But the industry's increased reliance on premium-priced products could make it more vulnerable to consumer belt-tightening in the next recession. Heavy debt loads make some companies vulnerable to a credit crunch.
Regardless of what direction the economy goes, however, package-goods companies are likely to continue their migration from high-priced mass media to more targeted advertising and promotion.
During the longest economic expansion in U.S. history, package-goods companies have moved to capitalize on prosperity with new premium versions of such everyday items as razors, diapers and laundry and dishwasher detergents. Procter & Gamble Co., for one, plans for premium-priced products to account for one to two percentage points of sales growth annually.
Some consumers may trade down to lower-priced products in a recession, said Andrew Shore, analyst with Deutsche Banc Alex. Brown, but he doesn't expect belt-tightening to have a major effect.
Should recession come, package-goods companies probably are better positioned than they were 10 years ago, said William Steele, analyst with Banc of America Securities.
"In the 1987-89 period, these companies had just raised prices pretty aggressively," he said. "I think the price-value relationship is better now." Marketers have had a harder time raising prices since then, and price gaps between brands and private-label products have narrowed, he said.
Package-goods companies are, on average, more leveraged than they were a decade ago-largely because of acquisitions or taking on debt to repurchase their stock, which hasn't matched the torrid pace of tech companies in recent years, Mr. Steele said. Last year's tech stock debacle has helped the industry in one respect as investors have shifted money into more stable areas such as package goods.
Still, some companies, such as Dial Corp. and Playtex Products Co., lately have had to renegotiate debt terms because they failed to meet financial covenants. A downturn could increase pressure for smaller players to merge or be acquired, Mr. Steele said.
Industry heavyweights P&G and Colgate-Palmolive Co. moved in mid-December to reassure Wall Street that they would meet earnings estimates this quarter. Reuben Mark, chairman-CEO of Colgate, went so far as to promise volume increases in all divisions and an increase in ad spending.
Economic factors did figure into revisions in sales and earnings forecasts for Clorox Co., which in December said earnings for its fiscal year ending June 30 would be flat-10% below earlier forecasts-and that sales would grow only in the "low single-digit range."
"To be clear, our issues go beyond the overall U.S. economy, but there's also no question that this is an important factor, especially when you consider our efforts to trade consumers up to more premium, value-added products," Chairman-CEO Craig Sullivan told analysts.
Outside of plastic bags and wraps, a category where Clorox is doing poorly but growth has remained fairly strong, retail sales were down 2% in November, the worst performance in those categories in more than seven years, Mr. Sullivan said.
Clorox said ad spending would be flat for the first six months of 2001, down from previous projections of growth in line with sales.
Analysts were skeptical that the economy was hurting Clorox, noting that peers P&G and Colgate have stood by their quarterly and annual earnings forecasts.
But Clorox was followed by two more package-goods companies disclosing disappointing numbers. Gillette Co. announced a restructuring involving 2,700 layoffs as it projected sales would be off by "low single digits" in the fourth quarter and "mid single digits" in the first quarter.
Rayovac Corp. last month projected its sales would fall 12%-13% in the quarter ended Dec. 31, and said retail battery sales should fall 10%-12% because of tough comparisons to late 1999, when consumers stocked up in anticipation of Y2K.
Rayovac Chairman-CEO David Jones said retailer inventory reductions also have taken a toll. Wal-Mart Stores, in particular, has permanently cut battery inventory levels by 25%-33%, he said.
Neither Gillette nor Rayovac signaled ad cutbacks, but spending is a likely casualty if problems continue, said Mr. Steele. "The first thing to go when a company is under pressure is the advertising budget," Mr. Steele said.
Good times or bad, one trend is clear: Companies in the package-goods industry are increasing media spending more slowly than others. Package-goods companies accounted for about 45% of measured media spending in the mid-1980s, compared with 19% in 1999, according to Jim Dougherty, analyst with Prudential Securities.
Even if other industries pull out of mass media and prices decline, don't expect package-goods companies to rush back in, Mr. Shore said. Media fragmentation has rendered mass media simply less practical for package-goods companies.
"I think the party is over," Mr. Shore said, "for advertising agencies that don't have the insight and infrastructure to truly recognize that conventional mass marketing is dead."