Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 2
what is the long term future of these companies

This came up during a Church and Dwight call:

--
That's helpful, guys. And one more, then I'll pass it on. I want to build off of Lauren's line of questioning but from a slightly different angle. She probed on e-comm. You guys clearly have a lot of great momentum and are investing behind it. There has been a tremendous [amount] of consternation. It's been primarily anchored on the food side of staples these days about retailer retaliation trying to sharpen price points, kind of suck some of the oxygen out of the air as discounters move in as encroachment from Amazon builds. Lots of pressure for price concessions and a clear evidence of using private label as a lever. Stepping into the HPC world where these categories are further afield online and arguably have more potential going forward, it would seem like your categories are equally susceptible to sort of the retailer pressure. So my question is just that. Are you seeing it? Are you seeing evidence of retailers trying to push to get those price points sharper, to help fend off some of the channel shifts that may be beginning to build momentum? ------------------------------------------------------------------------------------- Matthew Thomas Farrell Church & Dwight Co., Inc. - CEO, President and Director Yes. Is your question specifically about our bricks-and-mortar retailers squeezing CPGs more than in the past because of online pressure? ------------------------------------------------------------------------------------- Jason English Yes. That's a nice, succinct summary of it. Yes. ------------------------------------------------------------------------------------- Matthew Thomas Farrell Church & Dwight Co., Inc. - CEO, President and Director Okay. Well, look, the retailers -- this is not a new phenomenon. This has been going on for several years now. So every year, the retailers are aggressive with respect to our price concessions, and this year is no different. I think whenever you're negotiating with a retailer, you certainly want it to be a win-win. And that's how we approach it. So if it's, in fact, there's some things that they want us to do, there's something they'll do for us in return with respect to shelving or end caps, et cetera. So I know we've been able to perform really well under these circumstances, and we don't view that as -- we're going to be any more susceptible than any other company. In fact, we think we may be handling it better than others.
-------------

I mean, what is to stop Amazon from buying a competitor to CHD and work to feature that product vs another product in the same way that they do their electronics? They can destroy entire categories and companies at their whim, right>?
Print the post Back To Top
No. of Recommendations: 1
Buffett agrees:
from https://www.valuewalk.com/2017/08/warren-buffett-berkshire-h... -
Kraft Heinz: Retailers such as Amazon/Whole Foods are becoming stronger relative to the food companies. Specific brands will succeed through advertising (such as Berkshire owned Duracell batteries).
Video clip (2:47) - https://www.cnbc.com/video/2017/08/30/buffett-retailers-care...
Print the post Back To Top
No. of Recommendations: 0
Kraft Heinz: Retailers such as Amazon/Whole Foods
I should have bought Amazon.

Specific brands will succeed through advertising
Buy more FB, GOOG and other advertisers?
Print the post Back To Top
No. of Recommendations: 1
I mean, what is to stop Amazon from buying a competitor to CHD and work to feature that product vs another product in the same way that they do their electronics? They can destroy entire categories and companies at their whim, right>?

"Their electronics" is the gateway to a host of other, higher margin products like books, music, film. They are discounting the razor so they can sell repeat purchases of the blade. If they try to do that with, say, Nair, Orajel, Oxiclean, what have they got? A one time purchase that leads nowhere.

They only have so much space on the home "splash" page. They're going to use it to amp up things which offer a continuing stream, or which lead to the ecosystem of buying more stuff from them: "Alexis, buy me some Oxiclean". It isn't ever going to be "Oxiclean, buy me an Alexis." The ecosystem folds into Prime, into Prime Pantry, into Amazon Fresh, and so on.

Sure, they will likely be in the unbranded consumables market (already are with the acquisition of "365" via Whole Foods) but I think it's a nice sideline business, not one they're likely to shower capital on; the margins are just too small no matter what the scale.
Print the post Back To Top
No. of Recommendations: 0
goofy, CHD does 608m in cash flow w/42m in CapEx - the profits are there to be taken...I just think Amazon can be creative - they can lead you to the product they want you to buy ala the endcap placement in a Wal-mart but more creative. After all, they own the one and only portal that matters, so...
Print the post Back To Top
No. of Recommendations: 6
Something I can contribute to having recently worked for a branded products company dealing with large multinational retailers. Some random thoughts ...

