Thibaut Mongon, CEO of Kenvue Inc. a Johnson & Johnson’s consumer-health business, speaks during an interview to have a good time its IPO on the Recent York Stock Exchange (NYSE), May 4, 2023.
Brendan Mcdermid | Reuters
Most consumers have pulled back on spending as inflation squeezes their wallets, but they’ve not stopped paying up for brand-name health and private care products, Kenvue CEO Thibaut Mongon said.
Mongon told CNBC on Thursday that customers are still willing to spend on the corporate’s branded products – at the same time as they reduce discretionary spending at retail stores and trade down on some essential items by changing their usual purchase size or switching brands for lower prices.
The Johnson & Johnson consumer spinoff Kenvue beat second-quarter revenue and adjusted earnings estimates on Thursday, fueled by resilient demand for the corporate’s wealth of widely known brands equivalent to Band-Aid, Tylenol, Listerine, Neutrogena and Aveeno.
Still, the corporate’s stock price fell after J&J announced that it will launch an exchange offer to scale back its stake in Kenvue far sooner than expected.
Kenvue also noted that “private label” penetration in the buyer health product market was stable for the quarter. Private label refers to products made and sold under a particular retailer’s name which can be sold at a lower cost and aim to compete with branded products like Kenvue’s.
Those spending trends could bode well not just for Kenvue, but in addition for other corporations in the buyer health, beauty and beverage spaces that will not see consumers trade right down to cheaper products as often despite stubbornly high prices.
“Now, we live in a volatile environment with consistent consumer uncertainty and continued inflationary pressures,” Mongon told CNBC. “But I feel persons are very focused on their health and well-being immediately.”
“They wish to ensure they do what it takes to enhance their health,” he said. “They’re in search of trusted, science-backed and efficacious solutions to take higher care of their health, and that is what we and our brands do. That is what we have been doing for a very long time.”
Kenvue expects to see the strong demand proceed in the approaching quarters. The corporate forecasts 2023 sales will increase between 4.5% and 5.5% from last 12 months.
RBC Capital analyst Nik Modi expressed confidence in Kenvue’s ability to “maintain its momentum,” highlighting consumer trust in the corporate’s brands and health and private care products overall.
He noted that trade-down pressure has increased for certain corporations, based on market share changes over the previous few months. Meanwhile, Kenvue has gained market share, and will potentially proceed to accomplish that despite the broader environment, he noted.
“If we were going to see trade down with them, we’d have began to see it already,” Modi said.
Who else may gain advantage
Like Kenvue, some beauty and beverage corporations may not see the identical type of trade downs as some consumer staple segments are through the current period of macroeconomic uncertainty, in accordance with Modi.
He said beauty products like makeup are increasingly seen as “a reasonable luxury” at the same time as inflation shrinks consumers’ budgets.
“They don’t need to feel crappy about their situation and buy cheaper makeup,” Modi said.
Firms like Ulta, which sells makeup, skin and hair care and other beauty products, have benefitted from the resilience of the wonder category.
Earlier this 12 months, Ulta said its 2022 revenue exceeded $10 billion, while annual net income topped $1 billion — each records for the corporate. Ulta also reported first-quarter earnings that topped expectations in May, largely driven by demand for its beauty products.
Oddity Tech, a beauty and wellness company that uses AI to develop cosmetics, also appeared to profit from the strength of the wonder category when it debuted on the general public market on Wednesday. The direct-to-consumer platform’s stock popped 35%.
Modi said beverage corporations are also well-positioned, noting that big brand names like Coca-Cola aren’t very exposed to non-public label penetration.
Coca-Cola’s first-quarter earnings beat expectations on high demand for its drinks. But price hikes on its products, which were implemented to mitigate the impact of inflation, also helped to fuel the outcomes.
Consumer trust
Mongon said consumers turn to brands and products that they “know and trust” during difficult economic times.
He said that behavior – and an increased concentrate on health and well-being – is boosting demand for Kenvue’s products, which have been “in households for years, for a long time, sometimes for generations.”
Modi agreed, adding that the Covid-19 pandemic significantly elevated consumer attachment to brands, especially those who helped people maintain their health.
Demand for Tylenol, for instance, soared and outpaced other pain relievers through the outset of the pandemic as people scrambled to refill on essential health products.
“In the course of the Covid timeframe, you were looking to save lots of your loved ones or get your kids through a troublesome time frame with certain medicines and products, and I feel that type of emotional connection and engagement helped with brand stickiness,” Modi told CNBC.
“Consumers are inclined to trust these brands during very traumatic moments of their lives, so I feel that is why we’re seeing brands like Kenvue’s remain so resilient despite the macro pressure,” he said.
BNP Paribas Exane analyst Navann Ty added that the pandemic made consumers more empowered to “take their health into their very own hands at home.”
She said that shift is probably going benefitting Kenvue and others in the buyer health space, and is an “additional differentiation from other consumer categories.”
Ty noted that Kenvue is not “fully immune” to trade downs and private-label competition. But she said product recommendations by healthcare professionals are providing “some protection.”
Third-party surveys on certain U.S. healthcare practitioners from 2020 to 2022 found that Tylenol was the highest doctor-recommended adult pain medication nationwide, in accordance with Kenvue’s IPO filing in April.
Those surveys also found that Neutrogena was the U.S.’s leading over-the-counter sunscreen and pimples brand, while Listerine was the country’s top dentist-recommended mouthwash.
Mongon noted through the company’s earnings call that those recommendations “ultimately foster lifelong loyalty to our brands, loyalty that’s passed down from generation to generation.”