Consumers Abandon Brands. Will Blue Chips Suffer?

For over a year now, I've been chronicling the U.S. consumers' shift to value among everyday and discretionary goods. Moreover, I've presented evidence that an economic recovery wouldn't necessarily mean a snapback to the days of footloose spending.

I hate to break it to you, but the latest consumer data confirm both these points. This in turn sounds another note of caution on stocks you likely own.

Bye-bye, brands
Based on March 2010 survey results, market intelligence firm comScore reported a significant decline in brand loyalty. Headlining the findings: Less than half of surveyed U.S. consumers reported purchasing the brand they most wanted, down from roughly 54% in March 2008.

Furthermore, trading down has gradually spread to categories that previously commanded strong consumer allegiance, such as the health and beauty aid group. That, of course, bodes ill for the likes of Avon, Revlon, and Procter & Gamble (NYSE: PG  ) , which manages the Olay line, among others.

To rough out which other companies may be feeling the pain, I've excerpted details of comScore's findings in the table below, focusing on the most-beleaguered product segments.

U.S. consumers who report buying "the brand I want most"

Product Segment

March 2008

March 2010

Net Change
(in Percentage Points)

Toothpaste

67%

57%

(10)

Mouth rinse

61%

44%

(17)

Laundry detergent

57%

47%

(10)

OTC cough/

cold/allergy

58%

43%

(15)

Jeans (apparel)

54%

39%

(15)

Starting at the top, the toothpaste and mouth rinse purchasing trends don't come as good news for Colgate-Palmolive or P&G, which sell premium-tier products under the Colgate and Crest brands, respectively. Nor can Listerine brand mouthwash maker Johnson & Johnson (NYSE: JNJ  ) be thrilled by these developments. Unsurprisingly, the company reported slower U.S. category growth in its most recent quarter, even as Listerine sales picked up internationally.  

Moving on, the detergent numbers once again thrust P&G into the spotlight. Of course, one could easily have guessed at the headwinds in this category, given that the consumer-goods giant began discounting its Cheer brand back in fall 2009, followed by another round of price cuts in March of this year.

As for the over-the-counter medicines segment, it seems a sure bet that store brands offered by the likes of CVS Caremark (NYSE: CVS  ) are benefitting at the expense of labels such as Advil and Dimetapp, which Pfizer (NYSE: PFE  ) not long ago folded into its portfolio when it acquired acquired Wyeth.

Last on the list we have jeans. If consumers aren't springing for their favorite brand when it comes to jeans -- which, let's face it, are pretty much a wardrobe staple -- then we're definitely experiencing a one-legged recovery. Such category weakness may be responsible for Gap's (NYSE: GPS  ) recent lackluster results: The company posted April comps of minus 3%, on top of a 4% slide in April 2009!  

Who's gaining ground?
As with the Pfizer-CVS scenario posited above, it's rare for one company -- or one group of companies -- to lose without another winning. Along those lines, comScore highlights two recent winners: Amazon.com (Nasdaq: AMZN  ) and Wal-Mart (NYSE: WMT  ) .

In the e-commerce channel, these retailing titans together gained 3 percentage points of dollar-based share during 2009's holiday shopping months, versus the November-December 2008 period. Although both companies offer their own brands (Great Value for Wal-Mart; Pinzon, Strathwood, and others for Amazon), these results are more a study in general marketing outcomes than a brand-by-brand breakdown. 

The takeaway, according to comScore, is that companies that step up advertising activities during a recession -- Wal-Mart and Amazon have increased online marketing in particular -- historically outperform during subsequent recoveries. But in this case, I'm not so sure that past consumer cycles are valid predictors. For one, it used to be that private-label and store brands were blandly packaged, super-low-quality versions of brand-name goods, which gave consumers plenty of reason to go back to brands once hard times passed. These days, however, that's just not the reality.

Furthermore, how about the following whopper? Consumer confidence is now above March 2008 levels, yet as the earlier table indicated, consumer buying habits look quite different from two years ago. At this stage, it appears that increased ad spending by brand-name companies may not pay off to the degree that executives and shareholders hope and expect.