The pressures on branded products companies from private label is nothing new. It existed well before amazon had thoughts of selling in this area. Here in Europe the Aldi's & Lidl's et al have forced all grocery chains to implement private label/dealer-own-brand across practically all categories. Which is extremely ironic as the same retailer typically complain that they are not achieving high enough returns on their capital, while simultaneously training the shopper to buy the cheapest product that meets the shoppers own quality standards.

As a result retailers have been pressing for higher profitability from their branded lines. CPGs have responded by increasing prices & reducing product costs (and so quality) over time & reducing advertising expenditure. This results in stagnant to declining volume further compounding the issue. So recently retailers have moved to multiple private label lines at different levels of pricing & quality. Where I live this has got so bad that for certain categories the offer in the supermarket has become the retailers own brands and possibly one other branded product. The category where I used to work is rapidly heading towards that outcome - shelf spacing eyeballs at around 2/3rds private label today & increasing.

If all that wasn't enough, it has got much tougher (& potentially more expensive) to build brands as the advertising market has fragmented to an amazing degree. There's been the decline of the traditional channels (TV via streaming, print etc.) combined with the rise of hyper-targeted programmatic (internet) advertising. Where in the past a large CPG company could use its financial clout to buy a strong TV advertising campaign to build its brands, today smaller companies can concentrate their spend to build more targeted brands to specific consumer bases, & by doing so can sell a better targeted ad at more weight to achieve higher share-of-voice to those targeted groups - negating a key advantage large CPGs used to have.

In essence, unless a CPG company has a strong business outside grocery or similar (say in restaurants, cinemas etc.), I expect that future returns will not be nearly as strong as the past.
Print the post Back To Top
No. of Recommendations: 4
> what is the long term future of these companies

Long-time lurker, infrequent poster.

I found this article to be enlightening:
http://intrinsicinvesting.com/2017/08/30/death-many-brands/
Excerpts:
..
Many of the most well known brands in the world are based around reducing search costs. For example the Coke, Gillette, and Yellow Cab brands are assurances of quality and value that reduces the search costs of consumers looking to purchase beverages, razors and transportation.

But what if a new way of reducing search costs is developed? What happens to the value of these brands?
..

An alternate way to reduce search costs is for the distributor rather than the product manufacturer to play this role. The success of Costco is in large part built on the idea that any product sold in their stores is of high quality and is a good value. Costco leverages their scale to identify high quality, good value products and deliver them to consumers. This process reduces the value of brands and allows Costco customers to confidently buy non-brand products or products with limited brand recognition. ..

But now the internet allows for the reduction of search costs on a global scale. Products like LaCroix sparkling water, Dollar Shave Club razors, and transportation service delivered via Uber have all exploded onto the scene, draining value from the Coke, Gillette and Yellow Cab brands because in each case, the online distribution of information radically reduced search costs for consumers. ..
..
It is important not to underestimate how powerful search cost brands have been in economic value creation in the past. Over the past 50 years, the top performing sector of the stock market has been consumer staples.

Now, however, the era of search cost brands is coming to an end. The moats are being breached.
..
While many of the well known consumer brands derive their value by reducing search costs, there is another value proposition that some brands offer. An “identity brand” communicates something about the owner of the product to themselves or the rest of the world. ..
..
..Many car brands are identity brands as well. Would you think differently about your accountant if she drove a Ford Mustang rather than a Volvo? Probably so.

Consumer staple products are items where the consumer wants the product to do a specific, simple job at fair price. Most people don’t have their personal sense of identity tied up in what soda they drink or brand of razor they use. Would you think differently about your accountant if she used Tide rather than All brand detergent? ..

We don’t think the internet or social media or the logistical monster that is Amazon are doing anything to reduce the importance that people place on the role that brands play in developing and expressing self-identity. But we do think that these trends are bringing to an end the 70-year run of excess returns earned by companies who built their businesses on the back of search cost brands.
Print the post Back To Top
No. of Recommendations: 2
Most people don’t have their personal sense of identity tied up in what soda they drink or brand of razor they use.

