A New York Times story today ticks off the numerous consumer products companies that are getting hammered by startups. These companies have nice, fat margins, and, the story implies, it was only a matter of time until someone noticed and started going after them. Gillette had a 60 percent margin when it was sold to Procter & Gamble? That's enough to make even a software CEO drool, and a pack of Gillette razor blades still costs anywhere from $10 to $40. So you can hardly blame Dollar Shave Club for setting up a web-based subscription service that'll get you a supply of razors for $1 to $9 a month.
Likewise Warby Parker. Those co-founders knew they weren't the only ones sick of paying upward of $300 a pop for eyeglasses. Now even Warby Parker’s high-end frames cost $145--and that's with the lenses. Other examples cited by the NYT include Harry’s and Bevel, two other shaving-products companies, as well as Casper, which sells mattresses.
There's no doubt that this is a boon for consumers. But you have to wonder: Are any of these companies making any money? The Times doesn't say. The upstarts are busting up the big-guys' margins--but that doesn't mean their own margins are generous enough to ensure their long-term survival.
Think about it: Who's the biggest margin-buster of them all? Amazon, of course. You can pay $27.95 for Michael Lewis' Flash Boys at your local bookstore, or you can buy it from Amazon for $16.11. Throw in a second book, and you'll probably get free shipping.
But does Amazon make money? Not so much, (although it will occasionally post a profitable quarter). In its most recent quarter, Amazon lost $126 million. Revenues were $19.3 billion, so clearly, scale is not the issue. Forrester analyst Sucharita Mulpuru put it best in a New York Times story of about a year ago: "Amazon is the teacher's pet of Wall Street," she said. "There is no other company in the entire world that has the consistently abominable rate of profitability they do and yet has the stratospheric valuation they do."
Amazon was originally backed by venture firm Kleiner Perkins Caufield & Byers, allowing it to charge low prices, and lose money, in the name of market share. The newer margin busters are likewise supported by venture capitalists: Dollar Shave had raised $22.8 million as of last October, and reportedly recently closed on an additional $50 million. Harry's has raised $136 million, according to Crunchbase; Bevel has raised $2.4 million from VCs and the rapper Nas; and Casper has raised $14 million.
It's unlikely, should these companies attempt to go public, that the markets will grant them the same forbearance that's been so crucial to Amazon.com. At some point, this will not be about disruption, or venture capital, or hip young founders. It will be about business. And it'll be about showing us the money.