Looking at the production costs…
As I explained in my last blog post, the too-high margins that BigRazCo makes on its premium razors impacts the operational profit of BigRazCo itself and is the rationale behind the incredibly high price that BigShark paid for acquiring BigRazCo in 2005.
In today’s blog post, I would like to dive with you in the production costs of a Razor Blade and prove, from this, that profit margins are too high. Not anyone can produce quality razor blades. In total we have identified 5 major players. Three of them produce razor blades for “private labels” and two produce their razors and razors blades under the very well-known shaving brands. One of these two is: BigRazCo.
Many years before it was acquired, BigRazCo was convinced (= convicted?) of infringing competition law in EU, by creating, tough (?) buying shares of its main competitor in Europe, a real razor and razor blades monopoly. In the explanation of the judgment, some hints about production costs were revealed: at that time, the minimum investment to produce a de novo model was estimated to 150 million Euros, creating a huge barrier to entry. (Judgment said that given to the high barriers to entry, BigRazCo would have gained an inexpugnable monopoly position if investment in competitor was accepted under EU law).
It is indeed quite difficult to produce razor blades. You need special steel, for example. The “razor edge” is difficult to obtain (it reaches 300 angstrom in thickness, making it just 30 times larger than an atom’s size…) and you need a special steel quality (with more carbon in it), that, apparently, only one steel producer produces (see on my next blog post). But, is it so expensive that it justifies the price?
Certainly not. The barrier to entry explains the prices. The recent very good news issued by BigShark (a news that I will – honestly – celebrate in a next blog post), is that the owner of BigRazCo plans to launch a razor at 11 cents (45 times lower price than the price of a premium razor in Europe), as retail price in India also provides you with some hints. (I don’t understand the last part of the phrase..)
But let’s dive into the maths. Imagine a new razor blades-producing plant aimed at serving Europe, and that costs 150 million Euros (with share of production costs included). Consider now that this factory produces 1 billion razor heads per year. This would not be enough to cover market needs for BigRazCo blades in Europe; as a “Back of the envelope” calculation suggests: based on EU population, and considering the market share of BigRazCo in Europe and the frequency of cartridge refills, a least 1,3 billion blades are needed. But, let’s keep my figures: by using them, we get to an investment cost per blade of 15 cents, just for the first year after opening the plant. Now keep this figure in mind: you can use it to check if we can believe the figures I am presenting now:
Last year, the Dailymail online issued an article where the production costs of blades were revealed. Thanks this article, I was able to produce the graph here below:
This graph is adapted from an analysis published by Sean Poulter. (No hyperlink is provided as the true name of BigRazCo is mentioned in the original article. But, you can still search Google if you want: “Sharp practice”? The razor heads that cost just 5p to make”). Here is how I established the graph: the retail price in the UK of the premium razor I have in mind is 2,43 GBP, which, converted in Euros, makes 2,91 EUR. But, in continental Europe, razor heads are more costly (less competitive market). It can reach up to 4,50 EUR per razor head (the new model coming soon is even more expensive). I took the average price in Belgium – 4.05 EUR per razor head – based on our store checks, and applied the UK cost structure. Hence, the figures featured in the graph should be considered as approximate figures only as, for example, VAT differs from one country to the other.
What is to learn from this graph? At first, you should ask yourself: should I believe these figures? That’s what I asked myself: is Sean Poulter not exaggerating? I am afraid not…but I am not sure. Hence, I will continue my quest for the truth… (I promise you!). But, and that’s what you have to learn from this sort of “Maths of shaving” exercise: even if Sean Poulter or I was wrong by a factor of 2, profit margins would still be extremely high!
And now, let’s calculate the margins in percentages. The figures on the graph mean that BigRazCo makes a 65% profit margin (with which you still need to pay the marketing costs, part of the salaries of football, tennis and golf stars, etc…). Even half of this sum would already be a large number! Let’s now make the reasoning in “mark up”: divide the profit margin by the sum of “production costs” and “packaging costs”. What do you get? A mark-up of 2245%! Good business to be in, no?
Margins on razor blades are way too high. That’s what I wanted to show.
More shaving maths later (Don’t miss the last “Maths of shaving” episode…).