7 ms·

The Company Behind The Biggest Consumer Brands

21 points by HRoark 14y ago

Getahobby 14y ago
Not trying to be a troll but the thing that jumped out at me was the P/E listed for P&G and my mind immediately compared it to the FB P/E at the IPO.
- HRoark 14y ago
  Yeah, it's the norm for most tech companies to have high P/Es. It doesn't necessarily mean it's a bad investment.
patio11 14y ago
Consumer product companies sort of foreshadowed what happened to food (+), is happening to clothes, and will probably eventually happen to everything physical. The fundamental product (soap, razor blades, etc) is done. It works, involves no novel technology, and can be created at infintessimal marginal cost by any player in the industry. (Try to guess what the price of the soap in a bar of soap is. If your answer is expressable in whole cents, you are incorrect.) This suggests that prices would crater except that branding works: there is no discernable difference in any product in the hand soap aisle, so they spend tremendous amounts of money on advertising, over years, because they know that stamping that dove on the bar will dominate your purchasing decision years later. I'm well aware of this, and I'm 30, and I haven't shopped for a bar of soap in America for 10 years. Ruriko and I were at a Walgreens on our honeymoon and needed to buy one. I immediately started looking for Dove and, when asked if I needed help, said "Try to find the white/yellow box with the bird on it -- that is the best one" before conscious thought intervened and said "Well, honestly, every box on these shelves is identical, but the difference in prices between $2.69 and $0.89 is so miniscule for the average shopper that they'll mentally respond to marketing like I just did." + The e.g. tomato or pasta sauce is solved, cheaper than it has ever been, and (seasonal fluctuations nonwithstanding) will only get cheaper over time. It is an observable fact that, for any particular basket of food, we pay less than our parents did. This is discomfiting to people trying to sell us food. Most discussion of food in America is values signaling. (e.g. "Don't eat that, it's not healthy/environmentally sustainable/organic/etc" is, to a first approximation, likely as relevant as the color of your bar of soap.) Clothes are trending in this direction, too. Have you heard "You should buy X, X is quality, X' was probably created in a Chinese sweatshop?" Horsepuckey, everything is created in Chinese factories now, by the same people, from the same materials, using functionally the same designs. The only distinction is the name on the label. (This is why clothing brands are in an epic battle with counterfitters, because if it weren't for criminal penalties for bringing fake Gucci bags into the country fake Guccis would be absolutely indistinguishable from the genuine article. They're like fake diamonds. You know what a fake diamond is, these days? It is a diamond which did not begin life owned by the right people.)
- HRoark 14y ago
  Thanks for the great insight. The consumer product industry only has a few players (P&G, Unilever, Kimberly-Clark, Johnson & Johnson) which essentially gives them leverage to control prices and keep other competitors away through marketing. The effects of marketing are very subtle, as your experience clearly demonstrates that.
  - patio11 14y ago
    Not quite so true -- the consumer product industry has many players, but only a few mega-winners. They're not largely winning because they "control prices"/"keep competitors away" (which sounds like there is something disreputable happening), they're winning because given the choice between a $3 bar of Dove and a $0.25 bar of white soap, Dove will generally win. (See e.g. house brands at supermarkets vs. branded products, though house brands are not priced quite that aggressively, in part because they know that they'll sell less at $0.25 than at $1.)
    - HRoark 14y ago
      True. To clarify, I don't think it's safe to completely write off the fact that they could be doing something illegal (I'm not saying they are, but see this book of their alleged illegal practices in the 90s: http://amzn.to/5bbFuA http://amzn.to/5bbFuA). The reason why the Dove bar wins over the cheap generic brand is because of marketing, which stems from their financial advantage over smaller competitors. Likewise, their financial advantage is the result of increased sales from marketing campaigns (recall the Old Spice commercials). It's a vicious cycle.
    - mc32 14y ago
      Maybe realted, maybe not. I read somewhere a few years ago one of the DIY stores like Home Depot or what-have-you did a study and decided that swapping out the $1 paint brush for the $5 brush didn't decrease the volume sold, but 5x'ed revenues on that product. Their insight was that someone going in and buying a few gallons of paint were not going to comparison shop on brushes (and drive elsewhere) to save a couple of dollars on a cheap brush --people would pay for the convenience of getting multiple items in one place.
daemon13 14y ago
Just to add some points/clarity. The industry being discussed is called FMCG, abr. of Fast Moving Consumer Goods. FMCG industry is characterised by few major players, controlling most of the market leading brands. Such control is achieved through (1) marketing, (2) distribution and (3) mergers and acquisitions (M&A). The simplified explanation:- 1. Marketing. To win the consumer market, the brands shall win over the general population by delivering brand message/advertising through channels that reach the most of the population. Last 10-15 years such channel was TV. TV advertising is very expensive. The cost of launching new brand varies (country, market, etc) from $ 3-5M (small brand, one country) to several hundred $M (global launch, major market, etc). To maintain the market share, brand ad spending shall more or less match such spending of the competing brands. The annual marketing budget of FMCG company can reach 15%-20% of revenue, with appr. half going to TV. So a company with annual sales of $10B would spent annually on marketing $1-1.5B. As a specific example, 10 years ago Coca-Cola was spending on marketing in excess of $1B. Therefore, new entrants/smaller companies can not match such spending either for new launches or for sustaining the market share for their own brands. 2. Distribution. Most of the big players, like P&G, Coke, Pepsi, etc do direct sales/delivery and own fleet of vehicles to deliver goods to both chains and individual stores. Such fleet may cost tens of millions of $. Without such fleet in place [and existing relationships/clout with retail], new entrants can not ensure proper distribution/availability of their products. So even if they find money to spend on marketing campaign, when the customers will go to stores, they will not find the advertised brands and will buy what's available. 3. M & A. Those companies/brands that find a way to break in through - clever strategy - by playing in new and emerging market segments (Gatorade, etc) - catching a trend (BodyShop, etc) are acquired by Big Co after they become clear winner and catch with consumers, but before they reach critical mass.
- daemon13 14y ago
  I did not delve into private labels, pricing matters, retail strategy and pricing, P/E and other bits, since the above is key and post was getting lengthy.
parenthesis 14y ago
Another company in this sector not mentioned in the article is Reckitt Benckiser: http://en.wikipedia.org/wiki/Reckitt_Benckiser http://en.wikipedia.org/wiki/Reckitt_Benckiser

