Beating the Recession With Consumer Goods
Times are tough, especially in the margin-tight consumer goods industry. There are ways to make money in hard times, though, and Coca-Cola (NYSE: KO) and Procter & Gamble (NYSE: PG) know what they are.
Cut you down to size
For years, Coke relied heavily on a three-sized product platform in the U.S.: 20 fluid ounce bottles, 2-liter bottles, and 12 fl. oz. cans. Now, in an effort to diversify offerings, Coke is producing its product in smaller sizes at lower prices.
In September, Coke launched a 12.5 fl. oz., $0.89 bottle in hopes of finding consumers interested in a smaller, cheaper beverage choice. The new size joins the 16 fl. oz. $0.99 bottle as an alternative to the standard 20 fl. oz. option. The company also dropped the price on its eight-pack of 7.5 fl. oz. mini-cans to $2.99.
Oh, it works
Skeptical investors can be reassured that Coke was drawing on experience when it made this move. In the mid-'90s, Coke's bottling partners in Mexico began mixing up product sizes to try to survive the Mexican Peso Crisis. Today, you can find Coke in 30 different packages in Mexico. More importantly, it's the company's top market in per-capita consumption. The strategy is beneficial for Coca-Cola because though the smaller sizes are cheaper, consumers pay more per ounce than with larger sizes.
PepsiCo (NYSE: PEP) is also trying this strategy, though insiders suggest it's not doing it aggressively enough. The company has rolled out 16 fl. oz. bottles and a 1.5-liter bottle to compete with Coke.
Who else is doing this?
These beverage companies aren't alone in acknowledging that size matters -- paper goods giant Kimberly-Clark (NYSE: KMB) is hip to the game as well. The company has also reduced volumes on some of its products. At the same time, it is also introducing new premium products to appeal to affluent consumers.
Size matters, but price matters, too
Kimberly-Clark may be on to something, as a host of other consumer goods companies have begun developing products based on the consumer hourglass theory. The middle class -- or the middle of the hourglass -- no longer possesses the buying power it once had, so companies are targeting consumers at the top and the bottom sections of the economy instead.
Procter & Gamble has acknowledged this shift and developed a new dish soap at a bargain price. It's the first time in 38 years this has happened. The shift began in 2008 and was a real problem for P&G, as companies like Church & Dwight (NYSE: CHD) were able to use bargain products to chip away at its brand-name dominance.
At the other end of the spectrum, companies like Tiffany & Co. (NYSE: TIF) have watched sales of jewelry items popular among the middle class all but disappear. Its higher-priced items are doing just fine, as the company continues to post strong sales in these segments.
Farewell, middle class
The consumer goods industry is facing a middle class with weakened purchasing power. There are strategies these companies can use effectively to survive, and thrive, in this environment, though. For companies serving the newly pinched middle class, those willing to repackage and reprice themselves will stand the best chances of succeeding in these conditions.