April 24, 2024

Consumers spend on health products while withdrawing elsewhere

Thibaut Mongon, CEO of Kenvue Inc., speaks. from Johnson & Johnson’s consumer health business, during an interview to celebrate its IPO at the New York Stock Exchange (NYSE), May 4, 2023.

Brendan McDermid | Reuters

Most consumers have pulled back on spending as inflation weighs on their wallets, but they haven’t stopped paying for a brand name health and personal care products, Kenvue CEO Thibaut Mongon said.

Mongon told CNBC Thursday that consumers are still willing to spend on the company’s branded products — even as they reduce discretionary spending at retail stores and trade down on some essential items by changing their usual purchase amount or switching brands at lower prices.

The IS Johnson & Johnson consumer product Kenvue beat second-quarter revenue and adjusted earnings estimates on Thursday, buoyed by resilient demand for the company’s wealth of widely recognized brands such as Band-Aid, Tylenol, Listerine, Neutrogena and Aveeno.

However, the company’s stock price fell after J&J announced that it will launch an exchange offer to reduce its stake in Kenvue much earlier than expected.

Kenvue noted that “private label” consumer health product market penetration was stable for the quarter. Private label refers to products made and sold under a specific retailer’s name that are sold at a lower price and are intended to compete with branded products such as Kenvue’s.

Those trends may bode well not only for Kenvue, but also for other companies in the health, beauty and beverage spaces that may not see consumers trading down to cheaper products as often despite stubbornly high prices.

“Now, we live in a volatile environment with consistent consumer uncertainty and continued inflationary pressure,” Mongon told CNBC. “But I think people are very focused on their health and wellness right now.”

“They want to make sure they do what it takes to improve their health,” he said. “They are looking for reliable, science-backed and effective solutions to take better care of their health, and that’s what we and our brands do. That’s what we’ve been doing for a long time.”

Kenvue, to spin out of it Johnson & Johnson two months ago, strong demand is expected to continue in the coming quarters. The company forecasts that 2023 sales will increase between 4.5% and 5.5% from last year.

RBC Capital analyst Nik Modi said he is confident Kenvue will “maintain its momentum,” highlighting consumer trust in the company’s brands and healthcare products overall.

He noted that trade-down pressure has increased for some companies, based on changes in market share over the past few months. Meanwhile, Modi said Kenvue has gained market share, and may continue to do so despite the wider environment.

“If we wanted to see trade down with them, we would have started seeing it already,” Modi said. “I feel pretty good about their abilities.”

Who else could benefit from it

Like Kenvue, some beauty and beverage companies may not see the same kind of trade declines as some other consumer staple segments during the current period of uncertainty, according to Modi.

He said products like lipstick and moisturizer are increasingly seen as “affordable luxuries” even as inflation reduces consumer budgets.

“They don’t want to be happy with their situation and buy cheaper makeup,” said Modi.

Companies like it Ultawhich sells makeup, skin and hair care and other beauty products, has benefited from the resilience of the beauty category.

Earlier this year, Ulta said its revenue for 2022 exceeded $10 billion, and annual net income topped $1 billion — both records for the company. Ulta also reported first-quarter earnings that beat Wall Street expectations in May, largely due to demand for its beauty products.

Oddity Tech, a beauty and wellness company that uses AI to develop cosmetics, appeared to capitalize on the strength of the beauty category when it went public on Wednesday. The direct-to-consumer platform’s stock rose 35%.

Modi said beverage companies are also well positioned.

He said that big brand names like Coca-Cola are not exposed to private label penetration, and that consumers are willing to make room in their budget for drinks like Coke because “it’s a fun moment for them.”

Coca-Cola’s first-quarter earnings dented expectations of high demand for its drinks. But price increases on its products, implemented to cushion the impact of inflation, helped fuel the results.

Consumer confidence

Mongon said consumers turn to brands and products they “know and trust” during times of macroeconomic uncertainty.

He said transportation — and an increased focus on health and wellness — is driving sales of Kenvue products, which have been “in families for years, for decades, sometimes for generations.”

Modi agreed, adding that the Covid-19 pandemic has greatly increased consumers’ attachment to brands, especially those that have helped people take care of their health.

Demand for Tylenol, for example, soar and pioneered other pain relievers during the beginning of the pandemic as people struggled to stock up on essential health products.

“During the Covid time frame, you were trying to save your family or get your kids through a tough time with certain medicines and products, and I think that kind of emotional connection and engagement helped the stickiness of the brand,” Modi told CNBC.

“Consumers tend to trust these brands during very traumatic moments in their lives, so I think that’s why we’re seeing brands like Kenvue still be so resilient despite the macro pressure,” he said.

BNP Paribas Exane analyst Navann Ty said the pandemic has empowered consumers to “take their health into their own hands at home”.

She said the move is likely to benefit Kenvue and other companies that offer similar health products, which is “further differentiating it from other consumer categories.”

For Kenvue specifically, product recommendations from healthcare professionals are providing “some protection” from trade cuts, according to Ty.

Third-party surveys of select US healthcare practitioners from 2020 to 2022 found Tylenol to be the top doctor-recommended pain medication for adults nationwide, according to Kenvue’s IPO filing in April.

Those surveys also found that Neutrogena was the most popular sunscreen and acne brand in the United States, and Listerine was the top dentist-recommended mouthwash in the country.

Mongon noted that these recommendations “ultimately foster lifelong loyalty to our brands, loyalty that is passed on from generation to generation.”

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