After the explosion of ecommerce, the biggest story in American retail today is the collapse of traditional consumer brands. A case in point is Colgate-Palmolive (NYSE: CL); which saw its revenues plummet by $1.25 billion over the course of 2015.
The company started the year with $17.28 billion in revenue and finished it with $16.03 billion. Like Proctor & Gamble (NYSE: PG); which saw its revenue fall by $6.77 billion over the course of the year, Colgate-Palmolive is facing a revenue collapse. These figures point to a major sales collapse for consumer staples such as Colgate toothpaste and Palmolive dish detergent.
That collapse is beginning to affect Colgate’s ability to make money. It reported a net income of $2.286 billion in June 2015 that fell to $1.38 billion in December. Colgate-Palmolive also reported a negative profit margin of -11.75%.
An even more worrying sign was Colgate-Palmolive’s cash from operations. That number was at $3.298 billion in December 2014 and $2.948 billion a year later. Colgate-Palmolive was generating $350 million less cash in December than it was a year earlier.
This would seem to indicate an unsustainable business model. The company seems to be generating less and less cash. Naturally investors will wonder what the cause of this is.
Is the Retail Apocalypse Coming home to Colgate-Palmolive?
A potential cause of Colgate-Palmolive’s woes is the ongoing retail apocalypse afflicting America’s shopping centers. Over the past year, one major grocer; A&P collapsed completely, and another, Roundy’s; sold itself to Kroger (NYSE: KR) to avoid the death spiral.
During the same period America’s third-largest drugstore chain; Rite Aid, sold itself to Walgreen Boots Alliance (NASDAQ: WBA) to avoid the death spiral, and dozens of Kmart stores closed. Alco, a small discounter which operated 198 stores, closed all of its locations. America’s largest retailer Walmart Stores Inc. (NYSE: WMT) saw its revenues drop by $3.52 billion in 2015. Target (NYSE: TGT) also reported a slight revenue drop during fourth quarter 2015.
All this hurts consumer products companies like P&G and Colgate-Palmolive in two ways:
- There are simply fewer outlets for the products to sell at. This leads to lower sales volume.
- As the retail market becomes more consolidated a very giant players can engage in deep discounting. The Milwaukee Sentinel reported that prices at Roundy’s stores in Wisconsin would fall by 3% to 5% when Kroger takes over. This means less money for Colgate-Palmolive because the new giants have the power to leverage lower prices. A major problem is that the public gets used to the lower prices and demands them at all stores.
Other trends that hurt Colgate-Palmolive are the rise of deep discounters like Dollar General (NYSE: DG); which now operates nearly 11,000 stores, and Aldi. These bottom feeders charge even lower prices, which leads to an even lower markup. A big problem for Colgate is that some of its consumer staples, such as toothpaste are now bargain brands found at dollar stores.
Chains like Aldi and Costco Wholesale (NASDAQ: COST) are even worse because they sell many private-label brands. That means more money for retailers, but less profit for consumer-products companies.
Related trends like income inequality, wage stagnation and increased online shopping; all of which encourage bargain hunting, accelerate these changes and undermine brands. A related trend is the growth of digital media, which decreases exposure to traditional advertising and brand awareness on the part of consumers.
Is it Time to Dump Consumer Staples Stocks?
All this points to a fascinating conclusion: owning a consumer brand is no longer a license to print money. Among other things that means consumer-brand companies like Colgate-Palmolive are no longer value investments, because they are not reliable money makers.
Instead value investors looking to make a consumer defensive-play should consider retailers like Costco, Kroger, Walmart and Walgreen. Those companies are best poised to take advantage of the new retail realities with deep discounting and large footprints that provide the low prices today’s consumer wants.
Expect the decline of consumer brands to continue as Americans lose their brand loyalty. The situation at Colgate-Palmolive proves the future of consumer-defense stocks; belongs to big retail and not to big brands.