Brand Renaissance: Debunking the private label threat
Comment of the Day

September 20 2013

Commentary by Eoin Treacy

Brand Renaissance: Debunking the private label threat

Thanks to a subscriber for this interesting report from Deutsche Bank which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section
Despite the rhetoric, our work indicates private label: (i) is category specific, with big share gains in categories where unbranded share is already high; (ii) has had limited success in innovation and marketing driven beauty categories; (iii) typically flourishes in places where non-leading brands have given up and empty middle is exiting and (iv) typically requires a pricing umbrella with wide gaps to succeed. Winners include beauty centric players like Estee Lauder and Coty; category killers with dominant shares like Colgate (oral care), Coca-Cola (soft drinks) and PepsiCo (macro snacks) and; Church & Dwight and P&G both having successfully outflanked private label.

Private label broadly growing, but bulk of expansion in categories that have already inflected
Across US Nielsen database, private label share increased 1.3 pts. in the recent recessionary environment, with progress muted last two years as macro improved, noting small (16.8%) correlation coefficient between US GDP and P/L share change. In Europe, where P/L shares are higher and often attributed to high retailer concentration, we see little correlation between increases in retailer consolidation and increases in private label. Interestingly, our analyses show the leading brand in several categories is growing market share faster than private label, with tertiary brands the biggest laggards.

Empty middle dynamic accelerating, #1 and strong #2 brands well positioned
Across geographies, it remains abundantly clear the leading brand and strong #2 players in specific categories are still poised to win over time, with tertiary brands the most exposed to private label. In most instances, brand leaders are consolidating share along with private label, with niche brands the biggest laggards, a trend that should persist as retailers and manufacturers continue to leverage analytics to drive profitable assortment to enhance margins, reduce working capital and accelerate growth while moving away from margin and brand dilutive promotional spending often required to keep tertiary brands in the game. Across our coverage, the category killers are the big winners – with the greater the proportion of these brands of the total, the more sustainable the growth and pricing power and therefore, the higher the valuation multiple.

Eoin Treacy's view My view – At Fullermoney we included global brand recognition as one of the conditions for Autonomy-hood from 2010. Companies with products imbued with an ephemeral quality that inspires loyalty, covetousness and a sense of being indispensable tend to command a premium. These companies have also been among the most successful in introducing the billions of new middle class consumers in Asia to the benefits of their products.

I reviewed a number of consumer goods companies using long-term charts on the 17th and continue that review today.

Church & Dwight has been trending consistently higher for more than a decade. It found support in the region of the 200-day MA again this week and a sustained move below $58 would be required to question the consistency of the overall advance.

Clorox has held a progression of higher reactions lows since 2009 and broke out of a more than decade long range in 2011. It entered a process of mean reversion from April and continues to find support in the region of the 200-day MA.

Newell Rubbermaid trended lower between 1998 and 2009 but has recouped the majority of the credit crisis decline and found support from the region of the 200-day MA from last week.

In the white label sector, Spectrum Brands has been trending consistently higher since 2011 and a break in the progression of higher reaction lows would be required to question medium-term scope for continued upside.

Energiser has trended consistently higher since the 2009 low and is now testing the region of the 200-day MA, having pulled back from the July peak.

In the beverages sector Coca Cola retested the 1998 peak in May and will need to continue to find support in the region of the 200-day MA if the benefit of the doubt is to continue to be given to the upside.

PepsiCo's business is split evenly between beverages and snack foods. The share broke out to new all-time highs in April and has been consolidating mostly above the 200-day MA since.

Dr.Pepper Snapple has found support on successive occasions in the region of the 200-day MA since 2010 and is currently testing that area.

In the white label sector, Cott Corp failed to hold the breakout to new highs in May and has returned to range in the region of $7.

This table of historic and forward P/Es for some of the major consumer shares highlights the degree of valuation expansion which has occurred for some of the better performers. The Estimated P/Es for 2014 also suggest analysts expect earnings to catch up with the price action. Considering how many of the above shares have found support in the region of the 200-day MA, some additional ranging appears the most likely scenario before significant new highs can be sustained

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