Amazon Takes Away Power Of Brand Names, Throwing Another Industry Into Turmoil
Consumer packaged-goods companies are cutting back on marketing, signaling complacency, analyst says.
By Caitlin Huston
MarketWatch
July 11, 2017
Big brands may have given into the power of Amazon.com Inc.
Consumers influenced by Amazon’s approach are shopping based on price rather than the brand name, which is causing them to avoid physical stores, said James Cakmak, an analyst at Monness, Crespi, Hardt. While Amazon’s effect on physical retail stores is well-chronicled, Cakmak says that the major brands that are sold in those stores are now dealing with the results as well.
As Amazon AMZN, +1.81% and Wal-Mart Stores Inc. WMT, -2.79% make bigger pushes into the packaged-goods categories, brand names are spending less on marketing and backing away from their original models, Cakmak wrote in a Monday note. The $800 billion consumer packaged-goods category includes name-brand detergents, foods and personal care items, with large companies such as PepsiCo Inc. PEP, -1.07% Johnson & JNJ, -0.75% and Mondelez International Inc.MDLZ, -0.39%
“We see these companies starting to give up, and that’s a bad thing for the industry, consumers and the country,” Cakmak said in the note.
In the past, these companies were able to dominate their sector by controlling how the goods were distributed and placed on the shelf at retail stores. With prime presentation in stores, the companies would spend heavily on marketing, which made up 20% to 25% of their budgets, to influence consumers’ buying decisions.
Now, instead of fighting for shelf space, Cakmak says the companies appear to be scaling back spending. In his quarterly check with major advertising agencies, he found that consumer packaged-goods companies were spending less on marketing. More worrying were reports that these companies were more focused on protecting the bottom line, rather than investing in growth and new innovative strategies to combat the online models.
“We don’t know where the bottom is, but it’s not looking good,” Cakmak wrote.
For example, according to The Wall Street Journal, consumer brands such as Nestlé SA NESN, +1.28% and General Mills Inc. GIS, -0.43% have been “soul-searching,” as Nestlé has been looking to sell its U.S. confectionery business and General Mills executives acknowledged that they had been late to recent food trends.
PepsiCo Inc. beat its first-quarter earnings expectations, as it pivoted more toward its diet snacks and sodas, but said it came amid “challenging food and beverage industry trading conditions in North America.”
Overall, consumer packaged-goods spending is expected to be flat this year, Cakmak said, citing his checks with the ad agencies.
Cakmak sees Amazon leading this change as it increases its push into food and other goods, with its own private label brands and its recent bid for Whole Foods Market Inc. WFM, -0.36% Wal-Mart is also playing a part, as it has shifted more into e-commerce with its acquisition of Jet.com in August 2016 and its discounts for online orders.
Combined, the two retail giants are making the consumer packaged-goods sector a commodity-driven sector, rather than a brand-focused one.
“Now it’s all about price, especially as Amazon and Wal-Mart fight on a race to the bottom,” Cakmak wrote.
Shares of Amazon have gained 9.2% in the past three months, compared with the S&P 500 index’s SPX, +0.09% gain of 3%.
Big brands may have given into the power of Amazon.com Inc.
Consumers influenced by Amazon’s approach are shopping based on price rather than the brand name, which is causing them to avoid physical stores, said James Cakmak, an analyst at Monness, Crespi, Hardt. While Amazon’s effect on physical retail stores is well-chronicled, Cakmak says that the major brands that are sold in those stores are now dealing with the results as well.
As Amazon AMZN, +1.81% and Wal-Mart Stores Inc. WMT, -2.79% make bigger pushes into the packaged-goods categories, brand names are spending less on marketing and backing away from their original models, Cakmak wrote in a Monday note. The $800 billion consumer packaged-goods category includes name-brand detergents, foods and personal care items, with large companies such as PepsiCo Inc. PEP, -1.07% Johnson & JNJ, -0.75% and Mondelez International Inc.MDLZ, -0.39%
“We see these companies starting to give up, and that’s a bad thing for the industry, consumers and the country,” Cakmak said in the note.
In the past, these companies were able to dominate their sector by controlling how the goods were distributed and placed on the shelf at retail stores. With prime presentation in stores, the companies would spend heavily on marketing, which made up 20% to 25% of their budgets, to influence consumers’ buying decisions.
Now, instead of fighting for shelf space, Cakmak says the companies appear to be scaling back spending. In his quarterly check with major advertising agencies, he found that consumer packaged-goods companies were spending less on marketing. More worrying were reports that these companies were more focused on protecting the bottom line, rather than investing in growth and new innovative strategies to combat the online models.
“We don’t know where the bottom is, but it’s not looking good,” Cakmak wrote.
For example, according to The Wall Street Journal, consumer brands such as Nestlé SA NESN, +1.28% and General Mills Inc. GIS, -0.43% have been “soul-searching,” as Nestlé has been looking to sell its U.S. confectionery business and General Mills executives acknowledged that they had been late to recent food trends.
PepsiCo Inc. beat its first-quarter earnings expectations, as it pivoted more toward its diet snacks and sodas, but said it came amid “challenging food and beverage industry trading conditions in North America.”
Overall, consumer packaged-goods spending is expected to be flat this year, Cakmak said, citing his checks with the ad agencies.
Cakmak sees Amazon leading this change as it increases its push into food and other goods, with its own private label brands and its recent bid for Whole Foods Market Inc. WFM, -0.36% Wal-Mart is also playing a part, as it has shifted more into e-commerce with its acquisition of Jet.com in August 2016 and its discounts for online orders.
Combined, the two retail giants are making the consumer packaged-goods sector a commodity-driven sector, rather than a brand-focused one.
“Now it’s all about price, especially as Amazon and Wal-Mart fight on a race to the bottom,” Cakmak wrote.
Shares of Amazon have gained 9.2% in the past three months, compared with the S&P 500 index’s SPX, +0.09% gain of 3%.
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