Member Exclusive   //   December 11, 2020

A cautionary tale: What the FTC’s attempt to block P&G’s Billie acquisition means for CPG startups

This is the latest installment of the DTC Briefing, a weekly Modern Retail+ column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. More from the series →

This is the latest installment of the DTC Briefing, a weekly Modern Retail column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. Join Modern Retail+ to get access to the DTC briefing–as well as all articles, research and more.

Thanks to record e-commerce sales, it’s been a good year for direct-to-consumer founders. Except, maybe, for founders of direct-to-consumer razor startups.

Months after the FTC blocked Edgewell’s proposed acquisition of Harry’s, the FTC announced that it would be suing to block another proposed acquisition in the razor category: P&G’s intended acquisition of women’s razor startup Billie, which was announced in February.

Almost immediately after the decision was announced, the initial reaction was that the FTC’s decision was seemingly bad news for DTC startups. In an industry where there’s been relatively few exits totaling more than a billion dollars — or even several hundred million dollars — another exit would have been welcome. However, the founders and investors that Modern Retail spoke with pointed to the fact that the razor industry is highly consolidated, and even two blocked acquisitions in this category would not spell trouble for other DTC startups looking to sell to a CPG conglomerate.

Still, founders of startups in other highly consolidated CPG categories may want to take note of Harry’s — and now seemingly Billie’s — fate. If a founder is seeking to launch a new company in a highly consolidated category one way to potentially avoid antitrust concerns later down the line is to target the higher-end, premium side of that category.

In the press release announcing its decision, Ian Conner, Director of the FTC’s Bureau of Competition said, “if P&G can snuff out Billie’s rapid competitive growth, consumers will likely face higher prices.” It remains to be seen whether or not P&G still tries to move forward with the acquisition — a spokeswoman for the CPG conglomerate said in an email to Modern Retail that “we were disappointed by the FTC’s decision. We are considering our options in light of the decision and do not have any further comments at this time.” A spokeswoman for Billie did not respond to a request for comment.

“I’m not surprised by the FTC’s move to block P&G’s Billie acquisition considering what happened to Edgewell and Harry’s,” said Chris Cantino, co-founder of early seed stage investment firm Color and a former marketing executive at Schmidt’s Natural deodorant, acquired by Unilever in 2017. He pointed to the fact that by one estimate, P&G’s Gillette brand has 58% of the market share in women’s razors, while Edgewell only has 10% of the share in the men’s market razor category, so any acquisition P&G would have been made in women’s razors would have been more highly scrutinized.

However, other investors say they were caught a bit off guard by the FTC ‘s decision to go after Billie, given that the company has only been around for two years. Harry’s, in comparison, was a much more established company, having launched in 2012. “Billie hadn’t gone into retail channels yet, and so there was a view from my mind that P&G was potentially making this acquisition early enough in Billie’s life that the FTC would not take as much issue with it,” said Kiva Dickinson, co-founder of Selva Ventures, which has invested in CPG startups including Haus and Verb Energy bars. Still, he said, “when you are thinking about what the FTC is concerned about, they are concerned about five [players] becoming four, or four becoming three, or one of those three buying a really valid competitor.”

For the most part, the investors and founders who spoke with Modern Retail said that they believe razors is one of (if not the) most highly consolidated category in CPG, and one in which it’s been historically difficult to undercut the incumbents on price. Many added that they believe founders in other categories shouldn’t worry that the FTC’s decisions against Harry’s and Billie’s will extend to their category. “If Nike wants to acquire Allbirds — there’s not going to be an injunction there,” said one DTC founder, speaking on the condition of anonymity. (One notable exception is laundry detergent, in which P&G accounted for 60% of sales in the U.S. five years ago.)

Perhaps one of the biggest lessons out of what happened to Harry’s and Billie is that if a company drums up the fact that it was able to cut product costs by cutting out the middlemen, there’s a greater chance the FTC may come knocking on their doors if they sell to an industry giant who works a lot with the middlemen.

In its press release, the FTC pointed to the fact that the proposed acquisition “halted Billie’s anticipated expansion into brick-and-mortar retail stores,” as one of the reasons why they believed it would hurt consumers. Billie’s had also made its lower pricing one of its core value proposition — touting to customers that it had eliminated the so-called “pink tax” placed on women’s products.

However, that doesn’t mean that founders in these categories have no chance of selling to a strategic acquirer. “[Harry’s and Billie] were coming in with lower prices,” said Karen Howland, managing director at fintech firm CircleUp, which works primarily with CPG startups. “When I think about something like the tampon market, so much of the innovation has been on the premium side — [for example] organic tampons, which is more expensive — so the idea of it negatively impacting the consumer, via price is less relevant,” she said.

Still, there’s a fear that other founders may be spooked, rightly or wrongly. Or, that startups will have trouble raising money if investors feel like they don’t have as many potential exit options. “I’m worried it might make brands think that they have to sell earlier than they necessarily want to, before they get too large and get on the radar of the FTC,” said the anonymous DTC founder.