The 'Amazon Effect' Ensnares Diapers, Detergent

Summary

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WSJ Your Money Briefing

Episode: The 'Amazon Effect' Ensnares Diapers, Detergent
Date: April 27, 2018
Host: J.R. Whalen
Guest: Akane Ohtani, Wall Street Journal Reporter

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Overview

This episode of WSJ’s Your Money Briefing explores the “Amazon Effect”—the significant pressure that Amazon (and retailers like Walmart) exert on consumer goods companies, especially those in the household essentials market. The discussion centers on how behemoths like Procter & Gamble and Kimberly-Clark are grappling with the challenge of maintaining profits and shareholder confidence amid relentless competition and consumer shifts toward online convenience.

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Key Discussion Points & Insights

1. The Amazon Effect: A Pressured Market

• Many consumer-staple giants (e.g., Procter & Gamble, Kimberly-Clark) recently reported uninspiring earnings, surprising Wall Street analysts.
• These companies are unable to raise prices even as costs rise, in large part due to the competitive pricing pressure from Amazon and Walmart’s e-commerce platforms.
  • Quote: “A lot of these companies have actually faced tremendous pressure over the years to keep prices for these core products … low because they're facing increased competition from places like Amazon and Walmart.” — Akane Ohtani [03:27]

2. The Myth of Brand Protection

• Big brands were expected to weather inflation better due to broad consumer loyalty, but this hasn’t materialized.
  • Instead, these companies sometimes have to cut prices on core items, as sales growth disappoints.
  • Quote: “The bet would have been that if you're a household name like Procter and Gamble, maybe you have a little bit more leeway to raise prices… But that hasn't actually been the case.” — Akane Ohtani [03:27]

3. Consumer Shopping Shifts

• Convenience is king: Consumers increasingly choose home delivery for heavy or bulky necessities—even when sticking with trusted brands.
  • Quote: “Even if they do prefer to get the Procter and Gamble brand of diapers, they might not necessarily want to schlep out to the store to get it.” — Akane Ohtani [04:31]

4. Dividends No Longer a Draw

• Staples like P&G and Kimberly-Clark offer high dividend yields (~3%) compared to the S&P 500 average (2.4%), yet stock volatility and business uncertainty are scaring investors away.
  • Quote: “That dividend yield hasn’t been enough, it seems like, to attract investors into the space...” — Akane Ohtani [04:57]

5. Repercussions Beyond Staples (A Broader Market Tale)

• The market preference for fast-growing tech companies (Amazon, Netflix) has led to a sell-off in traditionally stable sectors: consumer staples, telecom, utilities, and real estate.
  • Quote: “Amazon has been incredibly dominant in the overall stock market... investors have really gravitated toward a handful of really fast growing companies that are often slated as technology focused firms like Amazon and Netflix.” — Akane Ohtani [06:46]

6. The Philip Morris Case: Alarming Investors

• Philip Morris, a major consumer brand, triggered alarm with weak earnings, citing not only pricing woes but also secular declines in smoking.
• Efforts to transition to alternatives (e-cigarettes, etc.) haven’t made up for lagging traditional sales; its stock endured its worst single-day drop since going public.
  • Quote: “We actually saw the stock take the biggest one day decline since the company went public in 2008.” — Akane Ohtani [06:36]

7. Investor Outlook: No Clear Recovery

• Despite some hope that increased market volatility could lead to a rotation back into “bond-like” stocks, there’s little optimism that consumer staples or similar sectors will rebound soon.
  • Quote: “It's hard to find people who are optimistic here.” — Akane Ohtani [07:29]

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Memorable Moments & Quotes

• “[These companies] are actually having to cut prices for core products because they're finding that their sales growth is just not coming in.” — Akane Ohtani [03:27]
• “It's probably more than prices. It's the convenience.” — J.R. Whalen [04:20]
• “That dividend yield hasn’t been enough… just because we keep hearing they're really concerned about the long term business prospects.” — Akane Ohtani [04:57]
• “Maybe we see a pickup in volatility and that will push investors out of the high flying tech names and into more of the bond like sectors like your staples and your utilities. But we haven't seen that happen yet.” — Akane Ohtani [07:29]

