The Sum of Its Parts: Consumer Products

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Johnson & Johnson (NYSE: JNJ) is a massive and diversified healthcare focused company. While some competitors have been shedding businesses to focus on only one business segment, JNJ has long benefited from doing multiple things well. One of its foundations is consumer products, a division that has been making investors money for decades.

Success is in the DNA

Johnson & Johnson is grounded in a company “credo,” a document created over 50 years ago that underpins its strategic framework. While the credo speaks to the many obligations the company wishes to live up to, the strategic framework provides a guide for meeting those self imposed obligations.

One key is to be broadly diversified. This, the company believes, “allows us to stay true to Our Credo in the face of an ever-evolving health care environment.” Part of this derives from an ability to work across product categories to benefit customers and to react quickly to fast changing trends.

Supporting diversification is a focus on long-term success, not immediate performance. This includes both supporting current brands, many of which the company has grown into leading market positions, but also investing in the future. Spending billions on research and development, the company claims that two-thirds of its growth over the past decade has been created from internal efforts. That's a powerful tool for long-term growth.

In addition, the company uses a decentralized management structure, allowing “those closest to patients and customers” to make critical decisions. While there is a hierarchy at every company, JNJ's businesses are allowed a fair amount of autonomy. Empowering employees in this way can be a highly effective way to improve performance. JNJ's corporate structure speaks to its decentralized nature, since it is actually a holding company, with over 250 operating companies underneath the Johnson & Johnson umbrella.

At the end of the day, the Dow-30 component prides itself on providing products across the “full continuum of care—prevention, diagnosis and treatment.” With facilities in 60 countries and products being sold in over 200, Johnson & Johnson claims to “touch more than one billion people around the world every day.” That's impressive and is a testament to this more than 100 year old company's long term success.

Consumer Products

The company operates in three areas, pharmaceuticals, medical devices, and consumer products. The last of the three is the smallest division of the company, and is further broken down into groups focusing on over the counter Pharmaceuticals and Nutritionals, Skin Care, Baby Care, Women’s Health, Oral Care, and Wound Care. Wound Care, interestingly, is one key area behind the company's success—Band-Aids. While these are commonplace today, when invented, they were nothing short of revolutionary.

Some of the Consumer Products group's brands include: Johnson's baby products, Aveeno, Clean & Clear, Neutrogena, Listerine, Band-Aids, Neosporin, Carefree, Stayfree, Splenda, Sudafed, Motrin, Zyrtec, Pepcid, and, of course, Tylenol. This is an impressive lineup of products and it doesn't nearly list all of what the company sells.

Investing in the Future

Although this business has been a laggard over the last few years, it is still highly profitable and accounts for just under $14.5 billion of the top line. While the company spends far more on R&D in the pharmaceutical and medical device areas, it still spent over $650 million for R&D in the consumer area in 2011.

Some of the new products from this group include Neutrogena Naturals, which hits on the natural ingredient trend, Aveeno Smart Essentials, Nicorette Quickmist, and Listerine Zero. Taking great brands and extending them is a hallmark of JNJ's success in this division. Sometimes, however, R&D hits on things that are so simple you wonder why nobody thought of them before. For example, in 2011 the Neutrogena brand brought out a spray sunscreen that can be applied to wet skin. It isn't hard to understand why it quickly became a top seller.

Problems in Paradise

Recent over the counter recall issues have been a drag on the company's results in this area, notably a problem at McNeil Consumer Healthcare’s Fort Washington, Pennsylvania facility. The suspension of production at this facility reduced sales and increased costs. Not a good combination, however, Johnson & Johnson has the financial strength, and margins, to handle such events. The company has worked through problems like this before, notably the early 1980s poisoning scare with Tylenol, and seemingly handled it as well as possible. This issue should be monitored, however.

Portfolio Management

The company portfolio of products isn't static. It buys and sells brands on a fairly regular basis. For example, in 2011, it sold its Monistat line of products. One off transactions are notable, but at times the company can make large transactions, too. For example, some of the company's big consumer brands arrived with the $16.6 billion deal, inked in 2006, to buy Pfizer's (NYSE: PFE) consumer product division.

Interestingly, Pfizer is a notable competitor to JNJ on the pharmaceutical side of the business. However, the two companies are going down different paths. While Johnson & Johnson believes diversification is a long-term benefit, Pfizer has been trimming down to focus only on its drug business. It recently spun off part of its animal health business, too, in an effort to fine tune its business focus on human drugs. While on some level, the higher profits available from the pharmaceutical business suggest that this is a wise business decision, Pfizer has slowly but surely removed cash cow businesses that could help to support its research and development efforts in the drug space.

Overseas Expansion

One of the key drivers for Johnson & Johnson is expansion into foreign markets, particularly emerging economies. This isn't unique to the company by any means, but its stable of well-known and highly respected brands gives it a leg up on competition. That said, it is using its size to gain share through acquisitions abroad, as well. The 2011 purchase of a Russian cough and cold product line is an example. Taking a dual approach, with local and world-wide brands, is a solid plan.

It's noteworthy, however, that other companies with leading brands have fumbled in emerging markets. Notably, Procter & Gamble (NYSE: PG) made a highly publicized push into such markets without much success. The company's focus on the higher end of the product categories in which it competes was one of the notable weaknesses sited by industry watchers. The company has reworked its plan for emerging markets, but is still pushing generally forward on its global growth plans.

Not being in these markets, however, isn't much of an option for a consumer products company. While P&G is financially strong enough to get through this problem period, it does stand as a warning that just being in an emerging market doesn't guarantee success. Johnson & Johnson's products in the consumer space, which span a vast array of health related categories, and decentralized structure should benefit the company as it continues to push into such markets. Indeed, paying more to buy a well known medical ointment is different than paying more to buy laundry detergent.

Small but Important

Johnson & Johnson's consumer business is its smallest division. It is probably the least exciting, too. However, it provides a solid foundation on which the company has built its pharmaceutical and medical device arms. While results have been relatively weak here, and the division likely won't ever be considered a growth engine, it shouldn't be seen as an insignificant part of the company's diversified structure.

Yours,

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Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Procter & Gamble. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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