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Why We Like the Mid-Sized Category in the Fast-Moving Consumer Goods Space

The fast-moving consumer goods (referred to as "FMCG") business is one of our favorite investable domains, as it produces small-ticket, everyday-use and nondurable items, the sales of which are repeatable, predictable and even non-cyclical in most cases.

You may find that this particular group has the most well-recognized, long-lasting brands as well as the most consistently high returns. However, that does not mean less competition (either within the group or from external forces), or a more promising growth prospect for all FMCG players equally. This is the primary reason why we remain highly selective in terms of picking long-term winners and prefer a mid-sized category play in this space.


With the continuous rise of e-commerce and digital marketing, large-sized categories (e.g., toothbrush, shampoo) that may look the most lucrative quickly attract competition among global FMCG conglomerates with intensive investments of capital and resources. At the same time, consumer behavior and consumption patterns evolve over time, posing challenges for large-sized businesses to adapt and stay competitive for the long run.

On the contrary, it could be relatively easy to capture the lion's share in a mid-sized niche, such as water flossers, bleach, or charcoal, and remain dominant there largely thanks to fewer resourceful peers and more agile operations. The niche focus just makes more economic sense from a shareholder perspective.

Take a look at Clorox (NYSE:CLX), the consumer product leader that owns its namesake bleach, as well as Brita water filters, Burt's Bees lip balm and Kingsford charcoal, among many others. As shown below, Clorox delivered superior annual free cash returns on assets and consistently outperformed competitors Unilever (NYSE:UN) (NYSE:UL) and Procter & Gamble (NYSE:PG) for more than a decade now.

Another competitive force at play among consumer brands is the retailer, which increases shelf space and low-cost options of private labels. However, we observe low exposure to private label pressure among mid-sized categories, which is less economically attractive to large-scale companies like Walmart (NYSE:WMT), Costco (NASDAQ:COST) or Amazon (NASDAQ:AMZN). For example, according to the management estimate, only five out of the 15 mid-sized categories at Church & Dwight (NYSE:CHD) have private-label peers. The weighted average private-label market share has stayed at only around 12% since 2013 for the categories where the company operates. The business has quite a few top-ranked products on Amazon, including Waterpik flossers, Arm & Hammer baking soda and Trojan condoms. It earned an above 10% free cash return on assets every year since 2020.

Besides, both Clorox and Church & Dwight have plenty of rooms for further expansion due to many untapped or under-penetrated territories, especially in the emerging markets. Both businesses currently earn the majority of their sales from the U.S., which accounts for 84% and 82% of total sales at Clorox and Church & Dwight, respectively, compared with 42% at Procter & Gamble and 16% at Unilever. Between the two, Church & Dwight seems keener to expand in international markets. Meanwhile, Clorox focuses a bit more on product innovation, citing its concern on lower returns overseas.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Clorox.

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This article first appeared on GuruFocus.