J&J Consumer Makes 'Aggressive' Shift In Digital Sales To Drive Growth

When J&J CEO Gorsky says, "We're not just sitting back, we're making aggressive moves in areas such as e-commerce – investments in that shift," his words are music to analysts' ears. J&J has OTC drug and other consumer health brands to drive growth, but it's missing the digital piece, they say.

Johnson & Johnson didn't disappoint analysts by announcing, after a flat consumer health fourth quarter, that it is investing in making its segment more competitive in a market swinging more toward online sales.

"The shift to e-commerce, shifts in some cases to more natural brands, digital types of brands, have been more secular in nature and have affected all of the large, [fast-moving consumer goods] companies," noted CEO Alex Gorsky during J&J's fiscal 2017 fourth-quarter earnings briefing on Jan. 23.

"We're not just sitting back, we're making aggressive moves in areas such as e-commerce – investments in that shift," the exec added.

Those words resonated with analysts tracking the global pharmaceutical, medical device and consumer health and personal care products firm's sales and earnings. Its consumer segment's fourth-quarter adjusted operational sales – excluding the net impact of acquisitions and divestitures – were up 0.2% to $3.5bn globally.

For full-year 2017, worldwide consumer sales were down 0.5% on the same basis to $13.6bn.

The results reflect declines in J&J's baby care and oral care businesses, which OTC product growth and Neutrogena skin care helped to offset, according to the firm's release.

 

J&J CEO Alex Gorsky: "We're making aggressive moves in areas such as e-commerce – investments in that shift."

Morningstar's Damien Conover stated in a same-day research note, "We believe the increased internet use for purchasing consumer goods is weighing on the firm’s brand power, as the company hasn’t optimized its marketing message in this distribution channel, a similar trend we have seen with other Big Pharma consumer units."

BMO Capital Markets analyst Joanne Wuensch took a similarly dim view on the J&J division at present. "Consumer continues to be a rather lackluster franchise for Johnson & Johnson."

However, "as competitive pressure from e-commerce and fast paced start-up companies continue to threaten its mega brand strategy," J&J "management is determined to reinvigorate the franchise in 2018 expecting growth to increase versus 2017," Wuensch observed.

At Morgan Stanley, analyst David Lewis suggested the problem is that J&J's consumer business "waits for the world to change."

The company's consumer segment performance "remains anemic," as market share gains achieved in 2016 were largely maintained in 2017, "but end-market dynamics around channel shifts and online are hampering broader market growth," Lewis said.

From his perspective, J&J likely could generate more growth by increasing spending on digital sales channels than by turning to acquiring additional consumer health businesses or brands. "We have consistently advocated for Consumer acquisitions, but admit that the environment with Amazon and millennial shifts makes the environment more opaque," the analyst wrote.

The firm's plan has analysts' confidence overall. "As the segment has been a drag on total Johnson & Johnson revenue growth, we expect these initiatives to improve over time," said Wuensch.

J&J isn't the only major pharma with consumer health interests that is being faced with decisions about sales channel and product lineup adjustments. With Amazon.com recently adding Basic Care OTC drugs to its consumer packaged goods lineup and with digital-first firms proliferating across consumer health and other CPG categories, nonprescription drug marketers are making moves to reckon with sales moving to e-commerce and growing numbers of consumers turning away from legacy brands. (Also see "Amazon OTCs Likely A Worry For Retailers, A Remedy For Perrigo" - HBW Insight, 8 Jan, 2018.)

Baby Products Relaunch Planned

J&J's consumer plans, Gorsky said, do not mean turning away from conventional channels for its OTC, personal care and beauty product lineups. "We will concentrate on enhancing our leadership in priority categories by focusing on critical geographies and our iconic mega brands," he said.

But a piece of the shift already has started in the beauty area and will be implemented more widely across the consumer segment. The Vogue hair care portfolio, owned by J&J since 2016, continues operating as a startup by innovating quickly to meet consumer preferences, typically developing and launching products at lower costs than legacy brands. (Also see "J&J Poses Vogue Hair Care Brand As Consumer Product Business Model" - HBW Insight, 9 Jan, 2018.)

Full-Year Results, Guidance

The firm's overall fourth-quarter sales grew 9.4% to $20.2bn, including a 2.1% contribution from exchange rates; its full-year sales total of $76.5bn represents an increase of 6%, with a slight 0.3% currency boost.

For full-year 2017, adjusted operational sales of:

• OTCs were up 2% in the US to $1.7bn and 2.7% internationally to $2.4bn, making for 2.8% growth globally to $4.1bn;
• oral care products were down 4.9% in the US to $616m and 1.85% internationally to $915m for a global slump of 3.2% to $1.5bn;
• beauty products grew 9.4% in the US to $2.3bn and 4.5% internationally to $1.9bn for a global total of $4.2bn, up 7.2%;
• baby products fell in the US 8% to $449m and 3.6% internationally to $1.5bn, resulting in a global 4.7% decline to $1.9bn.

The firm's full-year 2018 guidance is:

• sales of $80.6bn to $81.4bn, reflecting operational growth of 3.5% to 4.5%;
• adjusted earnings – excluding the impact of after-tax intangible amortization expense and special items – of $8 to $8.20 per share on operational growth of 6.8% to 9.6%.

Other elements of J&J's 2018 consumer strategy include driving further growth in the AveenoBaby line as well as relaunching its Johnson's baby franchise with line extensions and new packaging "to meet the purchasing preferences of millennial parents," Gorsky said.

The firm in early 2017 announced it would restage the Johnson's brand to drive a turnaround of its baby care business. (Also see "J&J Highlights Plans For Reinventing Johnson’s Baby, Globalizing Aveeno" - HBW Insight, 24 Feb, 2017.)

Additionally, consumer growth drivers are expected to include innovations in the OTC device space. The CEO called it "broadening the scope of our innovation model with breakthrough global platforms, such as a light-based pain therapy device."

"I am confident about the strategies that our consumer business is putting in place, but also recognize that to drive value and lead in the market, we will have to stay focused, continue to evolve our capabilities and deliver solutions that drive growth," Gorsky said.

Conditions Slowed US OTC Growth

Global sales of OTC drugs during the October-December period grew 2.6% to $1.1bn, driven by 6% international market growth to $699m on Tylenol analgesic and Benadryl allergy remedy sales in the Asia-Pacific region. A 3% dip in the US to $406m weighed on the momentum.

The firm said the US decline largely reflected a difficult comparison due to increased distribution for retailer restocking during the prior-year period, as well as a "minor supply disruption" that Hurricane Maria caused at a Puerto Rico facility, which since has returned to full operations.

In the oral care segment, sales of J&J's Listerine line during the quarter also were down in the US, slipping 4.3% to $156m, but 1.3% growth internationally to $237m limited the global dip to 1% at $393m.

J&J's beauty products business grew 2.4% for the quarter, adjusted operationally, to $1.1bn, with US sales up 2.8% to $596m and international 2% to $514m. US share gains in body and hair care led the way, driven by Maui Moisture and OGX innovations within the Vogue portfolio and e-commerce improvements, partially offset by increased trade promotion spending for Neutrogena products.

Baby care sales were exactly flat in the US at $123m but down internationally 3.2% to $367m for a global total of $490m, down 2.3%, the firm reported.