Consumer Focus Shifts to Health Products as Spending Decreases in Other Areas

Kenvue CEO Thibaut Mongon stated that while consumers have reduced spending due to inflation, they continue to invest in brand-name health and personal care products.

Mongon shared with CNBC that consumers are still willing to purchase the company’s branded products, even as they cut back on discretionary spending and opt for lower-priced alternatives or change their usual purchase habits.

Kenvue, a consumer spinoff of Johnson & Johnson, surpassed revenue and earnings estimates for the second quarter thanks to steady demand for its well-known brands such as Band-Aid, Tylenol, Listerine, Neutrogena, and Aveeno.

However, the stock price of the company fell when J&J announced an earlier-than-expected plan to reduce its stake in Kenvue through an exchange offer.

Kenvue also noted that the penetration of “private label” products in the consumer health market remained stable during the quarter. Private label products are sold under a specific retailer’s name and aim to compete with branded products like those from Kenvue.

These spending trends are not only favorable for Kenvue but also for other companies in the consumer health, beauty, and beverage sectors, where consumers are less likely to switch to cheaper alternatives despite high prices.

Mongon stated, “Now, we live in a volatile environment with consistent consumer uncertainty and continued inflationary pressures. But I think people are very focused on their health and well-being right now.”

“They want to make sure they do what it takes to improve their health,” he added. “They are looking for trusted, science-backed, and effective solutions to take better care of themselves, and that’s exactly what our brands provide. That’s what we’ve been doing for a long time.”

Kenvue expects to maintain strong demand in the upcoming quarters, with a forecasted sales increase of 4.5% to 5.5% from last year.

RBC Capital analyst Nik Modi expressed confidence in Kenvue’s ability to sustain its momentum, highlighting the trust consumers have in the company’s brands and overall health and personal care products.

Modi noted that while trade-down pressure has affected certain companies, Kenvue has gained market share and may continue to do so despite the challenging environment.

Similar to Kenvue, beauty and beverage companies may not face the same degree of trade-downs as some consumer staple segments during periods of economic uncertainty, according to Modi.

Modi stated that beauty products like makeup are seen as “an affordable luxury” even when consumers are dealing with inflation.

Companies like Ulta, a retailer selling beauty products, have benefited from the resilience of the beauty category. Ulta reported record-breaking revenue and net income in 2022 and exceeded expectations for the first quarter of 2023.

Oddity Tech, a beauty and wellness company utilizing AI to develop cosmetics, also saw success in the beauty category when it went public, with its stock rising 35%.

Modi added that beverage companies are also well-positioned, particularly big brands like Coca-Cola that are less exposed to private label competition.

Coca-Cola’s first-quarter earnings surpassed expectations due to high demand for its drinks, aided by price hikes to counteract inflation.

Mongon emphasized that consumers turn to brands and products they “know and trust” during challenging economic times.

He explained that this behavior, coupled with a heightened focus on health and well-being, drives the demand for Kenvue’s products, which have become household staples over the years.

Modi agreed, stating that the COVID-19 pandemic increased consumers’ attachment to brands, particularly those that helped maintain their health.

For instance, the demand for Tylenol soared during the early stages of the pandemic as people rushed to stock up on essential health products.

“Consumers tend to trust these brands during very traumatic moments in their lives, so I think that’s why we’re seeing brands like Kenvue remain resilient despite macro pressures,” Modi said.

BNP Paribas Exane analyst Navann Ty added that the pandemic empowered consumers to take their health into their own hands at home.

This shift is likely benefiting Kenvue and other companies in the consumer health space, providing an additional advantage over other consumer categories.

Ty noted that while Kenvue is not completely immune to trade-downs and private label competition, recommendations from healthcare professionals offer some protection.

A survey found that Tylenol was the top doctor-recommended adult pain medication nationwide, while Neutrogena and Listerine were leaders in the over-the-counter sunscreen and mouthwash categories, respectively.

Mongon highlighted the lifelong loyalty fostered by these recommendations, which are passed down from generation to generation.