I couldn't disagree with this more. When Pepsi did its blind taste tests 60% preferred Pepsi. When they put the brands on the table 60% preferred Coke. "They're drinking the brand!" on Pepsi manager exclaimed. Coke used to poke fun at Pepsi by claiming that people bought Pepsi but poured it in the kitchen, out of sight of guests, while they brought the Coke bottles into the living room.

And don't let anyone tell Bill Durant that people don't identify with the brand of car they choose. Tide vs All? Maybe not so much, but "Choosy Mothers Choose Jif" about sunk Skippy, because who wants to be an ordinary Mom? (Michelin used the same tactic with the baby riding on the Michelin tire because "So much is riding on your tires." Anybody want to guess how Budweiser became #1?

The "search brand costs" have been with us since I was a kid. The IGA had store brands and brand brands, and my mother chose on the basis of price, except oops, often the brand brand was better, and that's what she bought. It's not different now, just a bit more refined. I do trust Costco's Kirkland, but then I don't buy all my groceries there, and I will *never* buy Kirkland cola, will you? (Yes, some people buy Sam's Cola, which is sort of the point. There is always a market for off brands at price, there always has been and always will be.)

Building a brand is harder now because of fragmentation of market and media, but it's still going on. Ever heard of Tesla? Prius? Skinny Pop popcorn? Planet Fitness? Sketchers? Spotify? Venmo? Aldi? Airbnb? Uber?

But what if a new way of reducing search costs is developed?

The same thing that happened last time. Product differentiation. Price point. Branding. Segmentation. It is *never* going to be the case that everyone will decide "generic is good enough for me." Some will. Most won't, especially as wealth multiplies.
Print the post Back To Top
No. of Recommendations: 2
Hi Goofyhoofy -

You seem to be arguing that "nothing has changed". I respectfully disagree.

You talked about Coca-Cola versus Pepsi preferences. My children (age 3 and 9) don't drink carbonated beverages and they are not alone as evidenced by the declining soda sales over the past 11 years: http://fortune.com/2016/03/29/soda-sales-drop-11th-year/

You mention Tide which I'd note is owned by Proctor and Gamble - a leader in brand management of consumer packaged goods - who has spent the past few years selling off brands to try to improve their focus and leverage amid 3 years of declining sales - including notably a change in the razor brand preferences. https://www.fool.com/investing/2017/05/30/are-procter-gamble...

You said private label brands may have always been around since you were a kid - but I think we can agree that something has changed when According to the PLMA, "private-label sales grew 2.5% in 2014, versus 1.1% for national brands." A Wells Fargo analyst John Baumgartner reports Kroger's projection that its Simple Truth private label brand, now at approximately $1.2 billion in annual sales, may double in the next few years. ..” https://www.thebalance.com/private-label-food-trends-1326152...

The above examples are not unique - let's talk packaged-food companies: "Over the past three years, Kraft Heinz, General Mills, Mondelez, Campbell Soup, and the rest of the 10 largest packaged-food companies have seen about $16 billion in revenue evaporate.." https://www.bloomberg.com/news/features/2017-08-02/why-the-h... (great article about Kraft Heinz btw)

I would hope from my above examples that you can agree that perhaps something *has* changed.

-Jeff
Print the post Back To Top
No. of Recommendations: 0
I would hope from my above examples that you can agree that perhaps something *has* changed.
I don't know if it is the search cost. I would not buy off-brand detergent or soup because I don't know what the quality would be. Would you rather put Duracell in your medical device or some no name Chinese battery?
It may be the general decline of the middle class. Stagnant incomes, dim prospects, anxiety about the future etc making shopers pinch pennies.
Print the post Back To Top
No. of Recommendations: 6
Would you rather put Duracell in your medical device or some no name Chinese battery?

