Consumer products: Your 4-step disaster avoidance checklist

Brand Power: Helping you buy better!” goes the old TV ad. Maybe that was true 20 years ago, but it’s certainly not true now. Brands are increasingly under assault. Take this brief anecdote from a trip to Woolworths Limited (ASX: WOW) yesterday:

Panadol (paracetamol) – $4.75

Home-brand paracetamol – $0.80 (roughly equivalent dose etc.)

Pringles – $4.50

Home-brand equivalent – $1.50 (roughly equivalent weight etc.)

If that’s not enough to make a Panadol or a Pringles shareholder run screaming in terror, I don’t know what is. Of course, that type of competition would never happen to Coca-Cola Amatil Ltd (ASX: CCL) – Coke’s formulation is a secret and is protected by trademark law.

What you can do though, if you’re a supermarket, is find more popular or better value products (Pepsi) and either demand better prices from Coke, nibble away at its shelf space, or both.

This is one of the reasons I’ve watched the boom in baby formula with some concern. There are so many new competitors now, in addition to titans Bellamy’s Australia Ltd (ASX: BAL) and a2 Milk Company Ltd (Australia) (ASX: A2M) that it is surely only a matter of time before the supermarkets get in on the action.

A2 milk earned a ~17% profit margin (every $1 of sales earned 17 cents profit after tax) in 2017, which in my opinion is pretty high for a brand exposed to that kind of on-the-shelf comparison at supermarkets. If you’re considering buying a company that sells a consumer brand in this day and age, I’d suggest running through this brief checklist:

  • Can the product be replicated for half the price? (Coke – no; Baby formula- probably yes)
  • Can the product be made ‘obsolete’? (e.g. consumers switching to healthy/low sugar/ environmentally friendly variants etc.)
  • If there are multiple similar products, what differentiates them from each other? (price is usually the answer)
  • Is there a barrier to entry? (e.g. patented chemicals in household cleaners, no other suppliers etc.)

That’s just a brief list, and there are plenty more you could come up with. But if you think about it, almost every consumer company you can think of is highly vulnerable to this type of disruption. Even Freedom Foods Group Ltd (ASX: FNP), which was once a treasured sole supplier of gluten-free bread and cereal now has 5 or 6 competitors, especially in bread.

It’s very hard to maintain market-leading margins when your core product can be replicated and sold at half the price or less. As a result, investors should always take a closer look at the staying power of a company’s brand before considering a purchase.

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Motley Fool contributor Sean O’Neill owns shares of A2 Milk. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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