Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is This Iconic Company's Moat Disappearing?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Clorox (NYSE: CLX  ) is home to some of the most profitable brands in the world, but many investors fear that the company's recent revenue weakness is a sign of a worrisome consumer shift toward private-label products. Clorox derives most of its economic profit from brand equity alone, so if consumers decide brands are no longer important, then Clorox's moat is toast.

Can private labels undercut iconic brands?

Clorox, Hidden Valley, and Brita are just a few of the market-leading consumer brands in Clorox's portfolio. The company has historically generated high returns on capital -- in the 20% to 30% range -- because the earning power of its brands now far exceed the necessary marketing and research spending necessary to maintain the brands' value. In a way, Clorox's portfolio of brands is like a stock portfolio that compounds at over 20% each year -- that's pretty valuable.

But competitive forces seek to limit the company's growth and put pressure on its profitability. Private-label products are abundant in the household products market, which means lower-priced products are displayed next to Clorox's higher-priced branded products.

Worried investors point to the company's dependence on just a handful of retail channels; five retailers accounted for 44% of Clorox's revenues in 2012, including 26% through Wal-Mart. If any of its top five retailers were to drop Clorox's brands entirely, the company's value would be significantly impaired.

However, a large abandonment of Clorox's products is unlikely. Strong brands drive traffic to stores, and stores that do not carry certain brands will get less traffic. If a customer cannot buy Clorox bleach at Target, that customer may go to Wal-Mart for bleach and the rest of her shopping items.

More likely, shelves will become more and more crowded with private-label products receiving more prominent placement than they were traditionally given. Clorox has taken steps to reduce exposure to product categories -- like trash bags -- where consumers care more about price than brand.

But the majority of the company's brands should remain relatively immune to the private-label trend. Since 2005, the company has aggressively raised prices across the board, with nearly all of the price increases still in place today. This would not be possible if the company's brands were under fire from knock-offs.

Margins are under pressure, but not from private labels

Private-label products are a minor annoyance for Clorox, not a moat destroyer. The real pressure on margins comes from rising input costs, which have also affected rivals Procter & Gamble (NYSE: PG  ) and Kimberly-Clark (NYSE: KMB  ) .

P&G's brands include Tide, Charmin, and Iams. Its brand portfolio is much larger than Clorox's; it has $84 billion in sales compared to Clorox's $5.6 billion. P&G also has a much larger geographic footprint, but is now regretting its aggressive expansion into emerging markets and is backtracking to refocus on developed economies with more brand-conscious consumers.

In addition to rising input costs, P&G's margins are under pressure from its bloated cost structure due to the company's over-extension, but its retreat from emerging markets will enable the company to trim a lot of fixed costs. As a result, P&G is in the same boat as Clorox -- strong brands under temporary profitability pressure.

The story is different for Kimberly, however. Like Clorox and P&G, Kimberly owns a portfolio of market-leading brands, including Kleenex, Huggies, and Kotex. However, the company has struggled to maintain its margins more than Clorox and P&G because consumers are more willing to buy off-brand tissues and similar items during periods of economic distress. The protracted high underemployment rate causes additional strain on the company's profitability.

Kimberly's margins are already much lower than Clorox's. This is the difference between brand loyalty and brand preference -- consumers demand Clorox's brands, but only prefer Kimberly's. As a result, consumers will continue to purchase higher-priced products from Clorox and P&G, but Kimberly's margins will come under pressure from private-label products.

Bottom line

Despite recent weakness in revenue and margins, Clorox's moat remains intact due to strong consumer loyalty to its brands. Few moats last forever, but Clorox's will not disappear any time soon.

If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2601568, ~/Articles/ArticleHandler.aspx, 9/25/2016 6:51:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:00 PM
CLX $126.53 Down -0.04 -0.03%
The Clorox Company CAPS Rating: ****
KMB $126.73 Down -0.50 -0.39%
Kimberly-Clark CAPS Rating: ****
PG $87.76 Down -1.23 -1.38%
Procter and Gamble CAPS Rating: ****