21 points by HRoark 14y ago

Not trying to be a troll but the thing that jumped out at me was the P/E listed for P&G and my mind immediately compared it to the FB P/E at the IPO.

HRoark 14y ago
Yeah, it's the norm for most tech companies to have high P/Es. It doesn't necessarily mean it's a bad investment.

patio11 14y ago

Consumer product companies sort of foreshadowed what happened to food (+), is happening to clothes, and will probably eventually happen to everything physical. The fundamental product (soap, razor blades, etc) is done. It works, involves no novel technology, and can be created at infintessimal marginal cost by any player in the industry. (Try to guess what the price of the soap in a bar of soap is. If your answer is expressable in whole cents, you are incorrect.) This suggests that prices would crater except that branding works: there is no discernable difference in any product in the hand soap aisle, so they spend tremendous amounts of money on advertising, over years, because they know that stamping that dove on the bar will dominate your purchasing decision years later. I'm well aware of this, and I'm 30, and I haven't shopped for a bar of soap in America for 10 years. Ruriko and I were at a Walgreens on our honeymoon and needed to buy one. I immediately started looking for Dove and, when asked if I needed help, said "Try to find the white/yellow box with the bird on it -- that is the best one" before conscious thought intervened and said "Well, honestly, every box on these shelves is identical, but the difference in prices between $2.69 and $0.89 is so miniscule for the average shopper that they'll mentally respond to marketing like I just did." + The e.g. tomato or pasta sauce is solved, cheaper than it has ever been, and (seasonal fluctuations nonwithstanding) will only get cheaper over time. It is an observable fact that, for any particular basket of food, we pay less than our parents did. This is discomfiting to people trying to sell us food. Most discussion of food in America is values signaling. (e.g. "Don't eat that, it's not healthy/environmentally sustainable/organic/etc" is, to a first approximation, likely as relevant as the color of your bar of soap.) Clothes are trending in this direction, too. Have you heard "You should buy X, X is quality, X' was probably created in a Chinese sweatshop?" Horsepuckey, everything is created in Chinese factories now, by the same people, from the same materials, using functionally the same designs. The only distinction is the name on the label. (This is why clothing brands are in an epic battle with counterfitters, because if it weren't for criminal penalties for bringing fake Gucci bags into the country fake Guccis would be absolutely indistinguishable from the genuine article. They're like fake diamonds. You know what a fake diamond is, these days? It is a diamond which did not begin life owned by the right people.)

