The operating backdrop for the consumer staples sector was more
or less weak in 2013, as it was in 2012 due to a difficult consumer
spending environment. Middle-class consumers have struggled to cope
with rising gas prices, delayed income tax refunds and higher
payroll taxes. In addition, difficult operating conditions in
Europe and a slowdown in some Asian countries, like China, also
weighed on the sector's outlook. Consumer staple stocks have also
underperformed the S&P 500 as a whole in the past one year.
Unlike discretionary items, demand for consumer staples remain
relatively stable across the economic cycle. But consumer staple
companies are witnessing sluggish growth in the developed markets,
due to market saturation, which along with consumers' stagnant
disposable incomes and increased competitive activities have added
to the companies' woes.
Thus, many of the companies have been looking to the faster growing
emerging markets. That's a good strategy in the long run, but the
near-term outlook for many of these markets remains uncertain. The
ongoing emerging currency turmoil is particularly problematic, as a
stronger dollar reduces the value of outside-U.S. sales and in turn
This uncertain macro environment is a big reason why many
companies in the sector have lowered guidance for 2014. With
top-line growth hard to come by, many companies have been focused
on cost controls, acquisitions and share buybacks.
In a crowded and competitive space, consumer product companies need
to regularly innovate and upgrade their brands to create
differentiated value propositions for their customers and to remain
For the consumer product giant
Procter & Gamble
), innovation has been a strong tradition and the company has
introduced many new products in most of its categories. While
Molson Coors Brewing Co
) plans to bring new variety in brands like Coors Light, Carling,
Staropramen and Blue Moon to drive top line growth, cereal makers
General Mills Inc
) plans to roll out more nutritious products in 2014. Consumer
) innovation would include diaper and feminine care upgrades in
Brazil, China and Russia. The company also has an innovative
pipeline in North America that includes activity on Huggies diapers
and baby wipes, the GoodNites youth pants, Depend briefs and Viva
Shifting Focus on Health and Wellness and 'Good-for-You'
The companies are shifting focus to make healthier and nutritious
products in view of increasing health consciousness and rising
obesity concerns and growing regulatory pressures.
Beverage companies like
) are expanding their portfolio of non-carbonated drinks due to the
increasing awareness about calorie intake and nutrition among
consumers and declining demand for carbonated beverages. Though
PepsiCo is not largely dependent on its underperforming and
struggling carbonated beverages category, the company plans to
introduce naturally sweetened, lower-calorie sodas like Pepsi Next
to help revive sales in 2014. Beverage companies like
Dr Pepper Snapple Group Inc.
) and Coca-Cola are also working on the same lines to boost sales.
PepsiCo is increasing its focus on healthier snacks, lower calorie
beverages and non-carbonated beverages, which include Gatorade and
Aquafina. Its rival, Coca-Cola is also expanding its portfolio of
non-carbonated drinks, which include Powerade sports drinks,
Smartwater brand and Minute Maid fruit juices, whereas Coca-Cola's
Coca-Cola Enterprises Inc.
) is also slowly shifting its product mix from colas to energy
drinks and other non-carbonated beverages.
) is looking beyond its traditional coffee business and making an
effort to bring more nutritional and healthy products to its menu.
These include Evolution Fresh juices, Starbucks Refreshers energy
drinks, wholesome Salad Bowls and Parfait Greek yogurt products.
Food and beverage companies are not the only ones trying to shift
to healthier options. Tobacco companies are also adapting to the
evolving needs of consumers and have resorted to less harmful
alternatives like electronic cigarettes (e-cigarettes).
In the electronic cigarette industry, cigarette maker
) owned a leading position in the U.S. after it acquired
e-cigarette brand blu e-Cigs in Apr 2012. Later with the
acquisition of U.K.'s e-cigarette brand SKYCIG on Oct 3, the
company strengthened its position in the wide electronic cigarette
market. Nu Mark, the subsidiary of
Altria Group Inc
) launched its e-cigarette brand -- MarkTen in Aug 2013, and now
with the recent acquisition of e-vapor business of Green Smoke Inc,
Altria has enhanced its competitive position in the market.
Reynolds American Inc's
) Vuse e-cigarette brand also offers potential for long-term
Philip Morris International Inc
) has plans to foray into the e-cigarette business in late 2015.
Cost Reduction and Restructuring Initiatives
Most consumer staples companies are divesting low-margin brands,
improving supply chains and implementing cost-reduction initiatives
in order to boost profits. These initiatives help companies to
reduce the effects of inflating commodity costs and other input
costs, which have remained a drag on margins of most companies in
Coca-Cola started a four-year productivity and reinvestment program
in Feb 2012, under which it plans to optimize its global supply
chain, improve global marketing and innovation, achieve operating
expense leverage, standardize information systems and integrate
North American bottling and distribution operations acquired from
Coca-Cola Enterprises. The program is expected to generate
incremental annualized savings of $550 to $600 million through
PepsiCo recorded $2 billion as productivity savings through 2013
under its current productivity plan and intends to generate another
$1 billion in 2014. The company also announced a new 5-year
restructuring plan in its fourth quarter fiscal 2013 that will aims
to generate annual productivity savings of $1 billion from 2015 to
2019. The savings are expected to come from improved efficiency
through manufacturing automation and factory closures.
