In earlier posts at Financial Armageddon -- "Recession-Proof?" "'It Hasn’t Gotten to Human Food Mixed with Pet Food Yet...,'" "Another Industry that Is Not Recession-Proof," and "A Shift in Spending Behavior," to name a few -- I questioned the notion -- espoused by Wall Street analysts and other clueless types -- that no small number of industries was immune to the gathering winds of deflation and economic contraction.
Among other things, I argued that growing hordes of cash-strapped consumers with stagnant incomes, huge debt loads and pitiful savings would have little choice but to adjust their spending patterns in favor of the cheapest options -- even if it meant using toilet paper -- er, bathroom tissue -- that was not much better than sandpaper.
Based on the following Bloomberg report, "P&G, Colgate Lose to Generics After Increasing Prices," it looks like the facts are beginning to bear this out in a sector that has become a popular haven (as evidenced by the strong relative performance of brand name consumer product company shares since midyear) for the "smart money" set.
Procter & Gamble Co. and Colgate- Palmolive Co. led U.S. consumer companies in raising prices to counter higher costs, taking the risk that customers would switch to generic brands if they raised them too much.
Last quarter, the risk didn't pay off, as generic brands attracted Americans beset by higher food and fuel costs.
U.S. sales of store-brand household and personal-care products rose 8.9 percent in the four weeks ended Oct. 4, according to a study by Bernstein Research. By contrast, sales of products such as soap and dish detergent increased by 2.3 percent at P&G and 1.3 percent at Colgate, according to the Oct. 17 report. In the year-earlier period, sales of private-label products increased 2.4 percent, according to Bernstein.
Battered by increased expenses, consumers are stretching household budget dollars by slowing purchases of higher-priced products like P&G's Bounty paper towels and Kimberly-Clark Corp.'s Kleenex facial tissues. Kimberly-Clark will report earnings tomorrow.
"There is a cyclical nature to private-label based on the economy," Ali Dibadj, a New York-based analyst at Sanford C. Bernstein & Co. and author of the report, said yesterday in a telephone interview. "It's a balancing act during every downturn," he said.
Generic brands made up 13.5 percent of all household and personal-care products in September, a record, according to the report, which used data from research firm AC Nielsen.
Oil, Pulp Prices
Kimberly-Clark's net income may have declined 10 percent to $408.1 million, or 98 cents a share, according to nine analysts surveyed by Bloomberg, even as sales climbed 8 percent to $4.98 billion, because the Dallas-based company couldn't raise prices enough to counter higher costs.
Joey Mooring, a spokesman for Kimberly-Clark, declined to comment.
Consumer-products makers increased prices by as much as 16 percent this year to cover higher expenses for oil used in plastic packaging and pulp that Kimberly-Clark uses for Scott toilet paper and Kleenex tissues.
Cincinnati-based P&G, the world's largest consumer-products maker, may say Oct. 29 that net income rose 4 percent to $3.19 billion, or 99 cents a share, according to 12 analysts, its slowest growth in three years. Sales for the quarter ended Sept. 30 may have risen 9 percent to $22 billion, helped by higher prices.
Jennifer Chelune, a P&G spokeswoman, declined to comment.
Gaining Share
Private-label brands increased market share in 15 out of the top 20 household and personal-products categories, according to the Bernstein report.
"Private label is much more mature today than any of the past downturns, and retailers are much more sophisticated in knowing how to use it," Dibadj said.
The move to generics came as U.S. retail sales fell in September for the third straight month, the longest slump since the government began keeping records in 1992. Consumer confidence as measured by the Reuters/University of Michigan index declined by the most on record last month.
The Washington-based National Retail Federation said this may be the worst holiday selling season in six years, with purchases rising 2.2 percent in the last two months of the year from the same period in 2007.
Consumer-goods companies use advertising and new products to keep shoppers from switching to cheaper store brands, Mariann Montagne, a Minneapolis-based analyst with Thrivent Asset Management, said yesterday in a telephone interview.
Trading Down
Shoppers are more likely to "trade down" when it comes to diapers and anything made of paper, Montagne said. That disproportionately hurts Kimberly-Clark, which specializes in paper products, she said.
"There are certain categories, like toothpaste or hair dye, where consumers just don't buy generics," Montagne said.
Huish Detergents Inc., based in Salt Lake City, benefits when consumers turn to less expensive products. The maker of the Ultra, Bravo, Top Crest and Sun brands is the largest producer of store-brand laundry detergents and fabric softeners in North America and provides products to mass merchandisers like Wal- Mart Stores Inc.
Pryor, Oklahoma-based Orchids Paper Products Co. supplies paper towels, bathroom tissue and paper napkins under the Colortex and Velvet brand names to discount retailers Family Dollar Stores Inc. and Big Lots Inc. as well as Wal-Mart.
P&G Earnings
On Oct. 31, Clorox Co., the Oakland, California-based maker of its namesake bleach, may say net income rose 8 percent to $119.4 million, or 85 cents a share, according to nine analysts. Sales probably climbed 9 percent to $1.34 billion. Revenue and profit were helped by Clorox's Green Works line of cleaning products, targeted to consumers who want to protect the environment.
Dan Staublin, a spokesman for Clorox, declined to comment.
Colgate, the world's largest maker of toothpaste, which will report earnings Oct. 30, probably did better than its peers in the quarter as it continued to benefit from higher sales in developing countries. The New York-based maker of Speed Stick deodorant and Irish Spring soap gets about 75 percent of its sales from outside the U.S.
Stephanie Clark, who represents Colgate, didn't immediately respond to a request for comment.
I guess we can add a few corporate leaders outside the financial industry to the burgeoning list of those -- such as Wall Street CEOs, "strategists," and Federal Reserve policymakers -- who didn't see what was coming.
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