I can't really speak to medical devices but I can speak to my battery consumption habits (rechargeable AmazonBasic batteries) and overall industry trends ( Energizer Holdings has had declining revenue and I provide a link to short thesis from earlier this year)

First, every year I have fewer devices with changeable batteries. This matches a trend detailed in this 2014 Economist article: "The latest gadgets, such as wearable devices, come with batteries built in—typically based on a thin sliver of lithium, not a tube packed with manganese dioxide, alkali and zinc. “There are fewer cavities,” says Ali Dibadj of Sanford C. Bernstein, a research firm." ( https://www.economist.com/news/business/21594330-disposable-... )

Second, I use rechargeable batteries whenever practical. My use of rechargeable batteries is not unique as evidenced by the graph in in my previously cited 2014 Economist article which shows a declining disposable batteries and rising rechargeable batteries: https://cdn.static-economist.com/sites/default/files/imageca... This http://www.businesswire.com/news/home/20160229006693/en/Alka... and is backed by other studies "The global alkaline battery market is expected to decline at a CAGR of (0.16%) over the period 2015-2019." declining worldwide battery sales

Third, I'm not brand loyal for rechargeable batteries. Instead, I use thewirecutter.com (recently acquired by the New York Times) to identify the best rechargeable batteries to purchase ( http://thewirecutter.com/reviews/best-rechargeable-batteries... ). Here's what they said earlier this year: "We tested four brands of AAA rechargeable batteries, and found no statistical difference in their tested capacities right out of the box or after 50 charge cycles. For that reason, we recommend you buy whichever brand is cheapest at the time you need them. Generally, that will be AmazonBasics, but you can’t go wrong with Energizer, Eneloop, or Duracell rechargeable AAAs either." A few years ago they recommended Eneloop but I buy whatever they recommend and so today that would probably be AmazonBasics.

Lastly, I'm not the only one negative on battery brands - check out this short thesis for Energizer Holdings presented earlier this year: http://www.sohnconference.org/wp-content/uploads/2017/05/ENR... which notes some of the items I cited above but also notably:
* 90% of battery sales are concentrated in 8 or 9 retailers
* Costco forced Duracell to make a private label battery for them that costs less and lasts longer!
* Ecommerce currently is 2%-4% of battery sales but grew 75% last year
* AmazonBasics accounted for 33% of online battery sales and grew 93% year over year

-Jeff
Long Berkshire Hathaway but not excited about Duracell
Print the post Back To Top
No. of Recommendations: 7
You seem to be arguing that "nothing has changed". I respectfully disagree.
I don't really think that Goofy or myself (or even your search article) were that much in disagreement. Goofy mentioned a bunch of brands being built presently which appear to have some common characteristics - that is one or more of the following ...

1) They are a new category of product or a vastly reworked (disrupted) older category. Tesla? Prius? Spotify? Venmo? Airbnb? Uber? seem to fit into this idea. Perhaps even Aldi (a private label only very inexpensive grocery store - that ironically is now adding back brands to boost returns.) In these brand new or heavily disrupted categories a brand can act as a measure of quality.

2) Products that are consumed/used publicly. Coke (a good example of the restaurant comment that I made), Tesla, beats, sketchers would all be fine examples. Stocking Coke says a lot about the restaurant & the diner vs. say stocking a private label. Stocking Karma Cola says even more. Pulling up to collect your date / potential business partner in a Tesla, Ferrari, Bentley, a Prius or my 12-year old Nissan all say very different things. As does using the latest iPhone or Nokia 6 or even a Fairphone. Or the Apple Watch vs. Rolex or Richard Mille (I know a couple of folks with one of those.) beats headphones vs. Graddos. Or (these days) using Lyft vs. Uber. This could be a good area to look for CPG brands, although the best brands may be in luxury. These brands say who you are & what you stand for.

Then there's other products that fall outside of those two areas. Batteries - I use Sanyo (now Panasonic) eneloops (as they are the best for holding the charge & do so for a large number of recharge cycles) but recently bought some Ikea Ladda batteries to try. AmazonBasics have a good reputation and are worth looking at too. Duracell? Well they are expensive, but the evidence suggests they're no better - and the search costs for that information isn't that hard to get. Still when faced with a bunch of Chinese batteries & Duracell, I'd choose Duracell.