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Important Segment Timestamps

• Main theme introduction: [02:47]
• Brand earnings surprise & Amazon effect: [02:47]–[03:27]
• Consumer shopping convenience: [04:20]–[04:49]
• Dividends and investor perspective: [04:49]–[05:33]
• Philip Morris example: [05:33]–[06:36]
• Impact on broader market sectors: [06:36]–[07:46]
• Outlook for investors: [07:23]–[07:46]

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Conclusion

This episode paints a clear picture of how even the largest, most familiar brands are vulnerable to persistent price and convenience competition from Amazon and e-commerce. With earnings under pressure, dividend yields failing to comfort investors, and little optimism for a near-term recovery, the “Amazon Effect” appears to be redefining the landscape for consumer staples and beyond.

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Transcript

[Podcast Host]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise

[Akane Ohtani]

your money briefing Money and

[J.R. Whalen]

market stories from the Wall street journal. I'm J.R. whelan in New York. Next time you buy detergent or diapers, you'll be entangled in the Amazon effect. More on that in a moment. First, these Money headlines. A government watchdog group says some US Colleges and universities are inappropriately urging alumni to postpone payments on their student loans, causing their balances to rise while allowing the schools to skirt regulatory oversight. The practice is one reason why some borrowers balances are rising and so few schools are sanctioned for leaving students in excessive debt. The report examines a decades old law that's designed to punish a college if a high share of its students default within three years of graduating or dropping out. Ultimately, if a high rate persists, the school is barred from collecting any federal loan or grant dollars from new students, which is the school's main source of revenue. The emergence of genetics based medicines is pushing the cost of treating certain diseases to new levels, forcing hospitals and health insurers to reckon with how to cover total cost per patient approaching a million dollars. Novartis listed its newly approved cell therapy for cancer at $475,000, while Gilligad Sciences priced its rival drug at $373,000. And the price of the drugs is just the beginning. Hot hospitals and insurers say administering these therapies can add hundreds of thousands of dollars to the tab, including lengthy hospital stays and use of other services and medicines. And the Wall Street Journal Real Estate Bureau reports in tight housing markets where bidding wars are common, buyers who need financing can strengthen their offers by working with a locally based mortgage broker or loan officer. That's the word from real estate agents and lenders. Agents want to work with buyers whose lenders know the local market and have a record of getting deals done. That reassures the listing agent and the seller that a sale will close. This is your Money briefing from the Wall Street Journal. Welcome back, everybody. It's called the Amazon effect. We know it well. The online giant firing harpoons in the form of competitive pricing toward any retail rival in its path. And Wall Street Journal reporter Akane Ohtani joins us to discuss how some of the world's biggest Brands are feeling the heat. So, Akani, what's really significant here is the group of earnings results from some of the biggest names in the consumer stap.

[Podcast Host]

Right?

[Akane Ohtani]

In the last few weeks, we've seen results come in from Procter and Gamble. They produce Pampers diapers, Tide detergent, Gillette razors, Kimberly Clark. They also do diapers. They also do Kleenex tissues, things that everyone has in their house or their office. And then Coca Cola as well, of course, maker of some of the most popular beverages around the world.

[J.R. Whalen]

And it took a lot of analysts by surprise. They thought that increases in inflation would bring investors around to some of these businesses that sell household goods and basic necessities. But those businesses, businesses are reluctant to raise prices in order to stay competitive. And that's keeping their profits in check. And that's the Amazon effect.

