Church & Dwight (NYSE:CHD), a leading consumer company that boasts a range of personal care, household and specialty products, has stood its ground despite changing consumer preferences and more-powerful retailers.
It has grown its top line in every single year of the past decade while remaining profitable and free-cash-flow positive during the same period. It also recorded its 13th year of double-digit earnings-per-share growth in 2013, and has maintained a high, consistent level of returns on equity of above 15% from fiscal 2004 to 2013. In recent years, Church & Dwight has driven free-cash-flow generation through improved working-capital management, with its cash conversion cycle shortening from 51 days in 2007 to 34 days in 2013.
Recession-resistant product portfolio
Church & Dwight's product portfolio has a 'value' slant, with close to half of its products belonging to this category. To cite real examples, its laundry detergents cost 50%-65% less than Tide; its toothpastes cost approximately half as much as competing brands Colgate and Crest.
After the global financial crisis, consumers have become increasingly frugal and the numbers support this argument. Using the liquid-detergent-product category as an example, the value-priced liquid detergent product segment gained 500 basis points of market share from 2009 to 2013. In contrast, the premium and mid-priced liquid detergent segments lost 100 basis points and 320 basis points, respectively, over the same period.
Church & Dwight capitalized on the shift in consumer sentiment to gain further share in the value-priced liquid-detergent-product segment, increasing its market share from 46.6% in 2009 to 53.5% in 2013. However, it understands that there are always competitors out there with cheaper products. As a result, Church & Dwight maintains a delicate balance between quality and value. For example, its OxiClean laundry detergent is estimated to cost 20% less than competing brands, but boasts the ability to tackle the toughest stains, e.g. dried-on stains.
Similarly, Spectrum Brands, a consumer-brands company with products spanning diverse categories like batteries, small appliances, and pet supplies, boasts stable revenue streams. It has increased its revenues in each of the past five years, largely a result of its brands' 'same for less' value positioning among consumers. Apart from the fact that Spectrum Brands' products are cheaper than competing ones, the nature of its products also accounts for its resilience.
Most of Spectrum Brands' products consist of inexpensive consumables like batteries. Since batteries form a small part of consumers' budgets, consumers tend to be less price sensitive when they buy them. This explains Spectrum Brands' consistent margins in the high 30's. In addition, products such as batteries have short life-cycles and need replacement frequently. Regular purchases of the same branded products tend to stimulate strong customer loyalty.
Making the right bets
Unlike other multi-brand companies, Church & Dwight understands the concept of 'less is more.' Eight of its flagship brands account for more than 80% of Church & Dwight's revenue and earnings, and they are all market leaders in their respective product categories. This hasn't come by chance, with Church & Dwight supporting key brands with significant marketing spend. Based on its internal estimates, Church & Dwight is the 13th largest advertiser in the U.S., outspending many other consumer products companies.
Going forward, Church & Dwight is further concentrating its bets by placing greater emphasis on four of these brands. One example is OxiClean, the second most-advertised brand in the fabric care category, which has increased its revenue contribution by 23% over the past five years. Church & Dwight plans to increase its advertising spend for OxiClean by 53% and extend it into new applications such as auto dishwashing and bleach alternatives.
Similarly to Church & Dwight, Kraft Foods has also learnt the importance of making the right bets. It realized that the success of new products was directly proportional to advertising spend after internal data indicated that the best-selling new products it launched in 2009 were those for which Kraft incurred the highest amount of advertising expenditures.
As a result, Kraft spent $25 million each on the advertising & promotion for 13 Tier-1 products that it rolled out in 2011. This was five times as much as what Kraft used to spend for each new product launch. Kraft is persisting with this 'big bets' strategy in 2014, identifying a series of new products where it will commit to a minimum marketing spend. The results speak for themselves, with the revenue contribution from new products for Kraft increasing from 6.5% in 2009 to over 14% in 2013.
Foolish final thoughts
It's getting increasingly difficult for consumer product companies to differentiate their own products in a sea of unlimited choices. Church & Dwight has stood out among its peers for its focus on the value-priced product tier and its willingness to make big, concentrated bets on selected brands.
During the release of the company's first-quarter 2014 results, management guided for 7%-9% EPS growth for the full year of 2014 and reiterated its commitment to continued investment to drive new product launches. Church & Dwight is my top pick in the consumer-product space, as it's the best positioned to thrive in a difficult retail environment.