The companies under the Consumer Staples sector sell relatively
low-priced products that consumers use frequently in their daily
lives, including food, beverages and products for personal hygiene
or household cleaning. The purchase of these necessities is
generally stable over time, irrespective of the spending patterns
or whether the economy is expanding or contracting.
This is a defensive sector, as the outlook for its companies
would not change much with the economic cycle. We have seen that
lately, as these companies have been playing their role despite
concerns about the prolonged weak U.S. economy, the debt crisis in
Europe and the slowdown in China.
Consumer staples stocks have outperformed the S&P 500 as a
whole in the year-to-date and trailing 52-week periods, up +9% and
+18.4% in the YTD and trailing 52-week periods, compared to gains
of +6.4% and +10.8% for the S&P 500, respectively.
Many consumer companies are expanding focus to emerging markets,
while many are resorting to cost saving initiatives to survive
input cost pressures. The companies are also expanding their
portfolios through product innovations and acquisitions.
Expansion in Emerging Markets
With market saturation, low disposable income of consumers and
increased competitive activity in developed markets, many companies
are diverting their resources to explore emerging markets. Though
) are witnessing improving volume trends in North America, driven
by increased marketing and advertising spending, we believe that
the markets of North America are relatively mature compared to
their untapped developing counterparts such as Brazil, India,
China, Mexico, Russia and Southeast Asia, which exhibit positive
consumer spending growth.
Moreover, we have seen that product demand has remained stable
for companies that are more exposed to fast-growing emerging
markets in comparison to the slow-growing and saturated developed
markets. Demand for convenient and branded packaged food is growing
in the developing countries, as middle-class consumers shift to
urban living. Thus, the rising pool of middle class consumers in
emerging markets represents a huge opportunity for branded consumer
However, growth in the emerging markets has been largely hurt by
currency headwinds for many consumer staples companies due to a
stronger dollar, which reduces the value of outside-U.S. sales. But
with improving standard of living in developing countries, the
companies are now focusing on increasing pricing to derive profits,
which was earlier difficult.
Beverage companies such as Coca-Cola and PepsiCo have invested
heavily in the emerging markets of India, Russia and China,
encouraged by the high-growth nature of these countries. However,
the slowdown in Chinese economy has hurt the return on investments
Coca-Cola has already invested over $2 billion in India in the
last 18 years and has been witnessing double-digit business growth
in India aided by its top brands like Thumbs Up, Sprite and Maaza.
Over the next eight years, Coca-Cola, along with its bottling
partners, will make a further investment of $3 billion to build
consumer marketing, infrastructure and brands in India.
Coca-Cola also has plans to invest $4 billion in China over
three years starting 2012, invest $3 billion in Russia between 2012
and 2016, $8 billion in Brazil through 2016 and $300 million in
Vietnam between 2012 and 2015.
PepsiCo has invested $700 million in India since 2008. It also
plans another $500 million investment over the next three years.
Further, with the acquisition of Wimm-Bill-Dann in Sep 2011,
PepsiCo took control of the largest food-and-beverage business in
Russia, bringing the company closer to its strategic goal of
building a $30 billion nutrition business by 2020.
PepsiCo's strategic alliance with leading Chinese food and
beverage maker Tingyi Holding Corp. has created the number one
liquid refreshment beverage (LRB) manufacturing network in China,
and is expected to help PepsiCo to revamp its Chinese business.
H.J. Heinz Company
) has a significant presence in India, China and Indonesia. Heinz
products, especially ketchup, sauces and infant nutrition goods,
are showing healthy growth in all of these markets due to brisk
demand. Management expects its businesses in China, Indonesia,
Brazil and Eastern Europe to each generate around $1 billion in
sales over the next 3-5 years, with emerging markets as a whole to
double its sales to around $5 billion.
Recently, Heinz agreed to be acquired by an investment group led
by Warren Buffett's
) and private Brazilian investment firm 3G Capital for $28 billion,
) is also gaining popularity with consumers across China and the
Asia-Pacific region, which has grown 33% (in terms of revenue)
since 2010 and is expected to achieve meaningful business growth
over the next five years.
Starbucks has already entered the lucrative Indian market with
its first three store openings in Mumbai in Oct 2012 and a fourth
store in Delhi early this month. The company has also entered the
Vietnam market with its first store in Ho Chi Minh City on Feb
Cost Reduction Initiatives
Most consumer staples companies are also undertaking several
strategic initiatives like the divestiture of low-margin brands,
improvement of the supply chain and implementation of
cost-reduction initiatives, in an effort to reduce the effects of
inflating commodity costs. Though cost inflation has subdued,
rising commodity and other input costs remain a drag on margins of
most of the companies in this sector, despite top-line growth.
Coca-Cola is undertaking various productivity initiatives to
streamline its cost structure and boost profitability. With the
launch of a four-year productivity and reinvestment program in Feb
2012, the company plans to optimize its global supply chain,
improve effectiveness of global marketing and innovation, achieve
operating expense leverage, standardize information systems and
integrate North American bottling and distribution operations
). The program is expected to generate incremental annualized
savings of $550 to $600 million over the four-year period ending in
PepsiCo also announced a restructuring program in Feb 2012,
which is expected to result in $3 billion productivity savings by
2015. The program will include leveraging new technologies and
processes across operations, consolidating facilities, simplifying
organization structures, lowering layers of management, workforce
reduction of 3% and many more efforts.
