Thursday, 15 September 2016

DSC disruption? Close shaves and cutting-edge patents

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Recent developments in the lucrative male grooming market have caught the headlines for many reasons. However, little attention has been given to the spread of patents that lie beneath the surface of the literally cut-throat competition that drives technological progress in a market that is not only global but has the extra attraction of products that their users must regularly replace.

Deploying the Cipher patent analytics tool, we take a look below at some of the market's salien features. Here's our report:
Unilever enters the razor market with acquisition of Dollar Shave Club
• Small number of companies dominate the razor market and patent landscape
• Dollar Shave Club (DSC) are disrupting the market, but are exposed to IP risks
• Incumbents are very litigious and have very broad geographic coverage
• DSC under Unilever’s control creates a fascinating patent “balance-of-power”
More innovation and patents does not always lead to remarkably different products or disruption. It does, however, offer another way of stopping or slowing down competition. A good case in point is the razor market, exemplified by Gillette and Dollar Shave Club, which recently made headlines when they were acquired by Unilever.

For a long time, the razor market has been a good example of an oligopoly – a market controlled by a small number of companies with high barriers to entry and therefore typically high margins. P&G’s Gillette and Edgewell’s Wilkinson Sword/Schick are the main incumbents. This industry has been driven by high R&D investments leading to well-known features and ever more advanced razors (for better or worse). Equally well-known are the marketing efforts also contributing to keeping competition out and margins high.

Challenging the incumbents and going for the 21 billion dollar male grooming market is start-up Dollar Shave Club (DSC) who launched with a low-price razor and a subscription-based business model. With just three years after its launch, DSC now sells around 15% of all razor cartridges in the US. In July 2016 Unilever bought the highly successful start-up in an effort to enter the razor market.

Although DSC is growing rapidly in market share, disrupting the norm and setting a new standard (Gillette has since launched their own subscription solution) the patent balance-of-power is completely favoured to one side. Gillette is a powerhouse and DSC does not own any patents. In December 2015, Gillette launched a lawsuit against DSC claiming that their products “Humble Twin”, “4X” and “Executive” were all infringing a patent used in Gillette’s “Mach3”, “Venus” and “Fusion” razors. So although the market might be ripe for disruption, the incumbents have the ability to defend themselves using IP to protect their high margins. This is the focus of this analysis.

Figure 1 shows Gillett’s domination in the market, owning 50% of the patents within razor technologies. Energizer is second, which is perhaps surprising. Energizer bought Wilkinson Sword and Schick in 2003; it spun-off Edgewell Personal Care in 2015 which owns the two razor brands, but the patents appear to be split between the two and jointly they have 27% of the patents. BIC and Unilever have 12% and 11% respectively. So how has the share developed over time? Figure 2 sheds some light on the companies’ patenting activities as a proxy for innovation activities.

Since 2005 we see a clear trend of Energizer decreasing its patenting activity while Gillette ramped up its activity until 2010 where they also appear to be declining, although still consistently filing more than the rest of the competition. However, BIC are on track to file more than Gillette as there has been a surge in patenting in recent years, which might be surprising as many might think of them as populating the disposable low-tech niche in the market. It will be interesting to see how the incumbents react, since they can clearly flex their muscles against new entrants with little or no patents, like DSC.

Figure 3 outlines litigation activity among the main players and we can clearly see that the DSC lawsuit was not a one-off reaction. The incumbents have been actively asserting their patents for a long time, with Gillette instigating more than 30 lawsuits against large and small players.

And finally, Figure 4 shows us the impressive geographic coverage by the main players, indicating that the protection of key markets for sales and manufacturing is a high priority. This is apparent with BIC, which also has extensive coverage in places like Greece and Italy.

So, although there might only be limited technical advances with disruptive swings in market share, the incumbents have built a very strong position and will continue to fight to keep it that way. It will be very interesting to see how the dynamic changes with DSC under Unilever’s umbrella –- but they should be ready for a possible a patent fight.
This report can also be accessed on the Aistemos website here.  For more examples of Cipher-based analysis, click here.

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