The Company Behind The Biggest Consumer Brands | Hacker News Reader

The Company Behind The Biggest Consumer Brands

timgaweco.com

21 pointsHRoark21 comments

Consumer product companies sort of foreshadowed what happened to food (+), is happening to clothes, and will probably eventually happen to everything physical. The fundamental product (soap, razor blades, etc) is done. It works, involves no novel technology, and can be created at infintessimal marginal cost by any player in the industry. (Try to guess what the price of the soap in a bar of soap is. If your answer is expressable in whole cents, you are incorrect.) This suggests that prices would crater except that branding works: there is no discernable difference in any product in the hand soap aisle, so they spend tremendous amounts of money on advertising, over years, because they know that stamping that dove on the bar will dominate your purchasing decision years later.

I'm well aware of this, and I'm 30, and I haven't shopped for a bar of soap in America for 10 years. Ruriko and I were at a Walgreens on our honeymoon and needed to buy one. I immediately started looking for Dove and, when asked if I needed help, said "Try to find the white/yellow box with the bird on it -- that is the best one" before conscious thought intervened and said "Well, honestly, every box on these shelves is identical, but the difference in prices between $2.69 and $0.89 is so miniscule for the average shopper that they'll mentally respond to marketing like I just did."

+ The e.g. tomato or pasta sauce is solved, cheaper than it has ever been, and (seasonal fluctuations nonwithstanding) will only get cheaper over time. It is an observable fact that, for any particular basket of food, we pay less than our parents did. This is discomfiting to people trying to sell us food. Most discussion of food in America is values signaling. (e.g. "Don't eat that, it's not healthy/environmentally sustainable/organic/etc" is, to a first approximation, likely as relevant as the color of your bar of soap.)

Clothes are trending in this direction, too. Have you heard "You should buy X, X is quality, X' was probably created in a Chinese sweatshop?" Horsepuckey, everything is created in Chinese factories now, by the same people, from the same materials, using functionally the same designs. The only distinction is the name on the label. (This is why clothing brands are in an epic battle with counterfitters, because if it weren't for criminal penalties for bringing fake Gucci bags into the country fake Guccis would be absolutely indistinguishable from the genuine article. They're like fake diamonds. You know what a fake diamond is, these days? It is a diamond which did not begin life owned by the right people.)

Thanks for the great insight. The consumer product industry only has a few players (P&G, Unilever, Kimberly-Clark, Johnson & Johnson) which essentially gives them leverage to control prices and keep other competitors away through marketing.

The effects of marketing are very subtle, as your experience clearly demonstrates that.

Not quite so true -- the consumer product industry has many players, but only a few mega-winners. They're not largely winning because they "control prices"/"keep competitors away" (which sounds like there is something disreputable happening), they're winning because given the choice between a $3 bar of Dove and a $0.25 bar of white soap, Dove will generally win. (See e.g. house brands at supermarkets vs. branded products, though house brands are not priced quite that aggressively, in part because they know that they'll sell less at $0.25 than at $1.)

True. To clarify, I don't think it's safe to completely write off the fact that they could be doing something illegal (I'm not saying they are, but see this book of their alleged illegal practices in the 90s: http://amzn.to/5bbFuA). The reason why the Dove bar wins over the cheap generic brand is because of marketing, which stems from their financial advantage over smaller competitors. Likewise, their financial advantage is the result of increased sales from marketing campaigns (recall the Old Spice commercials). It's a vicious cycle.

Maybe realted, maybe not. I read somewhere a few years ago one of the DIY stores like Home Depot or what-have-you did a study and decided that swapping out the $1 paint brush for the $5 brush didn't decrease the volume sold, but 5x'ed revenues on that product. Their insight was that someone going in and buying a few gallons of paint were not going to comparison shop on brushes (and drive elsewhere) to save a couple of dollars on a cheap brush --people would pay for the convenience of getting multiple items in one place.

Interesting, this is psychological misinterpretation. People have a tendency to think that price = quality. There was similar scenario presented in the book Influence: The Psychology of Persuasion that had to do with a jewelry owner.

