I was in Target
Now, I intrinsically like finding bargains, and coupons are just a part of that for me. But from my consumer-products shopping, I know that a lot of folks haven't been into the coupon thing. Yeah, maybe they'll clip a random coupon here or there, but people just don't want to be seen with one of those big coupon wallets. (For the record, mine is purple and plastic -- I've tried to upgrade, but no one seems to sell these things anymore.)
My point here is that things are changing in consumer products. As we all know from the glum 2008 retail holiday season, Americans just aren't spending like they used to. Out of necessity, customers are looking to save money, and they may have to try an entirely new set of tactics: shopping in new places, using coupons, or trying private-label products. People will keep brushing their teeth and washing their hair even in a recession (at least, we can hope so!), but they may decide to downgrade from premium products offered by companies like Procter & Gamble
So what's coming for consumer-products companies in 2009 and beyond? Let's look at some recent purchasing trends and try to predict the future.
Psychology 101: Consumer Products
The Nielsen Company did an interesting study identifying categories of personal care and home products in which consumers were willing (or unwilling) to change brands. For example, if you like Kimberly-Clark's
Not surprisingly, the same goes for deodorant (once you find a product you like, you stay with it). And when buying lotions, shampoos, and even toothpaste, consumers care less about pricing and more about real product benefits. This makes sense: think of the power that a superstar like Johnson & Johnson
However, consumers don't seem to care as much about items such as bar soap and bathroom cleaners, so they'll more easily move to a lower-priced product. Toilet paper, laundry detergent, and paper towels are considered "bargain-activated" products, where price is the main driver in decision-making. While you might prefer Dove soap by Unilever
Coupons and private labels make a comeback?
No matter what the surveys say, for some consumers, price is always a consideration. That's why Colgate-Palmolive
Marketing firm ICOM found that 67% of Americans say they are more apt to use coupons during tough economic times. However, it's not clear that people will move their intention into action, since recent reports have found that less than 1% of all coupons are redeemed, versus a 1.6% redemption rate 10 years ago. That's probably one of the reasons why Kroger
So if consumers aren't using coupons to save money on brand-name consumer products, they'll probably resort to the easier option: private-label and store-brand products. Consumers say that they think private-label brands are just as good as name brands, with Nielsen reporting that 72% of consumers think these are a "good alternative" to name brands. Still, private-label products only make up 21% of consumer product unit sales, and 16% of overall consumer product revenue.
What's in store for 2009?
P&G is among the companies hit by recent economic pressures. It reported that it won't meet its quarterly goals for organic growth, in part because consumers are starting to move from its pricier products to private-label brands. P&G and a select group of other businesses had demonstrated some pricing power in recent quarters, but they may not be able to maintain that strength With its diversified stable of products, though, P&G seems well-guarded from widespread consumer shifts toward private-label brands.
Certainly, commodity price declines will make it somewhat easier for these big names to shoulder the burden of slowing domestic revenue. In addition, these companies have not yet saturated global and emerging markets, so continued focus on these growth areas will soften any blow from declining U.S. revenue.
For long-term investors, though, I have one reason for you to consider consumer products companies as investments: dividends. These blue-chip stocks typically deliver top yields, with Unilever among those with dividends exceeding 4%. Johnson & Johnson is delivering a 3.1% yield and is trading at a trailing-twelve-month P/E of 13.5, which is probably why it was named as one of the Fool's best stocks for 2009.
Yes, times are tough today. But lower commodity prices, combined with global growth and somewhat inelastic demand for certain products, give brand-name consumer-product companies like J&J and P&G great long-term investment potential. With bargain-basement market pricing and strong dividends, this definitely looks like the time to take a look at consumer-product companies, even with potential pressure from private-label brands in the short term.
For related Foolishness:
Johnson & Johnson, Kimberly-Clark, and Unilever are Motley Fool Income Investor selections. Looking for more advice in an all-consuming market? Give The Motley Fool's newsletter services a try free for 30 days.
Fool contributor Colleen Paulson is a former Proctoid (aka Procter & Gamble employee) and owns shares of Procter & Gamble, but she does not hold positions in any other companies mentioned above. The Fool's disclosure policy wouldn't be caught dead with that ugly purple coupon organizer.