I have written about many businesses, but this is the first start-up whose inspiration began with sticker shock at — of all places — Wal-Mart.
Entrepreneur Phil Masiello a couple of years ago found himself on a business trip to Bentonville, Ark., which is where Wal-Mart has headquarters.
The airline lost his luggage, so he drove to a nearby Wal-Mart (they have them in Bentonville) to buy toiletries.
“We are standing in Wal-Mart,” he recalled. “I was looking at the razors. I was a Gillette Fusion guy. I said to my business partner, ‘How in the world can we still in 2011 be paying $36 for eight razor blades?’ ”
But he needed the blades for his next day meeting with the retail chain on a skin-care product he was selling, so he bit the bullet and said he paid around $35 for an eight-pack of Gillette blades.
Fast forward two years.
Masiello now runs an online company called 800razors.com out of a small office in Catonsville, Md., just south of Baltimore, which he hopes will disrupt the massive razor industry the way Netflix disrupted the video-rental business.
The company has two full-time and five part-time employees, about $1 million in start-up capital from its two founders, and a fulfillment center in a nearby warehouse where it packages and sends out the razors.
The razor business is great because, well, most men and women need to shave pretty regularly. The great investor Warren Buffett discovered that long ago and bought Gillette, knowing that customers will keep coming back for their blades — time after time after time.
Masiello gets that. Give the customer a free handle (he does), and then they will keep coming back for the cartridges or blades. He hopes to use the Internet to eliminate the costly “middleman” the same way other disrupters have done.
The company’s Web site went live July 1, and first-year sales are expected to be just under $1 million.
Masiello isn’t the first-mover in the online shaving rodeo. California-based Dollar Shave Club launched 18 months ago with a hilarious video (I have watched it several times) that went viral and earned the company hundreds of thousands of subscribers and a feature on “CBS News Sunday Morning.”
Masiello said he is different from Dollar Shave because he is chasing both men’s and women’s markets. Dollar Shave focuses on men only.
Masiello has built companies before, but nothing this ambitious.
The New York native, who graduated from the University of Miami and has a master’s in business from the University of Maryland, had worked in the food sector and began a Washington grab-and-go meal place called the Daily Market back in the 1990s.
He and business partner Steven Krane developed the first Daily Market near Dupont Circle in April 1995, then added four more stores over two years before they sold it all to a big supermarket chain for $2 million.
“We each got a nice bonus, but not enough to retire on,” Masiello said of the deal.
Next, the business partners started a natural-skin-care products company with supermodel Carol Alt, which is why they found themselves in Bentonville without luggage, pitching Wal-Mart to stock their product. The Alt initiative ended up fizzling out.
After his lightning bolt of an idea on razors, he and Krane researched the industry. They talked to friends. They interviewed guys at the gym about their shaving habits and preferences. They found industry contacts, including one man in New York who had spent his entire career in the industry.
Here is their conclusion: Men and women want high quality shaves but balk at the price-shock of $30 and up for the cartridges (me included). They also found that the U.S. razor market is dominated by Gillette (66 percent) and Schick (19 percent).
Ripe for online disruption, Masiello thought to himself.
“Each year, 36 million U.S. customers purchase cartridge systems. We want to get 2.4 million cartridge customers by 2023.”
He and Krane said they wrestled the razor-cartridge price down to under $20 while keeping a quality shave.
To do that, they hunted for a manufacturer to help them squeeze down the cost. There aren’t many razor manufacturers out there, Masiello said. There’s Dorco in South Korea. There’s Kai in Japan. They found an American manufacturer that has been making blades since the 19th century, but they wanted to keep it a secret from the competition.
“We started talking to them on the phone, and they told us they had been approached by a ton of guys that want to go after the Internet market. They said, ‘We turned them down because we don’t believe they have the right model.’ ”
Masiello came back with a presentation to target the mass market with a focus on quality, but also offering less expense and the convenience of online ordering and direct-to-your door delivery.
By the end of the process, Masiello and Krane finally worked out a five-year deal with the American manufacturer to create a razor with the ceramic-coated blades that Masiello wanted.
Masiello would not tell me exactly his cost of production, only that it is about 30 percent of the razor’s sale price. His break-even point is $15.60 per sale going out the door. That includes shipping, packaging and handling. The average sale price so far is $19.12, which means they are turning a slight operating profit on each order.
He is offering a free handle and package of four cartridge razors for $9.99. You can also pay $17.99 for eight cartridges. Eight is a lifetime supply for me considering my light whiskers.
Masiello is approaching 20,000 subscribers, but I think he has a long way to go. Once he has captured a big subscriber base, he plans to add pre- and aftershave lotions, more razors and skin-care products for men and women — all of which have higher profit margins than razors.
“We are going to be the category killer,” said the ambitious entrepreneur.
I don’t know about that, but I do know Masiello and Krane could have a big payday if they get some scale. I tracked down 800razor’s manufacturer, and I found a plant in Tennessee owned by Energizer Holdings, which owns Schick.
If this takes off, Energizer/Schick could become his first outside investor.
So who is disrupting whom?