

The Company Behind The Biggest Consumer Brands - HRoark
http://timgaweco.com/pg

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patio11
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.)

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olog-hai
I think you're overstating the case. I found that Ivory soap dries out my
skin, while Dove doesn't. The store brand single-blade disposable razors at
Duane Reade tend to get badly clogged with hair, while Bic's version doesn't
clog at all. The wooden spoon from the 99¢ store snapped in half after a few
months of use. It's still true that you get what you pay for.

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barrkel
I agree. But it's often a little more subtle. Here in the UK, most major
supermarket chains have "own-brand" lines of major product lines; everything
from bread to plastic bags. The "own-brand" products are produced in the same
factories as one of the branded products (it would make very little sense to
anything else), but corners are often cut elsewhere. Own-brand pizzas have
skimpier and lower-quality toppings, sliced bread is poorly mixed, paper
towels have fewer plies, etc. On the other hand, some products, like whole
milk, are harder to cut corners on, and others, like various area cheeses
etc., are unique and the product of choice is simply the one who's taste you
prefer.

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daemon13
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.

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daemon13
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.

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

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parenthesis
Another company in this sector not mentioned in the article is Reckitt
Benckiser:

<http://en.wikipedia.org/wiki/Reckitt_Benckiser>

