February 10, 2008

Analyzing Consumer Packaged Goods Company

In today's post I will list several factors and criteria I use when I look at a consumer packaged good company. Examples of a consumer packaged goods companies are the likes of P&G, Unilever, Colgate, Clorox, Avon, Loreal...etc. A company in this industry typically hold a portfolio of various household products with slow but steady revenue growth as a result they have a low price earning multiples relative to the overall market. Currently the industry is concentrated in few large players that I think production costs are not enough to produce a competitive advantage between the players. I will even be bolder and say that cost structures are similar across the industry so cost in any analysis can not be the determining factor to invest in a company. So what is important?

Key to Analyzing Consumer Goods Companies

In my mind these are the most two important keys to pick a good investment in this space:

  1. Management ability to read and understand shifting consumers' tastes and preferences.
  2. Marketing skills and talents are what ensures success between industry players. As more or less cost and the function of the products themselves are relatively the same. Marketing is the true weapon that created brand loyalty and occupies consumer mind share.

There is not a lot of number crunching in analyzing these companies at the end it comes to your judgement and ability to spot key marketing and sales skills. Success in sales and gaining market share in this industry comes down to flair, insight and market research and strategy.

Steps to Analyzing a company

  1. Evaluate a companies existing product lines by answering the following: How does the company maintain its current market share and growth rate? Does the company achieve this by spending a lot of money on promotion and advertising? Is sales directly correlated to its advertising spending?
  2. Analyze the company's research and development capability to introduce new products: Like any company, consumer goods companies introduce new products and invest heavily in promoting these products reducing their profits for years to come until they reach critical market share and consumer loyalty so they can reap future profits. These products will age and consumers will wander for better and newer competing products, the company must offer either product extensions to prolong the life cycle of these products or offer completely new products to offset the decline in revenues from mature products. So you have to answer questions like: does the company spend enough on research and development? Does the company have an adequate product pipeline to offset declines in mature product revenue? Are the company's product lines old and tired?
  3. Understand management ability to adapt to change and sense consumer preferences: Good managers are able to have a keen understanding of their customers habits and preferences by performing effective marketing research. Do management have insight into the feeling and attitudes of their buyers? Does the company have a strong and accomplished management team compared to the competition?

Questions to ask yourself before investing:

  1. What is the company marketing strategy? Does it fit their product lines use by consumers?
  2. What is the competitive strength of the company's major brands?
  3. What is the percentage of revenue spent on R&D?
  4. Does the company sells oversees? If yes what is the breakdown? and what is the percentage of their earnings attributable to currency fluctuation?
  5. What is the depth of management talent? Do management have talent on the top only or are they developing their file and rank?
  6. What is the company's market share for its existing product lines?
  7. Does the company depend on limited distribution channels or does build a product franchise so it frees itself from the dependence on few large retailers?

A last issue for you to consider is there are two main categories of consumer goods companies: the personal and the utilitarian. There is a lot of differences between the two. Utilitarian like toiletries are price-sensitive and impersonal; a consumer can replace one for another based on price only. On the other hand, personal items like cosmetics are more preference driven and depends on individual tastes. As a result utilitarian products have low barrier to entry to new competitors and any investment in a company in this space should be made with great care.

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