I don't know why you've been down voted but this is exactly what I read yesterday in Dan Ariely's Predictably Irrational. A $2 aspirin worked better than a 50 cent one. That is to say, people who paid more for the exact same medicine were less likely to come back after a month for the same problem. It's actually crazy on how true his observations are, even on yourself.

With drugs there is also the placebo effect. This is where people will get better if the 'drug' is thought to be more effective. If you give people 4 sugar pills instead of 2, they feel better faster. This isn't wishy-washy 'feel better' stuff, but an actual improvement. People's brains can influence they bodies.

Real drugs are tested against placebos, and they have to 'beat the placebo' before we call them 'drugs'. (i.e. if they don't beat the placebo, they clearly don't work). And obviously although placebos work, they don't work very well, so you can't 'think yourself free of cancer'.

The placebo effect is one of the current unsolved mysteries of science today.

And you can often still find the $1 paint brush if you're willing to look outside your typical field of vision (eg. above or below the "home row" that a normal sized human sees at first glance).

They prefer to sell you the $1 brush over selling nothing at all (because you're shopping elsewhere, after feeling ripped of once).

I think you're overstating the case. I found that Ivory soap dries out my skin, while Dove doesn't. The store brand single-blade disposable razors at Duane Reade tend to get badly clogged with hair, while Bic's version doesn't clog at all. The wooden spoon from the 99¢ store snapped in half after a few months of use. It's still true that you get what you pay for.

I agree. But it's often a little more subtle. Here in the UK, most major supermarket chains have "own-brand" lines of major product lines; everything from bread to plastic bags. The "own-brand" products are produced in the same factories as one of the branded products (it would make very little sense to anything else), but corners are often cut elsewhere. Own-brand pizzas have skimpier and lower-quality toppings, sliced bread is poorly mixed, paper towels have fewer plies, etc. On the other hand, some products, like whole milk, are harder to cut corners on, and others, like various area cheeses etc., are unique and the product of choice is simply the one who's taste you prefer.

> It is an observable fact that, for any particular basket of food, we pay less than our parents did.

Is that true? I looked up prices of food for 1981[1] and compared it with similar data from 2011[2]. These appear to be grocery prices based on newspaper fliers recorded by some library in new jersey (only one data point but it was what google showed me). I wonder if there is any readily available restaurant pricing data over time.

I found this calculator for inflation[3] which is based on this data[4]. The result seems to show that most grocery food was cheaper in 1981 than 2011 in Morris County, NJ at least. Unknown food quality, and I did not look at data regarding purchase power, salaries, etc, etc. I imagine most things are cheaper now, but has food actually gotten much cheaper since our parents? I would readily agree that we have more variety, availability, and options though.

[1]: http://www.gti.net/mocolib1/prices/1981.html

[2]: http://www.gti.net/mocolib1/prices/2011.html

[3]: http://inflationdata.com/inflation/Inflation_Calculators/Cum...

[4]: http://inflationdata.com/inflation/Inflation_Rate/Historical...

Compounding inflation over 30 years is much greater than the cost saving measures implemented by the consumer goods companies (supply chain optimization, improvement of packaging techniques etc.).

I get your points, love your writing and have a lot of respect for you in general, but on your point about soaps you're dead wrong. Aside from a few major US mainstream brands, which are admittedly pretty similar in cleaning ability, there is a very wide variety in the quality and experience of different soaps. some soaps clean better, some worse. some moisturizing, some dry you out, some neutral. some heavily perfumed, some not. some use artificial chemicals, some use natural/organic ingrediants. some smell natural, some smell chemically. some are big and last a while, some seem to degrade and shrink away to nothing very quickly. some are oily, some not. some have chunks to make them more corse, some not. variety of colors, variety of smells. some good at washing off oils from my hands, some bad. some rectangular, some oval (which effects UX and grippability.) some soaps cause skin irritation (in some people) and others do not. some soap taste bad (if you get in mouth accidentally), some do not. some will make your eyes sting painfully if it gets in it, some less so. granted, if you only take say 2-3 major US brands into account, your observation is not too far off base. But if you have experience with dozens of different types, different vendors, you'll discover a wide variety of meaningful differences in soaps. Even just (bath) bar soaps. Though I've noticed differences in pump bottle hand soaps as well.