Ditch blue chips?
So far, none of these headwinds look like cause for outright losing sleep. In fact, I recently argued the investment case for consumer staples, including those that make name brands. Furthermore, for some companies, challenging consumer trends mean little at the companywide level. Take J&J and Listerine, for instance. The company's oral-care business represents only 2.6% of total revenue.

The most likely outcome of shifting consumer habits is that investors will need to adjust their company growth expectations, getting comfortable with, say, 7%-9% profit growth versus 9%-11%.

Even so, I wouldn't assume anything, be it positive or negative. As such, I recommend that investors diligently monitor company and industry trends; carefully choose buy-below prices on shares; and, when it eventually becomes necessary, exercise selling discipline.

That last one, of course, is probably the hardest part.

Pfizer and Wal-Mart are Motley Fool Inside Value recommendations. Amazon.com is a Stock Advisor selection. Johnson & Johnson and Procter & Gamble are Income Investor choices. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters, free for 30 days.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (7)

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  • Report this Comment On May 17, 2010, at 11:45 AM, Bikeskills wrote:

    At some level I agree that some brands - some - will lose some of their pricing power.

    The key though, is just what those brands mean to consumers, how much of a premium price they command and far more important than anything else: how can their manufacturers/marketers respond to pricing challenges.

    For example, how much "extra value" do people place on say a brand of pain reliver. If you believe - and I certainly do - Daniel Ariely's observations in his book "Predictably Irrational" then the answer is that many of us (myself included) place a lot of value - predictably so, even if irrationally so - in brands of things that we think (irrationally so) that it/they might make a difference: case in point, while I typically look for the least expensive "same thing" in... well lots of things I buy, I've never bought Advil that wasn't.... Advil.

    On the other hand, as we're involved with bicycles, you have to wonder how someone can take 20 or so pounds of aluminum, plastic, and steel and ask, and get, $5,000 or more for it by calling it a bicycle... the vast majority of which have very little in the way of real engineering and are almost always made by a sub-contractor in either Taiwan or China. And strangely enough, the firms that seem to be doing the best are the high-end firms... or at least their products. If you are asking "who is buying all these five thousand dollar bikes?" That's a good question... we ask ourselves the same.

    But what about Willams Sonoma? You can't have it both ways: if brands are going away, how is that WSM's sales are going way up?

    The bottom line is that brands are very complex and not a monolith issue in the consumer's mind nor is it the case that firms that created those brands don't have an array of options that range from creating lower cost feeder brands, lowering their prices dramatically to...

    Hey, we just ride bikes www.bikeskills.com

    Bikeskills

  • Report this Comment On May 17, 2010, at 2:04 PM, TMFKris wrote:

    "If consumers aren't springing for their favorite brand when it comes to jeans ... then we're definitely experiencing a one-legged recovery."

    Could it be consumers have wised-up to how ridiculous it is to pay a huge premium for a pair of jeans that is only "better" because of its name. ... Probably not.

    As the previous commentor said, brand loyalty is complex. While I buy some generic OTC meds (ibuprofen) and would even if I were super-rich, I've found that Pepto Bismol is worth the name b/c I find the taste more palatable and Band-Aids are preferable because of their quality (they don't split). These products are in a group where I don't even compare prices, although I try to buy them at the stores that sell them for the cheapest.

    But someday I might have less money and would step down to the generics. I dread trying new brands b/c if they don't work as well or I don't like them as well, I've wasted the money and am stuck with using up a product I don't like. And I'm compelled to use it up rather than throw it out.

    Of course I like to think (whether it's true or not) that my brand loyalties are based on logic and proven performance. And if the companies can get me to think that, then they've done their job.

    Kris (TMF copyeditor)

  • Report this Comment On May 17, 2010, at 4:45 PM, PeyDaFool wrote:

    "If consumers aren't springing for their favorite brand when it comes to jeans ... then we're definitely experiencing a one-legged recovery."

    GO JOEZ!

  • Report this Comment On May 17, 2010, at 8:59 PM, goalie37 wrote:

    Although the near sighted financial media may fear the change in the American consumer, I see it as a long term positive. This recession really changed us. People, by and large, are cleaning up their balance sheets - spending less and saving more. They are being smarter about their purchases. Gone (for this generation) are the days of using a home as an ATM. For a large part of the population to act more rationally is bullish in my opinion. Long term prosperity can not be sustained by waste and leverage.

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