HRoark 14y ago
Thanks for the great insight. The consumer product industry only has a few players (P&G, Unilever, Kimberly-Clark, Johnson & Johnson) which essentially gives them leverage to control prices and keep other competitors away through marketing. The effects of marketing are very subtle, as your experience clearly demonstrates that.
- patio11 14y ago
  Not quite so true -- the consumer product industry has many players, but only a few mega-winners. They're not largely winning because they "control prices"/"keep competitors away" (which sounds like there is something disreputable happening), they're winning because given the choice between a $3 bar of Dove and a $0.25 bar of white soap, Dove will generally win. (See e.g. house brands at supermarkets vs. branded products, though house brands are not priced quite that aggressively, in part because they know that they'll sell less at $0.25 than at $1.)
  - HRoark 14y ago
    True. To clarify, I don't think it's safe to completely write off the fact that they could be doing something illegal (I'm not saying they are, but see this book of their alleged illegal practices in the 90s: http://amzn.to/5bbFuA http://amzn.to/5bbFuA). The reason why the Dove bar wins over the cheap generic brand is because of marketing, which stems from their financial advantage over smaller competitors. Likewise, their financial advantage is the result of increased sales from marketing campaigns (recall the Old Spice commercials). It's a vicious cycle.
  - mc32 14y ago
    Maybe realted, maybe not. I read somewhere a few years ago one of the DIY stores like Home Depot or what-have-you did a study and decided that swapping out the $1 paint brush for the $5 brush didn't decrease the volume sold, but 5x'ed revenues on that product. Their insight was that someone going in and buying a few gallons of paint were not going to comparison shop on brushes (and drive elsewhere) to save a couple of dollars on a cheap brush --people would pay for the convenience of getting multiple items in one place.

daemon13 14y ago

Just to add some points/clarity. The industry being discussed is called FMCG, abr. of Fast Moving Consumer Goods. FMCG industry is characterised by few major players, controlling most of the market leading brands. Such control is achieved through (1) marketing, (2) distribution and (3) mergers and acquisitions (M&A). The simplified explanation:- 1. Marketing. To win the consumer market, the brands shall win over the general population by delivering brand message/advertising through channels that reach the most of the population. Last 10-15 years such channel was TV. TV advertising is very expensive. The cost of launching new brand varies (country, market, etc) from $ 3-5M (small brand, one country) to several hundred $M (global launch, major market, etc). To maintain the market share, brand ad spending shall more or less match such spending of the competing brands. The annual marketing budget of FMCG company can reach 15%-20% of revenue, with appr. half going to TV. So a company with annual sales of $10B would spent annually on marketing $1-1.5B. As a specific example, 10 years ago Coca-Cola was spending on marketing in excess of $1B. Therefore, new entrants/smaller companies can not match such spending either for new launches or for sustaining the market share for their own brands. 2. Distribution. Most of the big players, like P&G, Coke, Pepsi, etc do direct sales/delivery and own fleet of vehicles to deliver goods to both chains and individual stores. Such fleet may cost tens of millions of $. Without such fleet in place [and existing relationships/clout with retail], new entrants can not ensure proper distribution/availability of their products. So even if they find money to spend on marketing campaign, when the customers will go to stores, they will not find the advertised brands and will buy what's available. 3. M & A. Those companies/brands that find a way to break in through - clever strategy - by playing in new and emerging market segments (Gatorade, etc) - catching a trend (BodyShop, etc) are acquired by Big Co after they become clear winner and catch with consumers, but before they reach critical mass.

daemon13 14y ago
I did not delve into private labels, pricing matters, retail strategy and pricing, P/E and other bits, since the above is key and post was getting lengthy.

parenthesis 14y ago

Another company in this sector not mentioned in the article is Reckitt Benckiser: http://en.wikipedia.org/wiki/Reckitt_Benckiser http://en.wikipedia.org/wiki/Reckitt_Benckiser