And that's kinda the point - it's getting increasingly tough to build or maintain the broad 'Duracell type' brand in the face of pervasive information & media fragmentation. Or a tomato products brand. The business won't go away fast (those types of brands have real value), but the future appears pretty cloudy & increasingly dark (do you really care who made the battery in your laptop) - better to look elsewhere for consistent long-term growth. Or buy to trade the price ranges (where the stability has value in the transaction.)Or hope they become a target for 3G while you own them.
Print the post Back To Top
No. of Recommendations: 0
Would you rather put Duracell in your medical device or some no name Chinese

Do you know how many Chinese, Taiwanese chips, memory goes into those medical devices? Do you believe the battery is complicated, and far more important than those electronic components for the successful functioning of the device?
Print the post Back To Top
No. of Recommendations: 0
the search costs for that information isn't that hard to get. Still when faced with a bunch of Chinese batteries & Duracell, I'd choose Duracell.

The search cost or brand is mostly valid in consumer/ retail market, not necessarily in an OEM or a bulk buyers market, where the decision making don't have to rely on short-hand of brand.
Print the post Back To Top
No. of Recommendations: 0
Do you know how many Chinese, Taiwanese chips, memory goes into those medical devices? Do you believe the battery is complicated, and far more important than those electronic components for the successful functioning of the device?

A. Taiwan is not China. Name one Chinese foundry.

B. Quality control for chips is much more stringent than for batteries.
Print the post Back To Top
No. of Recommendations: 0
B. Quality control for chips is much more stringent than for batteries.

MASON: You’re afraid we’re falling behind.

BLOOMBERG: I’m not afraid, we are. You think about China … China used to be, made in China? A joke. Cheap stuff, I didn’t wanna use it. Today, made in China, quality.


http://thereformedbroker.com/2017/09/20/michael-bloomberg-wh...
Print the post Back To Top
No. of Recommendations: 0
Josh Brown, no disrespect, has ties with Bloomberg. I read his blog regularly. I felt this particular post was a suck-up job. I wouldn't take it too seriously.
Print the post Back To Top
No. of Recommendations: 0
Josh Brown, no disrespect, has ties with Bloomberg.

Not Josh, but his partner Barry Ritholtz writes for Bloomberg. In any case, we are not discussing why that piece deserves a place in Josh's blog, rather the perception of China.

Separately, today after a long time I went to a nearby outlet center, and they changed their name, added a bunch of international retailers and to begin with it was up-scale and it is now has a bit of international flair with Chinese speaking salespeople. Now they are bringing Chinese tourists by bus and we are at least 50+ miles from SanFran.

It is ironic that some of my co-workers are trying to buy knock-off's in their trip to Hong Kong and Chinese tourists coming to America to shop at Burberry.
Print the post Back To Top
No. of Recommendations: 1
FWIW - study of 23K products by Marketplace Pulse says most Amazon-branded products perform poorly against against their branded competition.

https://www.bloomberg.com/news/articles/2019-03-18/most-amaz...
Turns out most Amazon-branded goods are flops that don’t threaten other businesses at all, according to Marketplace Pulse. In a study, the New York e-commerce research firm examined 23,000 products and found that shoppers aren’t more inclined to buy Amazon brands even when the company elevates them in search results.
..
“This idea that Amazon can introduce a product and magically use data to dominate a category is just a conspiracy theory,” says Juozas Kaziukenas, founder of Marketplace Pulse. “There are a couple of successful examples everyone uses, but most of their products aren’t successful at all and many other companies continue to outsell Amazon even after it introduces its own competing brands.”

The study used sales rankings and the number of customer reviews as indicators of sales volume for different products, including Amazon’s own brands and brands sold exclusively on the site. Amazon’s success has been limited to basic products like batteries where shoppers are inclined to seek generic alternatives to save money, the study found.

But when competing against such categories as apparel, where household names have an entrenched position, such Amazon brands as “A for Awesome” children’s wear don’t stand out, the study found.
Print the post Back To Top