) cost reduction program of $1 billion is expected to deliver $400
million in annualized cost savings by the end of 2013. The company
also reduced its workforce by 700 employees in Feb 2012 as a part
of its restructuring program to reduce cost.
Another tobacco seller,
), also remains focused to reduce cost. The company is expected to
save about $70 million annually by 2015 associated with workforce
restructuring done in the year 2012.
Philip Morris International
) has also announced a one-year gross productivity and cost savings
target for 2013 of approximately $300 million. Last year, the
company managed to exceed its one-year gross productivity and cost
savings target of $300 million primarily through the
rationalization of tobacco blends and product specifications and
other manufacturing and procurement initiatives.
Consumer products giant,
) is undertaking a cost savings program, FORCE (Focused on Reducing
Costs Everywhere), which is benefiting the company through the
continued rollout of lean manufacturing and supply chain practices
and the formation of a global procurement organization. These
initiatives generated cost savings of about $240 million in 2009,
about $370 million in 2010, about $265 million in 2011 and $295
million in 2012. Kimberly-Clark expects $250-$300 million of cost
savings in 2013.
Kimberly-Clark's pulp and tissue restructuring program focuses
on improving underlying profitability and return on invested
capital of its consumer tissue and K-C Professional businesses,
which have been facing declining profits for many years. Through
this program, Kimberly-Clark anticipates operating profit to
increase by at least $75 million in 2013 and at least $100 million
Consumer product companies need to innovate and upgrade their
brands to create differentiated value propositions for their
customers in order to remain successful.
PepsiCo's low calorie cola -- Pepsi Next, launched in July 2012
-- was successful. The company also utilizes new packaging to shift
consumers to more profitable purchases. Its 24-ounce can for
regular and diet Dew is generating good customer response. The
company's recent innovations at the premium end include Quaker Real
Medleys hot cereals, Stacy's Gingerbread and Stacy's Cocoa and
Lay's Stax potato chips. The new innovations are expected to boost
revenue growth and also enable increased price realization in the
Starbucks has also introduced new products to excite customers.
With the launch of its premium single cup domestic coffee machine
Verismo in Sept 2012, the company expects to significantly expand
Starbucks' presence in the fast growing premium single cup coffee
segment. Apart from coffee, the company opened four Evolution Fresh
juice stores across the U.S., in order to meet the needs of the
increasingly health conscious Americans. In March 2012, the company
launched a new energy drink, Starbucks Refreshers, thus marking its
entry into the $8 billion energy drink market.
Starbucks is also diversifying with the La Boulange bakery
acquisition to popularize the French bakery experience in the U.S.
markets. In addition, with the acquisition of Teavana in late Dec
2012, the company aims to capture further share of the $40 billion
tea category. The company has also enhanced its core food offering,
which has jumped double digits in each of the last two fiscal
The tobacco sector has also been active in innovation with the
development of new products which reduce the harm caused by
tobacco. Reynolds American's Zonnic nicotine replacement therapy
gum and the Vuse e-cigarette offer potential for long-term
commercial success. Zonnic gum saves smokers from the harmful
effects of tobacco, while Vuse e-cigarette delivers vapor and taste
and has potential for long-term growth.
Despite macroeconomic headwinds, some of these companies have
been able to deliver impressive results and have the potential to
grow in the upcoming quarters. The improved business backdrop is
showing up in positive earnings momentum for consumer staples
stocks, resulting in a Zacks Rank #1 (Strong Buy) for
Green Mountain Coffee Roasters
Some attractive Zacks Rank #2 (Buy) stocks worth considering are
Procter & Gamble
Coffee maker Green Mountain's performance turned around in the
fourth quarter of 2012 (ending September) from past few weak
quarterly results, driven by the success of Keurig Single Cup
Brewers, single serve packs (K-cups), and Keurig-related products.
The company's margins are improving with favorable green coffee
The company is focusing on its products through innovations and
upgrading its Keurig brewing system to attract more customers.
Green Mountain has raised its earnings guidance twice for fiscal
2013 in the last two quarters. Green Mountain appears to be well
positioned for growth in the future quarters.
Stabilizing coffee costs also improved the margins at Smucker's.
The company has witnessed year-over-year earnings growth in all the
three quarters of fiscal 2013 (ending April), driven by company's
strong portfolio of brands, focus on innovations and promotional
offerings. Moreover, strategic acquisitions have broadened
Smucker's presence across emerging markets and added popular brands
to its portfolio. The company has increased its fiscal 2013
earnings guidance in the last two quarters, reflecting the
company's potential to drive profits in the coming quarters.
Like Green Mountain, the consumer products giant P&G also
had a tough fiscal 2012 (ending June). However, the company has
implemented some meaningful changes to re-accelerate its top and
bottom-line growth to keep pace with its peers, which is reflected
in its two back-to-back solid quarterly results in fiscal 2013. In
addition, the company's cost savings and productivity improvement
initiatives have improved margins.
