Consumer Staples companies 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 enduring demand for these products irrespective of the economic
cycle gives the sector a defensive posture.
Consumer staples stocks have outperformed the S&P 500 as a
whole in the year-to-date period, generating gains of 16.8% in the
year-to-date period compared with gains of 14.9% for S&P 500.
Though consumer staple companies, due to their defensive nature,
are much less exposed to changes in income, they are still impacted
when consumer confidence drops or income growth declines. In that
case, consumers tend to buy staples but will prefer cheaper brands,
which will hurt the profitability of the sector.
Consumer product companies regularly need to innovate and upgrade
their brands to boost consumer confidence and create differentiated
value propositions for their customers in order to remain
A consumer product giant
Procter & Gamble Co
) has a strong tradition of not only introducing blockbuster
products but also of creating new categories. The company has
consistently increased market share in fast growing businesses over
the years through innovation and new product launches. Through its
game-changing new products like Daz automatic detergent and
concentrated liquid detergent, P&G was able to capture a strong
market share in U.K. in the laundry category in 2011.
Similarly, Head & Shoulders has transformed itself from merely
being a North American brand to the largest shampoo brand in the
world due to the company's marketing efforts and product
innovation. In 2012, P&G invested around $2 billion in
innovation. It intends to expand its innovation and marketing
strategies to more categories, geographies and channels, thus
boosting top- and bottom-line growth.
The Hershey Co.
) regularly innovates in its core brands to meet consumer needs
that are not addressed by its current portfolio. Some successful
product innovations in recent years include Reese's Minis,
Hershey's Drops and Rolo minis. Some new products lined up for 2013
include Kit Kat Minis (Jun 2013), Twizzlers Bites, Jolly Ranchers
Bites, Kisses Deluxe, Hershey's Mais and many more. The company
also has products planned for some international markets like
China, Mexico and Brazil in 2013.
) regularly creates new flavors of existing products alongside
maintaining a robust pipeline of new products. The company also
invests aggressively in new packaging to shift consumers to more
profitable purchases. PepsiCo's popular 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 products are
expected to boost revenue growth and also enable increased price
realization in the long run.
Molson Coors Brewing Co
) introduced several beer brands in 2012 to ensure variety. New
brands like Rickard's Cardigan and Oakhouse in the above-premium
portfolio were launched in Canada. New varieties of beer brand
Leinenkugel were rolled out in the U.S. under the Lemon Berry
Shandy and Batch 19 brands.
Most recently, the company launched a non-beer drink, Molson
Canadian Cider, made from apples. Cider will form a part of the
popular Canadian beer brand Molson Canadian. Molson Coors has plans
to roll out beer brands like Apple Ale and Third Shift brands under
Redd's beer brand in 2013 in the U.S. These brands are
strengthening the company's portfolio and also adding to its market
Shifting Focus on Health and Wellness and 'Good-for-You' Products
Other than enhancing its products, the companies are also focusing
on shifting consumer preferences, increasing health consciousness
and rising obesity concerns. The companies are now inclined toward
making healthier and nutritious products.
Beverage companies like
The Coca-Cola Co
) and PepsiCo are slowly expanding their portfolio of
non-carbonated drinks due to the increasing awareness about calorie
intake and nutrition among consumers. Though these companies are
still largely dependent on its carbonated beverages, the changing
consumer preference toward health and wellness products pushes them
to introduce a variety of non-carbonated beverages.
While Coca-Cola commands a leading position in the juices or still
beverages category with its flagship brands such as Minute Maid,
Simply and POWERade, PepsiCo is also increasing its focus on low
calorie beverages, non-carbonated beverages and healthier snacks.
The company's low calorie cola, Pepsi Next and its 24-ounce can for
regular and diet Dew have been well received.
The company also formed a joint venture with Theo Muller Group
to open a new yogurt production facility to produce different
varieties of yogurt, which is one of the fastest growing categories
in the U.S. There is a huge demand for nutritious products and
yogurts being rich in protein, calcium and vitamin D will prove to
be a healthy snack. Further, the company's nutrition brands like
Quaker, Tropicana and Gatorade are expected to reap benefits from
shifting consumer preference toward health and wellness products.
Tobacco companies are also adapting to the evolving needs of
consumers and have developed less harmful tobacco products.
Increasing health consciousness among youth has reduced the demand
for tobacco over time, thus forcing the companies to look for other
alternatives like e-cigarettes. E-cigarettes are very popular among
youngsters as they have the same simulating effect as cigarettes
but are less harmful.
