Coke? Oreos? That's so last year By Jon Markman

Coke? Oreos? That's so last year
In this recession economy, Americans are choosing cheap and generic over brand-name goods. That's bad news for stocks you may believe are solid and safe.

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By Jon Markman
MSN Money
In prosperous times, with jobs booming and wages rising, shoppers strolling down the aisles of their local supermarkets don't think twice about grabbing a pack of Bounty brand quilted paper napkins at $4.98 for 200. But in the current mess, are you kidding me? Grocers report that customers in record numbers are going for the generic house brand, priced at up to a dollar less.

Multiply this scene by a few hundred million, and you can see why consumer products manufacturers are suffering more in the recent slump than they have at any other time in the past several decades. Procter & Gamble (PG, news, msgs), the maker of dozens of the nation's leading branded goods, such as Bounty, is seeing some of the steepest sales declines in its history, and efforts to stem the tide by boosting advertising and cutting prices are having only limited effect.

The troubles faced by Procter & Gamble, Oreo-maker Kraft (KFT, news, msgs) and others are emblematic of a radical shift in the habits of consumers worldwide, as cheap has become chic. Much of the change is necessary, as many families have less money to spend, but a mood shift has mysteriously taken hold through both the mass media and new social networking, leading even well-off consumers to cut conspicuous consumption of everything from branded paper towels to rockin' cars.

Safe no more
The Puritanical roots of middle America emerge at times like these -- causing us to huff that it's about time -- yet it may be more than a little callous to just brush off the business plans of hundreds of the nations' most prosperous companies. And at any rate, institutional investors are accomplishing that brush-off all by themselves without waiting for the announcement of first-quarter results. That is something private investors need to keep in mind if they plan to hold onto these shares -- many of which have been handed down from generation to generation in middle-class families with strict instructions from grandpa: Never sell.

In the past six months, Procter & Gamble shares, which were largely oblivious to the pain suffered by the rest of the stock market until the autumn, have fallen like a stack of paper towels sideswiped by a 5-year-old, slipping from a peak of $72.50 to just a hair over $46. Much of the decline has come very recently, as the stock -- previously a bomb shelter for cautious investors -- has plunged 24% since New Year's Day.

Many of its fellow consumer goods manufacturers, whose sales are typically so steady that they are known as "staples" to investors, have also tumbled this year in contravention of most conventional wisdom. Paper goods maker Kimberly-Clark (KMB, news, msgs), maker of the Kleenex and Scott brands, has seen shares plunge 28% since October; Coca-Cola (KO, news, msgs) is down 26%, Pepsico (PEP, news, msgs), maker of Frito-Lay snacks as well as its eponymous cola, is down 32%; and Johnson & Johnson (JNJ, news, msgs), maker of Band-Aids, is down 30%, with much of that coming in the past week. Ditto for the branded food makers that were also once believed to be immune to downturns. Cereal kings General Mills (GIS, news, msgs) and Kellogg (K, news, msgs) are down 23% and 30% since October, while HJ Heinz (HNZ, news, msgs) is off 36%.

Collateral damage from this new parade of parsimony is not limited to the manufacturers. Costco Wholesale (COST, news, msgs) reported Wednesday that its fiscal second-quarter profit fell 27%, due in part to a decline in nonfood sales. And Berkshire Hathaway (BRK.A, news, msgs), the investment vehicle of Warren Buffett, reported this week that earnings had been crushed this quarter in part by the decline in the value of its huge investments in brand giants Coca-Cola and General Electric (GE, news, msgs).

Video on MSN Money
Brand names vs. store brands

One family discovers how to save up to $3,000 by buying generic foods over brand names, with, Today show correspondent Janice Lieberman and CNBC's Carmen Wong Ulrich.
Why is this happening so fast?
An important side effect of troubled times occurs when consumers start wondering what truly makes them happy and discover that material things may not be near the top. If the answer doesn't make them suicidal, then consumers typically realize that contentment is not all about spending an extra dollar for the status of branded paper napkins that offer a little extra quilting. In similar eras in the past, it's turned out that consumers downshift into lower consumption modes quite rapidly and with remarkable ease, and even start to pride themselves on developing an upside-down view of luxury.

In this new world, says the Amsterdam research firm Trendwatching in a recent report, luxury becomes more aligned with scarcity than with mere expensiveness, especially when consumers start to look for ways to be unique. A new meme of Bohemianism may emerge too, as the concept of frugality is mixed with rebellion against the previous system of consumption. A longing for all things local, ecologically friendly, empathetic and eccentric may also emerge as people seek opportunities both to make themselves happy without products that were formerly emblematic and to justify their new anti-establishment decision making.

Continued: For Bounty, it's mutiny


For Bounty, it's mutiny
While the likes of P&G and Starbucks (SBUX, news, msgs) may suffer when thrift overtakes ostentation, the new world will have many unexpected winners as well. One will be smaller manufacturers like Bill Molt, who runs the family-owned Pacific Paper in Tacoma, Wash.

Pacific Paper is known in the industry as a "converter"; it buys 3-ton rolls of paper and puts them on a machine that embosses, perforates and plastic-wraps them for use as paper towels or napkins that can be sold to stores as generic national-brand equivalents. In the Pacific Northwest, the largest house brand at groceries is Molt's Western Family, and his napkins sell for as much as 25% less than Bounty or Scott brands.

"Bounty is a great product, but people are getting smarter with their money and they're saying if they can get a product that's just as good but they don't have to pay for all the marketing, then why not," Molt told me in a phone interview. "The big companies can drop prices or do extra advertising for a little while to try to knock us down, but in the long run they can't touch us because of their cost structure." He's looking to expand this year, as business looks strong.

When you read between the lines of the outlooks for Molt, Costco and P&G, you can see the first threads of a new fabric of American life being woven, one day and one purchase at a time. At a time when jobs are being lost in the United States at a clip of around 600,000 per month and the income of even those with jobs is falling half a percent a month, the end game now is about a realignment of the consumer, bank and national balance sheets to levels that will allow families, executives and policymakers to pay off debts, rebuild savings and live within their means on less credit.

Although the shares of Kimberly-Clark, Kraft and Starbucks will stabilize before too much longer, they are very unlikely to recover much of their lost ground as the world finds a new equilibrium next year at around 1.5% annualized GDP growth over the next half-decade, which is less than half the growth rate witnessed from 2002-07.

This environment may be favorable to low-frills retailers such as Family Dollar Stores (FDO, news, msgs) and McDonald's (MCD, news, msgs), and defiant innovators like Apple (AAPL, news, msgs) and Amazon.com (AMZN, news, msgs), but not very many others, as margins are stripped to the bone and marketing costs pare back the value of marketing gains.

As an investor, I'll take one black coffee with a generic napkin in a plain paper box to go. I'll stick with my view that stocks should still be avoided, as the economy will fall over the next nine months at least and share values will follow. But if you must own equities, stick with the companies like McDonald's, Family Dollar, Amazon, Apple and Hershey that have shown the greatest agility in managing the most unpredictable part of the cycle, which is behind us. While they won't rise the most coming out of the bottom -- that'll be the province of the most damaged stocks -- they will be the least aggravating at the many twists and turns that still lie ahead.

At the time of publication, Jon Markman did not own or control shares of companies mentioned in this article.