Through its cost savings program FORCE (Focused on Reducing Costs
Everywhere), Kimberly-Clark generated cost savings of $310 million
in 2013, and expects to continue the momentum going forward and
targets delivering at least $300 million of cost savings in 2014.
Kimberly-Clark's pulp and tissue restructuring program is expected
to increase operating profit by at least $100 million in 2014.
Green Mountain Coffee Roasters Inc
) is also taking several steps to optimize its efficiency and
reduce operational costs. It aims to deliver annual productivity
and cost savings benefits in the range of $70 million to $100
million by 2015.
), has also been divesting businesses to concentrate on its core
businesses such as detergents, foods, toiletries, and specialty
chemicals. On Jan 6, 2014, Unilever agreed to sell its Royal pasta
brand to RFM Corporation, one of the biggest diversified food and
beverage companies in the Philippines.
Earlier in Nov, it has sold its Wish-Bone salad dressing
Pinnacle Foods Inc
). Besides, it has sold its Skippy peanut butter business in Jan
2013 to Austin, MN-based producer of branded food and meat,
Hormel Foods Corp.
), while in Aug 2012,
ConAgra Foods Inc.
) bought its Bertolli and P.F. Chang's frozen meals brands.
Expansion in Emerging Markets
Besides costs saving initiatives, many consumer staples companies
are shifting their focus to emerging markets to boost sales.
Relative to the mature North American and European markets,
emerging markets such as Brazil, India, China, Mexico, Russia and
Southeast Asia are still untapped. Moreover, consumer spending in
these markets is also increasing. Demand for convenient and branded
packaged food tends to grow as middle-class consumers shift to
urban living. Thus the rising pool of middle class consumers in
emerging markets represents a huge opportunity for the companies.
However, increased exposure to emerging markets also brings along
currency headwinds, which adversely impacted several consumer
staples companies like Procter & Gamble, Unilever and
Kimberly-Clark in the recently reported quarter. Though these
companies expect currency headwinds to persist in 2014, they still
forecast strong sales gains in the emerging markets.
PepsiCo has been performing well in the high-growth developing and
emerging markets and about 35% of the total net revenue comes from
these markets. Going forward, the company expects emerging markets
revenues to increase in high single to low double-digits and also
expects two-third of its revenues to come from the emerging
markets. Tobacco company Philip Morris also has a significant
presence in a large number of markets. Asia remains a growth engine
for the company as it enjoys robust growth in Indonesia, Pakistan,
China, Philippines and Korea.
Acquisitions and Strategic Partnerships
Many consumer staple companies are also carrying out acquisitions
both domestically and internationally to expand their existing
customer base and product lines into new markets. On the other
hand, many companies are forming partnership to take a lead in this
For example in Dec 2013, food distributor
) agreed to buy US Foods to create one of the largest food
companies in the country and improve efficiency of both the
companies. After the completion of the deal (expected in the third
quarter of fiscal 2014), Sysco will receive annual synergies of at
least $600 million per annum over the next three or four years.
Apart from this acquisition, the company acquired other 14
companies during fiscal 2013, which represents annualized sales in
excess of $1 billion.
Most recently, Green Mountain tied up with Coca-Cola Company on the
development and introduction of Coca-Cola's global brand portfolio
for use in GMCR's forthcoming Keurig Cold at-home beverage system.
The deal will allow consumers to make the sodas and other drinks at
home through GMCR's Keurig Cold beverage system.
Also, Coca-Cola is taking a 10% stake in Green Mountain for
about $1.25 billion. This partnership will help GMCR to expand its
cold beverage lineup, and it will also allow Coca-Cola to get into
this growing segment too. However, it could pose a serious
competition to the at-home carbonated beverage company
SodaStream International Ltd
) in the near future.
Altria has partnered with Philip Morris whereby the two cigarettes
have combined their marketing powers to ramp up the distribution of
their unconventional cigarettes. Under the deal, Philip Morris will
market Altria's MarkTen e-cigarettes internationally and the latter
will distribute two of Philip Morris' heated tobacco products in
the United States, as Philip Morris sells cigarettes outside U.S.
Altria and Philip Morris have also decided to partner to work on
gaining market share as well as improving existing versions for the
Zacks Industry Rank
Consumer Staples is one the 16 broad Zacks sectors within the Zacks
Industry classification. We rank all the 260 plus industries in the
16 Zacks sectors based on the earnings outlook and fundamental
strength of the constituent companies in each industry. To learn
About Zacks Industry Rank
As a guideline, the outlook for industries in the top 1/3rd of all
Industry Ranks or a Zacks Industry Rank of #88 and lower is
'Positive,' the middle 1/3rd or industries with Zacks Industry Rank
between #89 and #176 is 'Neutral' and the bottom 1/3rd or Zacks
Industry Rank of #177 and higher is 'Negative.'
