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Consumer goods companies had a remarkably strong 2022, despite a sharp rise in raw material costs and stretched household budgets. That is a testament to the power of brands. But only companies able to maintain the lustre of their product names can pull this off consistently.
Customers will pay more for trusted products. These deliver higher profits to the brand owner, cushioning it against fluctuating input costs. The contrast is with generic products, churned out in high volumes at low margins.
A brandholder has “pricing power” in the jargon — a Holy Grail for most businesses. Brands generally deliver this without the risk of backlashes from competition regulators.
Customers buy L’Oréal products in response to the pitch “because you’re worth it”. They need to be: the SkinCeuticals Vitamin C antioxidant serum is hardly a snip at £165 for 30ml. L’Oréal’s strapline cunningly makes a purchase an assertion of self-worth rather than an exercise in bargain hunting.
The job of investors in consumer product companies such as the French personal care group is to assess how skilfully — and efficiently — they manage their brands.
Operating profit margins are one indicator. The figure at spirits manufacturer Diageo is a sky-high 30 per cent of sales. Beauty behemoth L’Oréal reports 20 per cent, while home and personal care group Unilever is on 16 per cent.
Consumer businesses do best when they nurture a tight group of brands without too much overlap between them. They may add new propositions to the group through acquisition, while dumping older brands no longer worthy of investment. The demands of brand management are relentless and executive burnout is common.
Consumers have swallowed big price increases this year without batting an eyelid, however. Companies in the space hiked prices by 10 per cent on average in the fourth quarter of 2022, according to Bernstein analysis, with volumes only 2 per cent lower.
While volumes have been surprisingly inelastic so far, there is a limit to the power of the brand. That is especially true for categories regarded as utilitarian. Witness results on Tuesday from Henkel, the German owner of Persil and Schwarzkopf. Volumes in its consumer segments fell by 14-15 per cent in the fourth quarter, dragging the shares down with them.
Some brand owners are better positioned than others as economies falter. Customers will pay over the odds for top-notch brands in booze and beauty, especially when they are backed by plenty of advertising spend. Tired names in laundry and hair colouring can slip off the radar screen.
Brands can easily become untouchable, too. That has been the fate of Yeezy, the sub-brand Adidas discontinued after creative collaborator Kanye West made antisemitic comments.
The relative strength of brands is reflected in the wide spread between the sector’s leaders and laggards. Henkel trails the pack on 16.5 times forward earnings, around half the valuation of brand powerhouse L’Oréal. That looks justified. After all, quality never does go out of style.
The fat of the lands
Obesity drugs are generating a buzz to rival chatbots and quantum computers. Wegovy, an injectable drug, Ozempic and several other diabetic treatments have gone viral on social media. Elon Musk and Hollywood celebrities say they have used the drugs to shed weight.
Slimming institution WeightWatcher also gave the obesity treatments a vote of confidence this week. Now called WW International, it is buying Sequence. The telehealth operator can prescribe drugs including Wegovy and Ozempic, which are produced by Danish pharmaceutical group Novo Nordisk.
The $106mn deal is small. But a jump of 80 per cent in WW’s depressed US-listed shares suggests the market thinks the transaction can tip the scale in the company’s favour.
One side effect of the treatments, which use a hormone to regulate appetite, should be scepticism. Wonder drugs, from Valium to Zantac, have a history of unintended consequences. Olestra, a zero-calorie fat substitute, was hailed as a breakthrough in weight control, but caused health problems for some users.
Appetite suppressants could, for their part, prove harmful to people with eating disorders, experts say.
Even so, investors are right to be excited about the drugs. These should find a growing market because obesity is growing in tandem with rising global prosperity. This increases individual food consumption and the prevalence of sedentary occupations.
Obesity already affects about 650mn people worldwide. Almost half of Americans will be obese by 2030, a Harvard study found. About 18 per cent of healthcare spending would then go on related conditions.
Morgan Stanley thinks the market for weight-management medicines could reach $54bn in seven years — with $31.5bn of this from the US alone.
Companies behind new obesity treatments are flying. Novo Nordisk generated DKr$16.9bn ($2.4bn) in sales from obesity treatments last year. Its shares are up 40 per cent over the past year. Eli Lilly, whose diabetes drug tirzepatide should get regulatory approval to treat weight loss this year, has risen 19 per cent.
Both are trading at steep premiums to Pfizer, whose shares have dropped 16 per cent as the Covid-19 vaccine sales boom faded.
Demand for the drugs is high. In the US, the challenge will be convincing insurers and government to pay for them. At $1,349 for four weekly shots per month, Wegovy is beyond the reach of most Americans — particularly the low-income groups where obesity is rife. But prices should drop as rival treatments join the market.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
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