Thibaut Mongon, CEO of Kenvue Inc., a Johnson & Johnson consumer health business, speaks during an interview to mark the company’s initial public offering on the New York Stock Exchange (NYSE), May 4, 2023.
Brendan McDermid | Reuters
Most consumers have cut back on spending as inflation weighs on their wallets, but they have not stopped paying for brand-name health and personal care products. said Thibaut Mongon, CEO of Kenvue.
Mongon told CNBC on Thursday that consumers are still willing to spend money on the company’s branded products — even as they reduce voluntary spending at retail stores and give up some essential items by changing their usual shopping size or switching brands at lower prices.
The Johnson&Johnson consumer spinoff Kenvue beat second-quarter sales and adjusted earnings estimates on Thursday, driven by robust demand for the company’s many well-known brands, including Band-Aid, Tylenol, Listerine, Neutrogena and Aveeno.
Still, the company’s share price fell after J&J announced much earlier than expected that it would issue an exchange offer to reduce its stake in Kenvue.
Kenvue also noted that private label penetration in the consumer health products market was stable during the quarter. Private label refers to products manufactured and sold under a specific retailer’s name, sold at a lower price and aimed to compete with branded products such as Kenvue’s.
These spending trends could bode well not only for Kenvue, but also for other consumer health, beauty, and beverage companies where consumers may not be switching to cheaper products as often despite stubbornly high prices.
“Now we live in a volatile environment with ongoing consumer uncertainty and inflationary pressures,” Mongon told CNBC. “But I think people are very focused on their health and well-being right now.”
“They want to make sure they’re doing whatever it takes to improve their health,” he said. “They are looking for trusted, science-based and effective solutions to take better care of their health, and that’s exactly what we and our brands are doing. We have been doing this for a long time.”
Kenvue expects strong demand to continue in the coming quarters. The company forecasts revenue growth of between 4.5% and 5.5% year-on-year for 2023.
RBC Capital analyst Nik Modi expressed confidence in Kenvue’s ability to “maintain its momentum” and underscored consumer confidence in the company’s brands and health and personal care products overall.
He pointed out that trading pressures on certain companies have increased in recent months due to changes in market share. Meanwhile, Kenvue has gained market share and may continue to do so despite the broader environment, he noted.
“If we were to see a drop in trade with them, we would have already seen it,” Modi said.
Who else could benefit from this?
Like Kenvue, some cosmetics and beverage companies may not experience the same trade declines as some consumer staples segments in the current bout of macroeconomic uncertainty, Modi said.
He said beauty products like makeup are increasingly being viewed as “affordable luxuries,” even as inflation squeezes consumer budgets.
“They don’t want to feel shit about their situation and buy cheaper makeup,” Modi said.
companies like ultimatewhich sells makeup, skin and hair care, and other beauty products, has benefited from the resilience of the beauty category.
Earlier this year, Ulta announced that its 2022 sales exceeded $10 billion while annual net income surpassed $1 billion — both records for the company. Ulta also reported better-than-expected first-quarter earnings in May, largely due to demand for its beauty products.
curiosity Tech, a beauty and wellness company that uses AI to develop cosmetics, also appeared to benefit from the strength of the beauty category when it went public on Wednesday. The direct-to-consumer platform’s stock is up 35%.
Modi said beverage companies are also in good shape, noting that big brand names like Coca-Cola have not been hit very hard by private label penetration.
Coca-Cola’s first-quarter earnings beat expectations on strong demand for its beverages. However, price increases on its products, introduced to mitigate the effects of inflation, also contributed to the results.
Mongon said consumers are turning to brands and products they “know and trust” during tough economic times.
He said behavior — and an increased focus on health and well-being — is driving demand for Kenvue products that have been in homes “for years, decades, sometimes generations.”
Modi agreed, adding that the Covid-19 pandemic has significantly increased consumer loyalty to brands, particularly brands that help people take care of their health.
Demand for Tylenol, for example, skyrocketed early in the pandemic, outpacing demand for other pain relievers as people needed to stock up on essential healthcare items.
“During the Covid timeframe, you wanted to use certain medicines and products to save your family or help your kids through a difficult time, and I think that kind of emotional connection and commitment helped build brand loyalty,” Modi told CNBC.
“Consumers tend to trust these brands at very traumatic moments in their lives. I think that’s why brands like Kenvue’s remain so resilient despite the macroeconomic pressures,” he said.
Navann Ty, an analyst at BNP Paribas Exane, added that the pandemic has empowered consumers “to take charge of their health at home”.
She said the shift is likely to benefit Kenvue and others in the consumer health space, and represents “additional differentiation from other consumer categories.”
Ty noted that Kenvue is not “completely immune” to trade losses and private label competition. But she said product recommendations from healthcare professionals offer “some protection.”
According to Kenvue’s IPO filing in April, third-party surveys of certain U.S. physicians for the period 2020-2022 found that Tylenol was the most physician-recommended adult pain reliever nationwide.
These surveys also found that Neutrogena was the top brand for over-the-counter sunscreen and acne in the United States, while Listerine was the top dentist-recommended mouthwash nationwide.
Mongon noted during the company’s earnings conference call that these recommendations “ultimately foster lifelong loyalty to our brands, a loyalty passed down from generation to generation.”