Washington Insider-- Friday

Dollar Shave Club Phenomena

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Some Environmentalists Reconsider Support for the RFS

Biofuels, once touted by environmentalists as a way to cut pollution, are now seeing support fade as the Renewable Fuel Standard (RFS), a program that puts renewable fuels in cars, has been linked by some to higher-than-expected carbon dioxide (CO2) emissions and reduced wildlife habitat.

More than 10 years after conservationists helped persuade Congress to require adding corn-based ethanol and other biofuels to gasoline, some groups now say the resulting agricultural runoff in waterways and conversion of prairies to cropland have dampened their enthusiasm for the program.

"The big green groups that got invested in biofuels are tacitly realizing the blunder," said John DeCicco, a research professor at the University of Michigan Energy Institute. He previously focused on automotive strategies at the Environmental Defense Fund (EDF). "It’s really hard for the people who really -- shall we say -- hate oil viscerally, to think that this alternative that we’ve been promoting is today worse than oil." That statement is staunchly opposed by RFS supporters, who say naysayers cherry-pick their observations.

The backlash from environmental groups could boost long-stalled congressional efforts to overhaul the RFS, including proposals to limit the amount of traditional, corn-based ethanol that counts toward the mandate, as environmentalists side with anti-hunger groups and the oil industry in calling for change.

The RFS forces refiners to blend steadily increasing amounts of biofuel into the gas supply. Most of the mandate is currently met by corn-based ethanol, which makes up nearly 10% of US gasoline and provides oxygen that helps the fuel burn cleaner.

The Natural Resources Defense Council (NRDC) said in a 2004 report that increased use of biofuels would slash global warming emissions, improve air quality and increase wildlife habitat.

Instead, RFS opponents now allege, farmers converted millions of acres of prairie grasses to grow corn for making ethanol, with fertilizer runoff contributing to a dead zone in the Gulf of Mexico. Scientists found that CO2 emissions associated with corn-based ethanol were higher than expected. And alternatives using switchgrass, algae and other non-edible plant materials have yet to see broad commercial viability.

"The ethanol policy was sold to environmentalists as something that was going to clean up the environment, and it’s done anything but," said Rep. Peter Welch, D-Vt., who is co-sponsoring legislation to revamp the RFS. "It’s truly been a flop. The environmental promise has been transformed into an environmental detriment."

Collin O’Mara, president of the National Wildlife Federation (NWF), told a House committee last month that the RFS program, created with "good intentions," has instead wreaked "severe, unintended consequences," including the loss of prairie land and water-supply damage that threatens wildlife.

Even the NRDC which once strongly supported the RFS now acknowledges "the bulk of today’s conventional corn ethanol carries grave risks to the climate, wildlife, waterways and food security."

NRDC spokesman Ed Chen said the group continues to monitor the RFS "because low-carbon cellulosic biofuels can play an important role in reducing transportation pollution,” but added that the organization is "far more focused" on other carbon-cutting strategies with more immediate climate payoffs.

Biofuel industry groups counter that alternative sources of fuel are still clearly worse for the environment. "In the absence of ethanol, your next barrel of transportation fuel is going to be coming from petroleum from fracking or tar sands or deep-water drilling," Bob Dinneen, president of the Renewable Fuels Association (RFA), said in a phone interview with Bloomberg. "So you sort of have to assess ethanol in the context of what its replacement would be, and quite frankly, by that measurement we are the stone-cold winner."

DOJ Asks Court to Keep Some WOTUS Documents Out of Admin. Record

The administrative record for consolidated challenges to the Environmental Protection Agency's (EPA) Waters of the U.S. (WOTUS) rule should not include documents that EPA and the U.S. Army Corps of Engineers – which jointly promulgated the rule with EPA – used during deliberations, the Department of Justice (DOJ) told the U.S. Court of Appeals for the Sixth Circuit in a July 22 brief.

Deliberative materials are generally not part of the administrative record because they represent the internal decision making process of the agency staff, not its final decision, the Justice Department argued.

The Justice Department said the eight internal corps memos the petitioners have sought contain "opinions, mental impressions, and staff recommendations that were shared internally among Corps and Army personnel and with Jo-Ellen Darcy, Assistant Secretary of the Army (Civil Works), in the course of interagency deliberations in connection with the Rule."

Other documents that the Justice Department said do not belong in the administrative record include the draft economic analysis of the final rule and the draft environmental assessment of the rule.

The corps memos, dating between April and May 2015, are pertinent from the perspective of business, agriculture and manufacturing groups opposed to the WOTUS rule, which would clarify which waters and wetlands fall under Clean Water Act (CWA) protections including permitting requirements.

