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"

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.