$eismic $hift in Retailing

Unilever just bought the privately held (and unprofitable) Dollar Shave Club for a cool billion dollars. Not a huge transaction for Unilever, but another seismic shift for retailing—and a shift that spells opportunity for those who can decipher these tremors.

Dollar Shave Club (as explained in its quirky ads) ships razor blades directly to your door for as little as $3 a month, shaving most men’s monthly razor bills by 80%.

Gillette, the razor giant owned by Unilever competitor Procter and Gamble, has seen its share of men’s razors drop to 59% last year from 71% in 2010, mostly due to Dollar Shave Club’s success.  So Gillette joined the fray in 2014 with its unimaginatively named Gillette Shave Club.

Retail’s standard model of distributing product through brick and mortar stores continues to be shaken. We’ve discussed Amazon’s success at converting consumers to home delivery of everything from books to pet food.

But this move cuts closer to the skin. Instead of a distributor (Amazon) buying product from various manufacturers and then selling to consumers, these manufacturers cut out the middleman entirely.

Clothes makers have long used multiple distribution channels. Ralph Lauren products for example, can be bought directly from the company via its website or in its own retail stores. And Ralph Lauren’s wares also are distributed through high end department stores.

But consumer products? Who could have predicted that consumers would jump through the hoops of an online purchase to remove one single item from their grocery cart?

Yet this is exactly what is happening with Dollar Shave Club and a recently launched Procter and Gamble laundry club. The Tide Wash Club is a monthly subscription service for Procter and Gamble’s highest priced washing pods. And while consumer product manufacturers run the risk of alienating their biggest customers (general merchandise and grocery stores), they do not want to miss out on the potential to sell directly to the consumer.

Not only does a direct sale allow the manufacturer to collect a higher price (retail versus a wholesale price), it gives them access to consumer behavior and shopping patterns they might not otherwise have access to.

Clearly online shopping is an unstoppable trend. The May issue of the government’s monthly consumer spending survey once again illustrated the shift to online sales.  Spending at department stores fell almost 6% and retail sales in general fell slightly. However sales to non-store retailers, a category encompassing online sales, rose a remarkable 12%. Non-store retail sales now equal $46 billion, only slightly below the $55 billion of general merchandise sales.

Any dramatic transformation in a business model offers investors many money making opportunities.

On the long side we’ve been researching companies that supply everything from distribution equipment, software and delivery services to Amazon and now perhaps to other manufacturers eager to find their way directly to consumers. On the short side, we’re knee deep in ideas of companies whose fortunes are being whittled away by online shopping sites.

Just last week Growth Stock Strategist saw one of its holdings report an 85% increase in earnings partly due to the explosion of home delivery. The stock is up 33% since our recommendation, but we see potential for another 35% gain. In Profit Catalyst Alert a put position in a supplier to department stores jumped 30% in two days when it reported weak numbers.

While every position might not be as exciting as these two, we’re researching other great companies that will capitalize on the shift to online spending.