The world's largest cereal maker, Kellogg, has delivered solid
growth in earnings in all the four quarters of 2012, driven by
robust organic sales growth performance. Despite its sluggish
cereal business, challenges in Europe and rising input costs, we
are optimistic about Kellogg's solid brand positioning, its
geographic diversity and cost-saving efforts, especially its
supply-chain initiatives. Moreover, we are encouraged by the growth
potential of the Pringles snack business, which was acquired in
June last year from P&G.
Meat products processor Tyson has been witnessing strong
momentum in the last several quarters backed by its bright prospect
in beef and chicken business and consistent innovation towards low
fat meat production. Rising demand for chicken coupled with
positive pricing is helping the company reap wider margins. In
addition, Tyson is working on growing its prepared foods,
international poultry and value-added poultry businesses by
producing high quality foods by using innovative and cost-effective
Tyson's close peer Smithfield also has bright prospects ahead as
the company expects hog prices and the impact of grain costs to
ease in the upcoming quarters. Smithfield's results have been
suffering since last two or three years as a result of higher grain
costs and oversupply of hogs. However the company recovered nicely
in fiscal 2011 (ending April) and posted record revenues in fiscal
2012, backed by the company's brand building investments and
innovation, restructuring initiatives, improved packaging and
production of healthier choices for consumers using lean protein
and natural ingredients.
Smithfield is also increasing its focus on consumer convenience
by introducing more ready-to-eat foods. Increased export volume of
fresh pork is also encouraging and we expect strong demand of fresh
pork in the upcoming quarters.
Hershey has solid growth potential driven by strong brand
positioning, strategic marketing investments in core brands,
disciplined innovation, lower cost inflation, improved pricing and
volumes and strong productivity. In fact, Hershey has outperformed
and delivered positive surprises in three out of the four quarters
of 2012 and has raised its guidance thrice in 2012, highlighting
its attractive earnings potential. The outlook for 2013 is also
encouraging, especially the expectation of no cost inflation this
The macro-economic environment in the U.S. has remained
challenging and uncertain for quite some time now. The European
economy has also remained unfavorable. The pace of economic
recovery is relatively slow in U.S., whereas the consumer
environment in U.S. is recovering at a mild pace. In Europe, the
economic conditions are uncertain and China is also seeing some
slowdown. These global economic pressures are expected to continue
in 2013 and severely impact the companies in the coming
For the global brewer
), the acquisition of StarBev in Jun 2012 opened opportunities in
the attractive beer market in Central Europe. However, unfavorable
economic conditions in Europe will offset the gains from the
acquisition. Moreover, the company has been facing continued
decline in volumes in three major markets of U.S., U.K. and Canada
in the last three years.
Molson Coors has also spent on marketing and advertising for its
Miller Lite and the Molson Brands but this has not led to
consistent growth in volumes. The increasing raw material costs of
the company and the currency headwinds hurting the top line also
remains a concern.
We believe that tough global macroeconomic conditions and
declining volume trends will continue to drag the company's
performance in the upcoming quarters. Currently, the stock carries
a Zacks Rank #3 (Hold).
), which focuses on the global food and snacks business of the old
Kraft Foods, missed on both the top and bottom lines in fourth
quarter 2012 mainly due to currency headwinds. In addition, the gum
and candy business has been suffering for the last few quarters.
Management does not expect the gum business to stabilize in the
coming quarters. The stock carries a Zacks Rank #3 (Hold).
Dr Pepper Snapple Group
) has had a dismal 2012, posting a negative surprise in two of the
four quarters of 2012. The company missed the Zacks Consensus
Estimates for both revenue and earnings while just managing to meet
company expectations for the year.
Moreover, the company's weak volume growth, higher cost pressure
and lack of exposure outside the U.S. is concerning. The company
has been facing persistent weakness in the overall carbonated soft
drinks' (CSD) volumes in North America since the past few months,
which also remains a significant overhang.
Changing consumer preferences, increasing health consciousness and
growing regulatory pressures are affecting beverage sales. We
therefore prefer to avoid the stock for the next few quarters. The
stock carries a Zacks Rank #4 (Sell).
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HERSHEY CO/THE (HSY): Free Stock Analysis
KELLOGG CO (K): Free Stock Analysis Report
KIMBERLY CLARK (KMB): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
MONDELEZ INTL (MDLZ): Free Stock Analysis
ALTRIA GROUP (MO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
PROCTER & GAMBL (PG): Free Stock Analysis
PHILIP MORRIS (PM): Free Stock Analysis Report
REYNOLDS AMER (RAI): Free Stock Analysis Report
STARBUCKS CORP (SBUX): Free Stock Analysis
SMITHFIELD FOOD (SFD): Free Stock Analysis
SMUCKER JM (SJM): Free Stock Analysis Report
MOLSON COORS-B (TAP): Free Stock Analysis
TYSON FOODS A (TSN): Free Stock Analysis Report
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