Altria Group Inc
) has developed innovative, less harmful and non-combustible
nicotine- products for adult tobacco consumers in collaboration
with Okono A/S. This is expected to help the company gain market
share in the industry. Moreover, existing smokeless tobacco brands
like Copenhagen and Skoal are also gaining retail share, having
grown from 47.5% in 2008 to 50.6% in 2012.
In addition, in Jun 2012, Altria's subsidiary Nu Mark introduced
Verve Discs, a mint-flavored, chewable tobacco product that
contains tobacco-derived nicotine, which has been widely accepted
by consumers as a substitute to harmful tobacco derivatives. Nu
Mark also plans to launch its first e-cigarette brand MarkTen in
Another cigarette maker
) acquired the e-cigarette brand blu e-Cigs in Apr 2012. blu e-Cigs
look like traditional cigarettes but do not produce smoke, ash or
smell. The company's sales significantly increased post-acquisition
and we believe the rising popularity of e-cigarettes will boost blu
e-Cigs popularity in the upcoming quarters amid overall slowdown in
the cigarette industry.
Another tobacco seller,
Reynolds American Inc
) also remains committed to stimulating demand through new and
innovative products in the smokeless category, owing to growing
health concerns. New mint flavors for the Camel brand of smokeless
tobacco like Camel SNUS are intended to meet changing demand.
Moreover, American Snuff's Grizzly natural premium style
cigarettes introduced in 2012 occupy a major portion of America's
smokeless tobacco market. Reynolds American's Zonnic nicotine
replacement therapy gum and the Vuse e-cigarette brand offer
potential for long-term commercial success.
Cost Reduction and Restructuring Initiatives
In order to boost profits and top-line growth, most consumer
staples companies are divesting low-margin brands, improving the
supply chain and implementing cost-reduction initiatives. 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 this sector, despite top-line
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 global marketing and innovation, achieve operating expense
leverage, standardize information systems and integrate North
American bottling and distribution operations acquired from
). The program is expected to generate incremental annualized
savings of $550 to $600 million over a four-year period ending
PepsiCo also announced a restructuring program in Feb 2012. It is
expected to result in productivity savings of $900 million in 2013,
which will go up to $3 billion through 2015. The program will
include leveraging new technologies and processes across
operations, consolidating facilities, simplifying organization
structures, lowering layers of management and workforce.
Consumer products giant,
) is streamlining its manufacturing facilities in Europe. As a part
of this initiative, the company dissolved the diaper segment in
Western and Central Europe, except the Italian market. This reduced
the European workforce by approximately 1,300 to 1,500 positions.
The company has stopped selling Huggies diapers in 13 countries so
far and expects to exit the remaining five markets by the end of
Its cost savings program FORCE (Focused on Reducing Costs
Everywhere) is expected to generate cost savings of $250-$300
million in 2013 and benefit the company through the continued
rollout of lean manufacturing and supply chain practices and the
formation of a global procurement organization.
Kimberly-Clark's pulp and tissue restructuring program helped
improve underlying profitability and return on invested capital of
its consumer tissue and K-C Professional businesses. Kimberly-Clark
anticipates operating profit to increase by at least $75 million in
2013 and at least $100 million in 2014 through the restructuring
The J. M. Smucker Co.
) has also been involved in restructuring its coffee, fruit spreads
and Canadian pickle and condiments operations since 2010. The
initiative involves capital investments in a food manufacturing
facility in Ohio; consolidation of coffee production in Louisiana;
and transfer of the company's pickle and condiments production to
These initiatives will lead to workforce reduction, closure of
six facilities and reduction in the overall cost structure in 2013.
In Feb 2013, Smucker announced a capacity expansion initiative,
scheduled to be completed in 2014, to support the company's growing
peanut and other nut butter businesses.
Global brewer Molson Coors began a number of new initiatives in the
third quarter of 2012 for the next two years. The initiatives
involved combining its UK and Ireland businesses with its
newly-acquired StarBev breweries (later named as Molson Coors
Central Europe) to create a single unit called Molson Coors
Other than this, the company liquidated its under-performing
China joint venture, restructured its Coors Light beer business in
the rest of China, improved performance in Japan, and integrated
the Central Europe license and export business. These initiatives
are expected to improve the efficiency of the organization and
generate additional resources to invest in brands and innovation.
