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Industry Analysis: Household Products
The Household Products Industry is composed of a diverse group of companies. These manufacturers of consumer goods, used in and around the home, offer their wares to various wholesalers and retailers.
Diversity is a key characteristic of this group. Household Products companies are, for the most part, conglomerates. Many possess a long roster of goods, spanning the brand-name, generic and private-label categories that satisfy a broad customer base. Although there are clear, large-cap leaders in this group that will appeal to conservative investors, there are a few narrowly focused small-cap members that may attract the venturesome.
A Good Defense . . .
Household Products equities can be classified as defensive investments. They perform well during good economic times, and provide solid downside protection in challenging periods. The industry is mature, and sales and earnings streams are relatively steady throughout the business cycle.
Within the group, some companies are more defensive plays than others. The most defensive tend to sell small-ticket items that are not only viewed as necessities, but are quickly consumed and replaced. While it’s true that consumers are not likely to bathe or launder clothes more frequently than usual in good times, it's also safe to say that the buying public will not suspend these activities when times are tough. Producers of basic items (e.g., toothpaste, soap and laundry detergent) generate consistently solid results, regardless of the economic climate. Consumers typically rein in discretionary spending during lean times, when many big-ticket purchases (such as a new car) might fall out of reach. Still, they may splurge a little on affordable luxuries, such as favorably margined housewares and small appliances.
. . . And Offense
The largest Household Products companies have long histories of acquisitions and divestitures. Their managements commonly seek to acquire small outfits or product lines that will complement existing offerings. Such asset purchases can help to maintain top- and bottom-line growth. Return on investment, though, is more important than expansion of scale. The better run operations do not hesitate to sell or spin off underperforming lines. Managements’ attention is best spent on the most profitable products.
Mergers and acquisitions offer a means to alter market strategy and/or improve operating efficiencies. The purchase of highly profitable products can allow companies to keep offering essential, complementary lines that may carry slim or even negative margins. Too, the addition of well-run manufacturing facilities helps to reduce overall operating costs. M&A deals may also create enhanced economies of scale via asset consolidation.
Overseas expansion also lends opportunity for U.S.-based companies to push sales and earnings higher. North America, Europe, and Asia/Pacific regions are the largest, most attractive markets, but are generally mature and highly competitive. Developing nations hold greater growth potential, thanks to the rising affluence of their populations. A significant overseas presence can reduce overall operating uncertainty; still there are some notable risks. At any given time, changes to foreign currency exchange rates will either support or restrain reported sales and earnings growth. Too, companies with foreign production assets are subject to local political risk.
Innovation is another means to capture mass or niche market share. Household Products makers may attempt to upgrade or add “value” to mainstay offerings or develop new complementary items. Even something as simple as improved packaging can lift the appeal (and profitability) of a comparatively mundane product. Given the scale of the companies in this industry, annual research and development outlays may not account for a sizable percentage of sales, but the nominal amount can be impressive (in the hundreds of millions for some). Branded goods make up the lion’s share of total business, but private-label deals with retail chains will support operating performance over the economic lifecycle.
Brand equity is an important competitive consideration. Initially, companies need to spend heavily on marketing and advertising to build consumer awareness and firmly establish a new brand. And mature products require periodic support (and quality control) to ensure customer loyalty. The biggest players in the industry have devoted substantial time and money to marketing and advertising campaigns. These efforts have affirmed the power of name recognition. The longer a consumer has purchased a brand-name product, the more reluctant he/she is to switch to a competing item. Only in the most difficult of times will a committed customer consider not paying a premium for an enjoyable, long-used product.
Household Products equities, generally considered defensive holdings, tend to gain much favor during weak economic periods. In recessions, the companies are not immune to consumer cutbacks in discretionary spending and elevated raw materials expense, but most of their offerings are essential to everyday living. Though in such times, top- and bottom-line growth may slacken a bit, operations usually remain profitable. Historically, the return on shareholder equity for companies with the strongest brand portfolios has consistently been in the double digits. The stocks of such companies are most preferred by conservative investors. Financial Strength ratings, as well as Price Stability and Earnings Predictability scores, are typically very favorable. A good number of these equities have an appealing dividend component. New companies, or those keenly focused on niche markets, may hold some appeal for venturesome investors.