Is Johnson & Johnson an Unsinkable Ship? [UPDATE]

[NOTE: The "Our Perspective" section of this blog has been updated in light of Johnson & Johnson's recent announcement to reorganize its subsidiary unit, McNeil Consumer Healthcare.  Scroll to the bottom of the page to read the latest update]

The Situation

Johnson & Johnson, the major pharmaceutical and healthcare company, returned to the news in 2010 and 2011 with headlines that sounded like they were ripped from the great Tylenol scare of 1982.

These recent articles have focused on the company’s yearlong forced recalls of various brand name products in the J&J portfolio, such as Benadryl, Tylenol, Sudafed, and more. In total, approximately 50 million containers worth of these items were removed from store shelves due to various unsanitary conditions and poor product handling that took place at McNeil Laboratories, a subsidiary of J&J. For nearly the entire 2010 calendar year, recall problems averaged at a rate of once per month, following the company like a shadow throughout the remainder 2010 and into the beginning of 2011.

The Move

Johnson & Johnson has been working tirelessly to combat the negative publicity from this PR maelstrom. As a main plan of attack, the company decided the best course of action was to provide more transparency of its businesses.  Therefore, in July 2010, Johnson & Johnson initiated an action plan to begin an internal review of its subsidiary facility’s sanitation conditions under the watchful eye of the FDA. As of January 2011, McNeil Laboratories completed this internal assessment process with lackluster reviews of the site.  Subpar performance aside, the willingness of J&J to initiate this process in mid-2010 did ease the minds of some consumers into believing the company was taking the proper steps to ensure that this type of problem would not revisit anytime soon.

The Result

Now in early 2011, we have only just begun to witness the repercussions these recalls have had on the company. Some consumers have vowed to no longer use Johnson & Johnson products in the future, citing the brand’s untrustworthiness as the main factor for their decision. And with the recent release of its Q4 earnings, we can see a direct correlation between the company’s financial losses and the impact of the recalls. How these shortcomings will ultimately translate into a positive or negative fluctuation of J&J’s brand value should certainly draw close scrutiny to the company as the full effects of this fiasco continue to unravel over the coming months.

Our Perspective

Product recalls are a problem that seems to plague the medical industry quite frequently, and Johnson & Johnson has certainly had a tough year on that front. The slew of articles comparing J&J to the Titanic in past months has amassed to the point of borderline cliché.  We hate to join in these comparisons, but when the metaphor is apt, what else can you do? Johnson & Johnson has over 92 brands to its name, and with every recall it feels like we are witnessing the company’s ship steer into one iceberg after another. But while many companies tend to recoup from your average recall – including Johnson & Johnson at certain points in the company’s history – this does not look to be one of those times.

Has the J&J name suffered irreparable damage in the wake of its latest PR disaster? Some argue yes, but we remain on the fence. Due to J&J’s particular brand strategy, the harm done to the parent brand has really only dented its value, rather than puncturing a gaping hole in the company hull. After all, how many people could list every product under the J&J umbrella? The fact is, as many people are crying foul over these sanitation oversights, the calls for boycotts of Johnson & Johnson products won’t amount to much. And why is that – because J&J is a master of the endorsed brand strategy.

As much as we might support the implementation of a monolithic brand structure for most businesses and the simplification it usually begets, J&J proves that an endorsed brand strategy is not always a bad thing. Johnson & Johnson is one of the foremost recognizable names in the consumer healthcare space. It achieves this recognition despite the parent brand’s dilution across a plethora of subsidiaries and brand-name products. As a result of this structure, troublesome news for one endorsed brand under the J&J umbrella hardly spells disaster for the entire company. It’s the veritable equivalent of kids throwing rocks at a multi-million dollar ocean liner.

Resistant as the company might be to PR damage, this time does feel somewhat different. J&J announced recalls nearly every month in 2010. Rather than stop there, the negative PR train just kept on rolling after it was discovered that the company faced a similar problem a few years ago and tried to hide news of it by hiring people to buy as many of the defective products as they could. What is the company thinking? It tries to quell one issue only to fall face first into another one.  The decision to stop production on a range of products with so many brand loyal consumers is the business equivalent of throwing your consumers into the waiting, open arms of your competitor. It is almost as if J&J does not fear the fallout of its actions because, as history shows us, the company has bounced back from similar PR hiccups in the past.

Could it be that the public has grown to accept product recalls as an inevitable, necessary evil – one bound to plague any company in the medical / pharma space as long as the sector exists? As likely as this sentiment may be, one has to suspect that at some point J&J will announce one recall too many. People are starting to losing faith in the Johnson & Johnson brand, and when the company implements decisions like ceasing the production of a popular product or hiring shoppers to quell news about a recall – whether or not they have a moral justification for doing so – it won’t be long before they push away their brand loyalists for good.

[UPDATE: Amid another recent flurry of product recalls, last week J&J announced that it would be reorganizing its subsidiary unit, McNeil Consumer Healthcare.  Among the changes set to take place are new management for McNeil and J&J's North American operations ceasing to market OTC products, at least for the foreseeable future.  Clearly the company is working in a delicate, yet swift manner to distance itself from McNeil following the heaps of bad press and hurt business J&J has been forced to endure over the last several months at the expense of its manufacturing facility.

Should J&J eventually look to spinoff McNeil, they are now in a prime position to do so.  Not only is Johnson & Johnson stepping out of the ever-growing hazardous shadow of McNeil, but even the US Food and Drug Administration has specifically targeted McNeil for the sanitation oversights at its manufacturing facility, not J&J.  The FDA's recently issued Consent Decree targets McNeil only and not their parent company.  This move gives J&J some much-needed breathing room in order to finally begin a solid effort at rebuilding its brand image with consumers.

As we explained earlier, being an endorsed brand has its benefits and drawbacks.  Here, we clearly see one of those key benefits coming into play.  In order to salvage their brand name, J&J can draw a well-defined line between itself and McNeil.  This gives both the parent company and its business unit a stronger chance at brand image revitalization.  Once that trust returns - however long it takes - expect J&J to welcome McNeil back with open arms.  When it does, the J&J brand will be whole again.]

Timeline

• 1886 – Johnson & Johnson is founded in New Brunswick, NJ
• 1921 – BAND-AID Brand adhesives are invented
• 1932 – When Robert Wood Johnson II takes over the company, he transforms the J&J brand into a “decentralized Family of Companies”
• 1943 – Robert Wood Johnson writes the credo that would become the philosophy of Johnson & Johnson
• 1954 – Johnson & Johnson’s famous NO MORE TEARS baby shampoo enters the market.
• 1959 – Johnson & Johnson acquires McNeil Laboratories and one of the company’s main products, TYLENOL; The drug soon becomes available as an over the counter (OTC) medication one year later
• 1987 – ACUVUE contact lenses are introduced
• 2006 – J&J acquires Pfizer consumer healthcare and, thus, the ownership of major brands like BENADRYL, BENGAY, and LISTERINE.