Far from a group of steadily performing lookalikes, the consumer-staples sector has its clear financial leaders and laggards. But for companies that sell household goods, the latest distinguishing factor could come down to a different kind of green.
The conscientious consumer
Sure, green lifestyle trends are most visible in the success of such companies as lululemon athletica (NASDAQ:LULU) and Whole Foods (NYSE:WFMI). But the greening of consumer habits extends beyond organic cotton leggings and all-natural eats. Household items such as detergent and surface cleaners also grab their fair share of consumer appeal, even if they don’t score the eco-bragging rights of flashier wares.
Small, privately held companies led the charge with green household products decades ago, only to be partially eclipsed by publicly traded names Clorox (NYSE:CLX) and Church & Dwight (NYSE:CHD), both of which have recently gotten in on the action. Now, however, smaller players are stepping up the competition, which could further tarnish the image of mainstream cleaning products -- and rouse M&A activity in the process.
The Wall Street Journal recently reported that Seventh Generation and Method Products -- two holders of significant natural-segment market share -- are launching their first major ad campaigns, including print and TV spots. The move follows decisions by both companies to fill CEO posts with industry veterans who hail from the likes of PepsiCo (NYSE:PEP) and Procter & Gamble (NYSE:PG).
Last year, Seventh Generation pulled in sales of roughly $150 million, which arguably positions it and its peers as nothing more than a minor nuisance for multibillion-dollar competitors. Consider, however, that bolder marketing is only the latest development in a longstanding trend toward a greener clean.
According to market research quoted by WSJ, U.S. sales of "ethical" household products have nearly tripled in the past five years, to an estimated $1.6 billion in 2009. And by several accounts, the recession did little to alter consumers' preference for safer, more environmentally friendly (but often more costly) cleansers. Further spurring the green momentum is a Congressional bill that would require manufacturers to disclose the full list of ingredients in various household products. If that bill is made law, the P&Gs of the world could face significant sales pressure, as both consumers and private organizations question all chemical names more than four syllables long.
Green for growth
The obvious solution for mainstream companies is simply to evolve their product lines. That, however, can be a long and costly process. Clorox and Church & Dwight clearly have a head start on big-name peers, yet I wouldn't be surprised to see either company attempt to fill out its existing portfolio through acquisition. In the hands of a deep-pocketed blue chip, the Seventh Generation and Method brands would likely soar past their already impressive historic growth rates. The former sported sales growth of 20% last year, while Method boosted sales 32% the year before that.
Consider, for instance, the case of Clorox: In slightly more than one year after launch, the company's Green Works product line had captured nearly half of segment market share -- far ahead of both Seventh Generation and Method. That, Fools, is the power of marketing muscle and mainstream distribution. All of which color both Colgate-Palmolive (NYSE:CL) and P&G as potential acquirers of a Method-type name.
Ultimately, green cleansers won't scrub away the likes of Ajax and Clorox bleach anytime soon. But with consumer preferences shifting, it may soon take a lot more corporate elbow grease to sell shoppers on the twinkling, chemical-laden likes of Mr. Clean.
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