The interest comes after other internal corps memos on the rule were leaked to the public by a member of Congress a year ago, and were sharply critical of the way the EPA wrote the draft final rule without addressing critical questions surrounding the technical, legal and economic analyses underlying the rulemaking effort.

According to the leaked memos, the support documents were "flawed in multiple respects," making it difficult for the corps to defend the rulemaking and to implement it in the field.

The Justice Department contends that the administrative record that the Sixth Circuit has amassed for this lawsuit contains at least 20,400 documents with more than 350,000 pages. These documents include the proposed and final rules as well as technical and scientific reports, scientific literature and comments submitted by the public along with the agencies' response, and are more than sufficient to inform the court about the legality of the rule, according to the Justice Department.

Washington Insider: Dollar Shave Club Phenomena

Unilever is paying $1 billion for Dollar Shave Club, a five-year-old start-up that sells razors and other personal products for men. The New York Times on Wednesday says this is noteworthy, and that every other company should be “afraid, very afraid” of its future implications.

The reason, the Times says, is that the deal anecdotally shows that few companies are safe from the creative destruction brought by technological change. The very nature of a company also is becoming smaller and leaner with far fewer employees.

Dollar Shave Club was founded in 2011 on a simple idea--instead of paying at a store, a Dollar Shave Club subscriber could go online and set up a regular order to be shipped monthly for a lower cost.

The razor business had been dominated by Gillette with its steady improvements in razors and shave quality. Procter & Gamble paid $57 billion for Gillette in 2005 but then everything changed in 2012, when free ads on YouTube brought 12,000 orders, got 20 million views and pushed Dollar Shave Club to over $240 million in revenue.

The Unilever purchase announced last week means wealth to be “spread among a few,” the Times says. The club has over three million subscribers but only about 190 employees. Its razors are made in South Korea by Dorco. Distribution was initially handled in-house but eventually was contracted to a third-party company in Kentucky. “What remained was a terrific design, marketing and customer service shop; and a business that was easily expandable to meet demand and that had a good niche with men who do not like to shop.”

It used to be that if you wanted to sell razors, you needed a factory, a distribution center, a sales force, a research and development team and a marketing budget. Keeping all of these functions under one roof lowered transaction costs and made operations more efficient.

Now, the internet, mass transportation and globalization destroy everything. Dollar Shave Club used Amazon Web Services, a cloud computing service started by the online retailing giant in 2006 that encouraged a proliferation of e-commerce companies. Manufacturing now is just as much a line item as is a distribution apparatus for an increasing number of companies.

This means that Dollar’s riches will be split among the select few who have the education and skills to be at the heart of the new decentralized company. The Korean razor company that manufactures Dollar’s razors will not be sharing the $1 billion deal price with its employees. It was not even an investor (the investors here will also profit, with returns of up to 20 times their investments).

This is a scary time for a company since the state of play creates the potential for mass and creative disruption. Again, in the past, “challenging Gillette would have been impossible. It would have required billions of dollars to invest in a distribution network and advertising to get the product on store shelves," the Times says.

No more. Now you can get free advertising through YouTube, easy distribution through the mail system and low-cost sales through the internet. Factories and distribution can be bolted on throughout the globe.

However, the Times also notes that intellectual property and unique assets still are extremely important. “Unique technology means you have a right that cannot be taken away or commoditized.” Gillette sued Dollar Shave Club for patent infringement, “but it is hard to patent a simple razor.” And, the club’s prosperity may not last if the shaves are not satisfactory.

David Pakman at Venrock, the initial lead investor in Dollar Shave Club, argued about its uniqueness on a blog post celebrating the sale. He said that most subscription services fail, particularly because Amazon looms. But Dollar Shave Club was able to build brand loyalty and fight off Gillette, which was dependent on distribution through retail outlets.

Other smaller brands are building on Dollar Shave Club’s success in consumer goods and food, especially as consumers prefer “new, innovative and small.” In the food space, for example, TechCruch wrote “big brands lost share to small brands in 42 of the top 54 most relevant food categories in the past five years,” citing research by the investment bank Jefferies.

Dollar Shave Club may be an uncommon event. But it is no doubt the wave of the future, the Times argues. Expect more start-ups in disruptive areas, it says. Expect more old-line companies to find themselves on their back feet, compensating by paying outsize, sometimes incredulous sums for breakthrough competitors.

And expect more enormous investment in new things new as the old companies without unique assets struggle to compete. Still, this battle is not over, and Gillette knows a lot about quality shaves, and how to sell those. This development may, in fact, focus competition on unique assets and how these can be more useful and appealing to consumers. Still, it is an important disruption that should be watched carefully as it develops and affects agriculture and food, Washington Insider believes.

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