Expansion in Emerging Markets
Besides costs saving initiatives, many consumer staples companies
are shifting their focus to emerging markets to boost sales. With
market saturation, low disposable income of consumers, uncertain
macroeconomic conditions and increased competitive activity in
developed markets, these companies are diverting their resources to
explore emerging markets.
Though companies like Coca-Cola and PepsiCo are witnessing
improving volume trends in North America, driven by increased
marketing and advertising spending, we believe that the North
American markets are relatively mature compared to their untapped
counterparts such as Brazil, India, China, Mexico, Russia and
Southeast Asia, which exhibit consumer spending growth.
Moreover, we have seen that the 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, the increasing presence in the emerging markets also
brings along the negative impact from currencies for many consumer
staples companies. A stronger dollar reduces the value of
outside-U.S. sales and in turn limits growth in the emerging
markets. However, with improving standard of living in developing
countries, the companies are now focusing on increasing pricing to
derive profits, which was difficult earlier.
PepsiCo is expanding in nations like Russia, Mexico, Canada and the
United Kingdom and also in the emerging markets of China, India,
Brazil and Africa by offering locally relevant innovation and
value-added products. Bottling consolidation in Mexico and the
strategic partnership with leading Chinese food and beverage maker
Tingyi have strengthened PepsiCo's business in those countries.
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. The company has
tripled its revenues from the emerging and developing markets in
the past five years. Going forward, management expects two-third of
its revenues to come from the emerging markets.
Philip Morris International Inc
) also commands a footprint in a large number of markets. Asia
remains a growth engine for the company. It witnessed robust growth
in Indonesia, China, Philippines and Korea.
Further, through strategic acquisitions like Sampoerna in
Indonesia and Larkson in Pakistan in 2012, the company has gained a
strong foothold in the non OECD (Organisation for Economic
Co-operation and Development) markets. In addition, Philip Morris'
acquisition (which is expected to close by Sep 2013) of 100%
interest in its Mexican subsidiary will boost its presence in
General Mills, Inc
) also focuses on expansion in China, Brazil, India and Russia
where consumer spending is on the rise. The company is especially
focusing on China, which has one of the largest numbers of
consumers given its growing number of middle-class and affluent
The company plans to achieve $600 million in sales from its
wholly-owned businesses in China in fiscal 2013 and $900 million by
2015. In Brazil, the company's growth prospects have improved
largely following the acquisition of Yoki. In India, though the
company's business is small, it is growing quickly. Sales in India
are expected to exceed $70 million in fiscal 2013.
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 positive earnings momentum of
consumer staples stocks, which resulted in a Zacks Rank #2 (Buy)
Kraft Foods Group Inc
), PepsiCo and Lorillard, reflects the improved business backdrop.
Food maker Kraft Foods Group has outperformed the Zacks Consensus
Estimate since it was spun off from Kraft Foods, Inc into an
independent company last year in Oct 2012. In first quarter 2013,
Kraft Foods beat the Zacks Consensus Estimate for both revenues and
earnings on the back of solid innovation and stepped up advertising
spending for its biggest brands.
The company also reaffirmed its full year 2013 outlook. We are
encouraged by Kraft's aggressive cost reduction and
efficiency-improvement initiatives, which will provide more cash
for innovation, brand building and marketing initiatives. Kraft
also aims to maximize cash flow, which will be used to pay robust
PepsiCo has delivered positive surprises in the last four quarters
on the back of improved performance of its snacks business and
encouraging growth in the international markets. The company's
strong brand portfolio, its product and geographic diversity,
productivity gains, solid organic revenue growth and strong margins
also contributed to growth. Year 2012 was a turning point for
PepsiCo with increased investments in brand building, market
execution and innovation and improved productivity expected to set
the foundation for further growth and competitive advantage.
PepsiCo is positive for 2013 too. The company expects to achieve
its top-line target through its strong portfolio of beverages,
snacks and healthy & wellness brands. Moreover, the company
noticed that many international markets are relatively untapped by
other companies, especially for products like salty snacks. Hence,
PepsiCo enjoys a competitive advantage over other players.
We are also impressed with cigarette manufacturer Lorillard, which
has a dominant share in the tobacco market owing to the popularity
of its premium brand Newport and value brand Maverick. Newport
continues to gain popularity despite higher pricing and amid
overall slowdown in the cigarette industry. Moreover, it is
adapting to changing consumer demands by investing in
less-hazardous alternatives for tobacco with the acquisition of blu
eCigs and developing electronic cigarettes. The rising demand for
electronic cigarettes is expected to boost blu e-Cigs sales, going
There are some other attractive stocks which are worth considering
though they carry a Zacks Rank #3 (Hold). They are
Tyson Foods Inc
), Hershey and Smucker.