[Akane Ohtani]

Right? I mean, a lot of these companies have actually faced tremendous pressure over the years to keep prices for these core products, be they diapers or laundry detergent, low because they're facing increased competition from places like Amazon and Walmart, which really ramped up their E commerce businesses. And so when you're trying to keep your prices low, it really does hamper how much you can inflate your profit margins. The bet would have been that if you're a household name like Procter and Gamble, maybe you have a little bit more leeway to raise prices because everybody knows you. They walk into the supermarket, you're a familiar brand. But that hasn't actually been the case. We've been hearing a lot on these earnings calls from these companies that they're really struggling to raise prices. In some cases, they're actually having to cut prices for core products because they're finding that their sales growth is just not coming in.

[J.R. Whalen]

It's probably more than prices. It's the convenience. I mean, when it comes to laundry detergent and a large box of diapers, why not have the UPS guy do all the legwork and bring it to your house, right?

[Akane Ohtani]

It really does speak to a broader shift in how consumers are shopping. I mean, you know, even if they do prefer to get the Procter and Gamble brand of diapers, they might not necessarily want to schlep out to the store to get it. So it's really sort of putting a lot of pressure on these companies that a lot of investors thought could sort of weather the storm a bit.

[J.R. Whalen]

And these companies, even with them dangling dividends in front of investors, that's not been enough to lure them to jump in and buy shares.

[Akane Ohtani]

Right? That's another sort of surprising aspect of the consumer staples stocks underperformance. They actually offer a pretty hefty dividend yield. So essentially a lot of investors think of them as almost like bond like stocks. You can get an average dividend yield of about 3% if you hold one of these stocks on average, versus just 2.4% for the broader S&P 500. But actually, even though we've seen a lot of volatility in the stock market this year, that dividend yield hasn't been enough, it seems like, to attract investors into the space just because we keep hearing they're really concerned about the long term business prospects.

[J.R. Whalen]

Can you just give us an idea of what the reaction was like and for our listeners also, when Philip Morris earnings came out earlier this month and how that set off alarm bells?

[Akane Ohtani]

Yeah, that was a big one. It's probably one of the biggest companies to start off this stream of sort of negative earnings this season. Philip Morris produces cigarettes. It has the Marlboro line. It's very sort of mainstream for cigarette smokers. And yet when it reported its earnings, it said that it was also having difficulty raising prices for cigarettes and also having trouble responding to the decline in smoking, actually. And to compensate, it's been trying to invest in sort of cigarette alternatives. So E cigarettes and other sort of devices that, you know, it says are sort of a healthier alternative to your traditional cigarette. But the growth there hasn't been enough to offset the slowdown in sales for its traditional core products. And so we actually saw the stock take the biggest one day decline since the company went public in 2008.

[J.R. Whalen]

Wow. And it's not just the shares of consumer staples taking a hit. You point out in your story that telecom, real estate and utility stocks are also down. That seems to be beyond the Amazon effect.

[Akane Ohtani]

Right. It's not like Amazon we think of as being competitors and reaching into the real estate space or your phone plan. But Amazon has been incredibly dominant in the overall stock market. I think it goes back to that investors have really gravitated toward a handful of really fast growing companies that are often slated as technology focused firms like Amazon and Netflix. This year it's been at the expense of these slower growing, more steady businesses in the utility space or the telecom space or of course the consumer staples space.

[J.R. Whalen]

And for the investment community, this is something really to get used to because not a lot of light is being seen at the end of the tunnel.

[Akane Ohtani]

Yeah, it's hard to find people who are optimistic here. I mean, the one sort of thing you hear is maybe we see a pickup in volatility and that will push investors out of the high flying tech names and into more of the bond like sectors like your staples and your utilities. But we haven't seen that happen yet.

[J.R. Whalen]

And a good reason to stay with the Wall Street Journal markets team to that's Wall Street Journal reporter Akane Ohtani joining us here in our studio. Akani, thanks for being with us.

[Akane Ohtani]

Thanks for having me.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Podcast Host]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] WashingtonWise.