely to fall under “regulatory scrutiny,” said Jason Goldberg, chief commerce strategy officer at Publicis.
First and foremost, Edgewell is a major wet shaving brand that owns Schick. If it went through with its acquisition of Harry’s, a wet shaving competitor, the combined company would own an outsize portion of the market, Goldberg pointed out. The same scrutiny did not apply when Unilever acquired of Dollar Shave Club for $1 billion in 2016 because the CPG giant didn’t already own a major shaving brand.
Most acquisitions in the DTC space won’t be billion-dollar deals that far exceed the current threshold requiring FTC disclosure, and most companies won’t end up owning a significant portion of the market if a merger goes through. As it stands now, brands need to report deals larger than $63.4 million (which changes to $94 million on Feb. 27), per a 2010 update to the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
“There’s no antitrust issue if someone’s bought by someone that’s not a competitor,” Goldberg said.
Harry’s distribution in brick-and-mortar stores was another key component of the FTC’s compliant. The agency noted it forced P&G and Edgewell to lower prices for Gillette and Schick, respectively. According to market research company Numerator, Gillette sold $838 million worth of razors over the past 52 weeks (ending the week of Jan. 20) to Harry’s $100 million and Dollar Shave Club’s $34 million. Given Harry’s $66 million edge over Dollar Shave Club, it’s clear the FTC saw the dual men’s and women’s shaving brand as a more competitive force in the industry than its DTC foe.
“The FTC thinks there’s more direct evidence that Harry’s drove prices down than Dollar Shave Club,” Goldberg said.
News of the FTC’s case rocked the DTC industry, but other mergers, such as T-Mobile and Sprint or 2018’s approved merger of AT&T and Time Warner, highlight not only the power of lobbyists—according to a Forbes, T-Mobile spent more than $8 million each year between 2017 and 2019 on lobbying to get the merger approved—but the lack of lobbying power in the retail industry. And the retail industry is still catching up in other areas like digital transformation and harnessing the power of data to better target consumers.
“It’s time for retailers to start getting their act together and start educating themselves on what is the law, how does FTC work, [and] they need to clean up their in-house council,” Kodali said. “It’s so conservative and they’re terrified and everything seems to be avoiding litigation. The lesson here is not never do another merger; the lesson is how did the other guys get away with a merger and what’s the mistake here?”
The FTC isn’t setting a precedent with the current case, either. In 2000, the FTC blocked the merger of Conso International Corporation and pattern making company McCall Pattern Company that would have given Conso “more than three-quarters of the U.S. unit sales of domestic home sewing patterns,” according to the FTC. In that case, Conso backed out of the deal. Goldberg reiterated that unlike the T-Mobile and Sprint merger that leaves a number of big players and plenty of competition in the space, the wet shaving industry is largely dominated by P&G and Edgewell. Just like in the Conso case, the competitive dynamic in the wet shaving space could have shifted if Edgewell acquired Harry’s.
Charley Moore, a business lawyer and founder and CEO of RocketLawyer, said that in the case of the T-Mobile-Sprint merger, the federal judge that approved it ruled it would help consumers since Sprint was falling behind in innovation.
“Harry’s was a fairly strong business that was having a disruptive effect and creating the kind of competition that regulators like to see in the market, whereas Sprint was not competing effectively in the market,” Moore said.
However, Moore said, there’s been a growing awareness of antitrust issues and “increased scrutiny on monopolies.” For example, the FTC announced on Feb. 11 it was looking into every acquisition made by Alphabet, Amazon, Apple, Facebook and Microsoft.
“The biggest takeaway form a regulation standpoint is the FTC appears to be, in a unanimous way, following through [on] its bedrock principle of protecting price competition,” Moore said.
Brandless’ exit and Casper’s waning IPO are warnings for DTC
Casper’s sleepy IPO—and its share price dropping below its opening day price—is a reminder of what could await other DTC brands with high valuations.
“Casper is a pretty brutal reminder that the market may not value the same way the private investors did,” Goldberg said. “Whatever you thought your chance of going public and getting a good valuation was last quarter, that number has meaningfully gone down because of Casper.”
Other news, such as Brandless abruptly shutting down on Feb. 10, doesn’t help the DTC industry right now either, Goldberg said, and makes it harder for new DTC brands to raise money.
Ben Brachot, founder at Dwight Funding, added that investors are becoming more “diligent in where they’re investing their dollars” amid all the recent news. But, he doesn’t believe Brandless’ strategy of pricing products at $3 so early or taking in a $240 million Softbank investment will hurt other DTC brands.
“Authentic brands that are good business still have a place to survive and thrive in today’s markets,” Brachot said. “Low gross margins, high customer acquisition costs and those types of business are going to have a very difficult time in the next couple of years.”
For Kodali, Casper and Brandless are indicative of how venture capital funding and earned media don’t necessarily equate to success for a company, especially as customer acquisition costs have gone up.
“These DTC startups all tried to lead with a narrative that they could acquire customers more cheaply,” Kodali said. “You see one year of low customer acquisition costs and you think that’s going to hold true forever, and that’s not the case. That’s the cause of decline for a lot of these companies—they had bad models that didn’t account for inflation in ad spend.”