It's an interesting perspective, but I can't agree with you that consumer products (and food) are "done".

I am not going to suggest you actually go out and do the Pepsi Challenge with pasta sauce, but I don't actually believe that there are no food brands you, Patrick, are loyal to based on taste or quality, that you buy even though they might be more expensive than another.

Is there a brand of rice you get because it comes out just a bit better than the other one you tried? Or a rice cooker that is notoriously reliable compared to another that dies after a year? Or a bread brand you get because it lasts longer before going bad?

Ignoring all the marketing, I am sure if you did an objective Consumer Reports-style study of almost any category of consumer product or food, you would find some that perform better at what they do, or taste better, or are actually healthier for you by an objective standard, or have the best combination of price/quality for you.

Coke and Pepsi are distinguishable from each other easily. A McDonalds Fry and a Burger King Fry are too - completely different. And there is such a thing as quality even if you aren't conscious of it.

My understanding is that this comment is stating that there is a trend towards products having more or less identical functional features, but at different price points and that they will only be distinguished from each other by marketing. I would argue this has always been the case, from the day people first started trading goods instead of making everything for themselves. Whenever there are competing, nearly-identical goods in the marketplace, someone invents ways to distinguish them based on pricing, logos, fatuous claims, etc., but that happened a long time ago.

An interesting thing about FMCG companies and profitability:

BigCo selling a bar of soap for $4 has a similar contribution margin to GenericCo selling a bar of soap for $1. Why? BigCo has larger overheads (i.e., they have to promote and advertise, do consumer research, etc.). In fact, BigCos don't make much profit from categories like soap and laundry powder, but they need them to cover overheads.

Just to add some points/clarity.

The industry being discussed is called FMCG, abr. of Fast Moving Consumer Goods.

FMCG industry is characterised by few major players, controlling most of the market leading brands.

Such control is achieved through (1) marketing, (2) distribution and (3) mergers and acquisitions (M&A).

The simplified explanation:-

1. Marketing.

To win the consumer market, the brands shall win over the general population by delivering brand message/advertising through channels that reach the most of the population. Last 10-15 years such channel was TV. TV advertising is very expensive.

The cost of launching new brand varies (country, market, etc) from $ 3-5M (small brand, one country) to several hundred $M (global launch, major market, etc).

To maintain the market share, brand ad spending shall more or less match such spending of the competing brands.

The annual marketing budget of FMCG company can reach 15%-20% of revenue, with appr. half going to TV.

So a company with annual sales of $10B would spent annually on marketing $1-1.5B. As a specific example, 10 years ago Coca-Cola was spending on marketing in excess of $1B.

Therefore, new entrants/smaller companies can not match such spending either for new launches or for sustaining the market share for their own brands.

2. Distribution.

Most of the big players, like P&G, Coke, Pepsi, etc do direct sales/delivery and own fleet of vehicles to deliver goods to both chains and individual stores. Such fleet may cost tens of millions of $. Without such fleet in place [and existing relationships/clout with retail], new entrants can not ensure proper distribution/availability of their products. So even if they find money to spend on marketing campaign, when the customers will go to stores, they will not find the advertised brands and will buy what's available.

3. M & A.

Those companies/brands that find a way to break in through

- clever strategy

- by playing in new and emerging market segments (Gatorade, etc)

- catching a trend (BodyShop, etc)

are acquired by Big Co after they become clear winner and catch with consumers, but before they reach critical mass.

I did not delve into private labels, pricing matters, retail strategy and pricing, P/E and other bits, since the above is key and post was getting lengthy.

Not trying to be a troll but the thing that jumped out at me was the P/E listed for P&G and my mind immediately compared it to the FB P/E at the IPO.

Yeah, it's the norm for most tech companies to have high P/Es. It doesn't necessarily mean it's a bad investment.

Another company in this sector not mentioned in the article is Reckitt Benckiser:

http://en.wikipedia.org/wiki/Reckitt_Benckiser

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