You've likely bought one of Clorox's (CLX -0.69%) many products, which range from bleach to salad dressing to charcoal. But the truth is that you bought that product from a store, not from Clorox itself. And that's an important nuance that a recent cyberattack at the company brought to the fore. Here's what you need to know.
Clorox is a partner to retailers
Consumer staples companies like Clorox are often viewed as backing the brands they sell in a sort of direct relationship with the consumer. After all, Clorox runs ads that push consumers into stores to buy its products. But the connection isn't direct at all. Clorox is actually selling its products to a retailer and the retailer sells them to consumers. This distinction is more significant than you may think.
Image source: Getty Images.
Clorox definitely wants to make sure its products are attractive to consumers. But the consumer staples maker also has to make sure its brands are attractive to retailers, too. Providing broad-based advertising is one way it does this. Having a strong distribution network is another. But one of the biggest ways to be a good partner to retailers is to constantly invest in innovation.
It seems like nothing gets consumers more excited than the words "new" and "improved." You can't simply slap those words on a box, however; you really need to invest in the research and development to create new products and improve existing ones. It is the backbone of a consumer staples maker's toolkit.
You can't stop this innovation train
This is an interesting issue today for Clorox because it recently got hit by a cyberattack. It was bad, forcing the company to basically go back to the Stone Age of paper and pencil to track its business. It has been all hands on deck to work through the problem -- except for Clorox's research and development team.
In the company's prepared fiscal first-quarter 2024 earnings comments, CEO Linda Rendle highlighted product innovation as a key focus:
The activation of our plans on consumer-centric innovation remains on track. Investment in bigger, stickier innovation platforms focused on value superiority is core to how we drive growth, and we continue to expect launches across all our major brands this fiscal year.
During the Q&A session with analysts, management was asked about this focus and how it was maintained during the cyberattack. The answer was simple: The research and development group was "walled off" from the rest of the company so it could continue its efforts unfettered by the technology issue. The same thing was done amid the supply chain upheavals during the coronavirus pandemic. That's how important it is to ensure that innovation continues.
Some of the potentially bigger, stickier innovations that are going on today concern a continuous spray disinfectant mist from the Clorox brand. In 2022, the bottle and scented products were released. In 2023, that platform was built upon with a fragrance- and dye-free offering. In 2024, there's another iteration planned, but the company isn't talking about what it is just yet. The big story is that Clorox built a new platform on which it can iterate with "improved" variations.
The same basic thing is happening with the company's Glad trash bags. First, in 2022, it produced a bag that offered Clorox disinfecting powers. In 2023, that was expanded to include a Pine-Sol scent. This innovation will be extended again in 2024 and beyond.
Hiving off the research and development team during the pandemic is what allowed for these platforms to be created. And protecting the same group is what will allow for product improvements going forward in the face of another major business disruption (the cyberattack). Clorox is well aware of how important it is to keep innovating, and it has no plans to stop just because of an adverse event.
Getting the "simple" things right
While it wouldn't be correct to suggest that research and development is simple, it is still a key part of a simple business plan. Clorox is struggling financially as it works through the setback of the cyberattack, but it hasn't lost its way when it comes to executing on the most important basics of its business model.
Shareholders should be pleased to see that, and potential investors might take that as a sign that the historically high 3.6% dividend yield here is an opportunity to buy a company that knows what needs to be done to excel over the long term.