The consumer staples sector is further sub-divided into the
following industries at the expanded level (260 industry groups):
Beverages - Alcohol, Beverages - Soft, Consumer Products -
Miscellaneous Staples, Cosmetics & Toiletries, Food - Meat
Products, Food - Miscellaneous/Diversified, Publishing -
Newspapers, Soaps & Cleaning Preparations, Textile - Apparel
The 'Publishing - Newspapers' is the best placed among them with
its Zacks Industry Rank #7, placing it into the top 1/3rd of the
260+ industry groups. It is joined by 'Food - Meat Products and
Textile - Apparel' with Zacks Industry Ranks of #55 and #78,
Only 'Beverages - Soft' lies in the middle 1/3rd with a Zacks
Industry Rank #106. However, all the other sub-sectors -- Consumer
Products - Miscellaneous Staples, Food - Miscellaneous/Diversified,
Beverages - Alcohol, Soaps & Cleaning Preparations, Tobacco and
Cosmetics & Toiletries -- are featured in the bottom one-third
of all Zacks industries with respective Zacks Industry Ranks of
#198, #214, #217, #217, #228 and #249.
Looking at the exact location of these industries, one could say
that the general outlook for the consumer staples space as a whole
is negative, as many of the companies do not expect macroeconomic
environment to improve drastically in 2014.
The consumer staples sector depicts weak earnings trends, with
lackluster top-line growth and continued negative guidance. The
fourth quarter 2013 results for the sector have been average in
terms of earnings beat ratios (percentage of companies coming out
with positive surprises) and weak for revenue.
Of the 78.8% companies reported under the consumer staples
industry, the earnings "beat ratio" was 69.2%, while the revenue
"beat ratio" was only 30.8%. Total earnings for this sector
increased 2.4% until now, compared with a growth of 2.3% registered
in the third quarter.
Total revenue increased 1.7% in the quarter, better than the growth
of 0.2% in the previous quarter. Though revenues have improved
marginally, but the companies are expecting difficult consumer
spending environment to persist in 2014, which has also reflected
in companies' weak guidance.
The consensus earnings expectations for 2014 are projected to grow
5.8%, lower than 9.3% growth expected earlier. Revenues are
expected to decline 6.0% in 2014, as against 4.1% growth in
revenues expected earlier.
The consumer staples sector is expected to account for only 6.5%
share of the S&P 500 index earnings in 2013, while it accounts
for 7.2% of the total market capitalization.
For more details about earnings for this sector and others, please
read our '
Despite macroeconomic headwinds, some of these companies have been
able to deliver impressive results and have the potential to grow
in the upcoming quarters. Beverage company
Constellation Brands Inc.
), holding a Zacks Rank #1 (Strong Buy) has a solid brand portfolio
enhanced by regular acquisitions, impressive wine volume growth and
effective cost management.
Tyson Foods Inc.
) enjoys strong demand for its products, and benefits from
operational improvements and positive pricing and thus holds a
Zacks Rank #1 (Strong Buy).
Companies like Starbucks Corporation and
The Hershey Co.
) have solid growth potential. While Starbucks boasts solid organic
growth, innovation program and productivity gains, Hershey, with a
Zacks Rank #2 (Buy) have solid innovation programs and
international presence which helps them to maintain top line growth
despite macroeconomic headwinds faced by the developed nations.
Despite holding a Zacks Rank #3 (Hold), Starbucks raised its
earnings expectations for 2014 on the back of first quarter
There were some companies which were hit hard by the challenging
macro-economic environment, owing to lower consumer spending. The
persistently sluggish European economic conditions also remain an
Zacks Rank #3 companies like Procter & Gamble,
Mondelez International Inc
) and Kellogg are facing the brunt of sluggish sales, currency
headwinds, lower pricing and poor volumes. Beverage company Molson
Coors, holding a Zacks Rank #4 (Strong Sell) is also a victim of
weak consumer demand across many regions and declining sales
Though these companies are fundamentally strong and regularly
innovates products, invest in the emerging markets, adopts measures
like cost savings and restructuring to revive sales, we are
uncertain about the economic environment in 2014, due to our
budget-constrained consumers. However, we do believe that the
scenario will improve soon.
CONAGRA FOODS (CAG): Free Stock Analysis Report
COCA-COLA ENTRP (CCE): Free Stock Analysis
DR PEPPER SNAPL (DPS): Free Stock Analysis
GENL MILLS (GIS): Free Stock Analysis Report
GREEN MTN COFFE (GMCR): Free Stock Analysis
HORMEL FOODS CP (HRL): Free Stock Analysis
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
LORILLARD CO (LO): Free Stock Analysis Report
MONDELEZ INTL (MDLZ): Free Stock Analysis
ALTRIA GROUP (MO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
PINNACLE FOODS (PF): 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
SODASTREAM INTL (SODA): Free Stock Analysis
CONSTELLATN BRD (STZ): Free Stock Analysis
SYSCO CORP (SYY): Free Stock Analysis Report
MOLSON COORS-B (TAP): Free Stock Analysis
TYSON FOODS A (TSN): Free Stock Analysis Report
UNILEVER N V (UN): Free Stock Analysis Report
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