Smucker's performance remained strong in all the four quarters of
fiscal 2013 (ending April), driven by a 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.
Stabilizing coffee costs also improved margins at Smucker's. The
company has increased its fiscal 2013 earnings guidance twice,
reflecting the company's potential to drive profits in the coming
Kellogg has strong earnings potential as it delivered solid growth
in earnings in all the four quarters of 2012, driven by robust
organic sales growth performance. Though Kellogg's performance was
weak in the first quarter of 2013 due to decline in the snacks
category, higher costs and headwinds from the Venezuela currency
devaluation, the company remains positive for 2013 and has
re-affirmed its 2013 guidance.
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.
Even with a Zacks Rank #3 (Hold), chocolate maker 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 four out of the last five quarters. The
company has raised its guidance thrice in 2012, highlighting its
attractive earnings potential.
Meat products processor Tyson Foods has been delivering strong
earnings in the past several quarters. Though the first-quarter
fiscal 2013 (ending Sept) results were sluggish, we remain
encouraged with the company's strong product portfolio and its
presence in the international markets, particularly in China,
Mexico and India. Tyson is also focusing on strengthening its
presence in Mexican cuisine, as Mexican food is becoming
increasingly popular in the U.S. processed food industry.
To enhance its portfolio with Mexican cuisine brands, Tyson
acquired the assets of Circle Foods in early-June, which owns
popular brands like Nuevo Grille and Tortillaland handheld Mexican
products, Tortillaland uncooked tortillas and ROTILAND Indian flat
breads. Tyson's focus on Mexican food is also evident from its
strategic acquisition of the Mexican snacks and tortilla producer,
Don Julio Foods of Clearfield, Utah in Apr 2013. Tyson also has
acquisitions and new product launches in the pipeline for 2013.
The macro-economic environment in the U.S. has remained challenging
and uncertain for quite some time. U.S. consumers are burdened with
higher gasoline prices, payroll tax increases and a labor market
that is improving at a glacial pace. These external forces might
restrict consumer discretionary spending in addition to slow job
growth, high interest rates and tightened credit availability. The
persistently sluggish European economic conditions also create an
overhang. We expect these global economic pressures to continue in
While the acquisition of StarBev Breweries in Jun 2012 opened doors
of opportunities for Molson Coors in the attractive beer market in
Central Europe, the unfavorable economic conditions in Europe are
expected to offset the gains from this acquisition. Moreover, the
acquisition has increased the debt burden of the company.
In addition, 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. Lack of brand marketing and unfavorable weather
conditions are also hurting volumes. Though Molson Coors has been
spending on marketing and advertising for its Miller Lite and the
Molson beer brands, it has not led to consistent growth in
The increasing raw material costs of the company and the
currency headwinds are also denting top-line growth. 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
The consumer products giant Procter & Gamble had a tough fiscal
2012 (ending June) as it performed below its own expectations due
to an uncertain economic environment, currency headwinds and rising
input costs. The company implemented some meaningful changes to
re-accelerate top and bottom-line growth to keep pace with its
These initiatives also improved its performance in the first two
quarters of fiscal 2013. However, the effect was short lived as the
company posted mixed third-quarter results in late April. Though
earnings exceeded management's expectations on strong cost savings,
organic revenue growth was quite weak and below expectation.
Its fourth-quarter outlook was also quite subdued with earnings
expected to decline from the year-ago results. P&G is also
facing rapid and significant increases in commodity costs, which
are hurting margins despite revenue growth. P&G holds a Zacks
Dr Pepper Snapple Group
) has been suffering due to weak volume growth, higher cost
pressure and macro-economic headwinds in the U.S. The company has
had a dismal 2012 and also posted weak sales in the first quarter
The company has been facing persistent weakness in 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. The
stock carries a Zacks Rank #3 (Hold).
COCA-COLA ENTRP (CCE): Free Stock Analysis
DR PEPPER SNAPL (DPS): Free Stock Analysis
GENL MILLS (GIS): Free Stock Analysis Report
HERSHEY CO/THE (HSY): Free Stock Analysis
KIMBERLY CLARK (KMB): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
KRAFT FOODS GRP (KRFT): Free Stock Analysis
LORILLARD CO (LO): Free Stock Analysis Report
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
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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