Stocks in the Consumer Staples sector have carried out their
defensive role despite concerns about the prolonged weak U.S.
economy, the debt crisis in Europe and the slowdown in Chinese
economy. The companies under the 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. Year to date (through September 21,
2012), shares of consumer staples companies, accounting for about
11.1% of the S&P 500 Index by market capitalization, were up
10.9%, compared with a 16.1% gain for the S&P 500.
In 2011, the sector index grew 10.5% versus flattish growth for
the S&P 500 index. It should surprise no one that the group
will get back into the limelight should market conditions grow
challenging in the coming days.
Expansion in Emerging Markets
The macro-economic environment in the U.S. has remained
challenging and uncertain for quite some time now. Therefore,
many consumer companies are expanding focus to emerging markets
as developed markets are witnessing volume declines due to market
saturation, low disposable income of consumers and competitive
However, their developing counterparts such as Brazil, India,
Mexico, Russia and Southeast Asia boast positive consumer
spending growth. Moreover, we have seen that product demand has
remained relatively stable for companies that are more exposed to
fast-growing emerging markets in comparison to the slow-growing
developed markets like the U.S.
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
Beverage companies such as
The Coca-Cola Company
) have invested heavily in the emerging markets of India, Russia
Coca-Cola has already invested over $2 billion in India over the
last 18 years and has seen a double-digit growth rate in India
aided by its top-brands, which includes Thumbs Up, Sprite and
Maaza. Over the next five years, Coca-Cola, along with its
bottling partners, is poised to make a further investment of $2
billion to build consumer marketing, infrastructure and brands in
India. The company also has plans to invest $4 billion in China
over three years starting in 2012, $3 billion in Russia between
2012 and 2016 and $8 billion in Brazil through 2016.
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 September
2011, PepsiCo took control over 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.
) has expanded in China, and the region is expected to become the
company's second-largest market by 2014. Starbucks is also
looking to enter the lucrative Indian market with a store to be
opened by the end of October 2012.
However, the companies find it difficult to maintain a favorable
volume-price mix in the emerging markets where they cannot raise
prices given the low standard of living compared to the developed
countries. In addition, companies have seen lower growth in
emerging markets in the past quarter than prior quarters.
Emerging market growth 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. Moreover,
the slowdown in Chinese economy will significantly impact the
Input Cost Inflation
Continuously rising commodity and other input costs remain a drag
on margins of most of the companies in this sector, despite
top-line growth. Thus, these companies are resorting to price
increases and cost-cutting measures to negate the inflated input
costs. However, the companies are optimistic that commodity cost
inflation will slowdown in the second half of 2012.
Cost Reduction Initiatives
In an effort to reduce the effects of inflating commodity costs,
most consumer staples companies have undertaken several strategic
initiatives like the divestiture of low-margin brands,
improvement of supply chain and implementation of cost-reduction
Coca-Cola is undertaking various productivity initiatives to
streamline its cost structure and boost profitability. In
February 2012, it launched a four-year productivity and
reinvestment program, which includes initiatives like
optimization of global supply chain; improving effectiveness of
global marketing and innovation; operating expense leverage;
standardization of information systems and integration of North
American bottling and distribution operations acquired from
Coca-Cola Enterprises Inc.
). The program is expected to generate incremental annualized
savings of $550 to $600 million phased over a four-year period
starting in 2012 through the end of 2015.
Altria Group Inc.'s
) cost reduction program of $1 billion, which started in October
2011, 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 February 2012 as a part of its
restructuring program to reduce cost.
Another tobacco seller,
Reynolds American Inc.
), recently completed its business analysis and in the process
has identified resources to reinvest in the businesses to sustain
its growth momentum. The business analysis focused on ways to
reduce cost and the company has decided to eliminate surplus
labor to generate savings of about $25 million associated with
workforce restructuring by year-end 2012. Those savings will
increase to about $70 million annually in 2015.
The manufacturer of health and hygiene products,
) 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 and about $265
million in 2011. Kimberly-Clark expects $150-$200 million of cost
savings in 2012.
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 in
Consumer product companies necessarily 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, was launched in July 2012
and is off to a good start. 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 brand investments are expected to boost revenue
growth and also enable increased price realization in the long
Coffee makers have also been introducing new products to excite
customers. Most recently, Starbucks launched the premium single
cup at-home coffee machine, Verismo that is now available at
company stores and select high-end specialty retailers, mainly in
the U.S. and Canada. This will allow customers to prepare
Starbucks-quality espresso and coffee drinks at home and help
Starbucks capture a significant share of the fast growing premium
single serve market. In January 2012, the company launched Blonde
Roast coffee in the U.S. and Canada for consumers who prefer a
light roasted coffee.
Green Mountain Coffee Roasters, Inc.
) also has launched low-priced Keurig Vue coffee brewer models
like Keurig Vue V600 and Vue V700, an addition to the Keurig Vue
Brewing System, in order to reach out to more consumers. The
models include some of the most popular features such as auto
on/off, strength, temperature control, energy saver mode and size
J.M. Smucker Company
) has recently announced plans to branch out into specialty nut
butters. It also plans to launch chocolate and mocha cappuccino
varieties of Jif hazelnut spreads in early fiscal 2013.
The tobacco sector has also been active in upgrading their
products. In the last quarter, Reynolds launched new mint flavors
for the Camel brand of smokeless tobacco like Camel SNUS to adapt
to changing tobacco usage patterns, offering adult tobacco
consumers with innovative, smoke-free tobacco products. Its
subsidiary American Snuff launched natural premium-style
cigarettes under its flagship brand.
Another tobacco company
Philip Morris International, Inc.
) has also strengthen its brand portfolio through innovation
based on enhanced consumer understanding. Among the recent
launches, Marlboro Black Menthol Edge 8 and Marlboro Menthol Edge
1 were introduced during the second quarter of 2012 in Japan.
Marlboro Ice Blast, 5 milligram and 1 milligram variants were
launched during July, 2012, following successful market share
gain by the 8 milligram variant during the second quarter.
Similarly in Russia, Marlboro Clear Taste was launched during
June 2012, and it received positive feedback from customers.
COCA-COLA ENTRP (CCE): Free Stock Analysis
GREEN MTN COFFE (GMCR): Free Stock Analysis
HEINZ (HJ) CO (HNZ): Free Stock Analysis
KELLOGG CO (K): Free Stock Analysis Report
KIMBERLY CLARK (KMB): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
ALTRIA GROUP (MO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
PHILIP MORRIS (PM): Free Stock Analysis
REYNOLDS AMER (RAI): Free Stock Analysis
STARBUCKS CORP (SBUX): Free Stock Analysis
SMITHFIELD FOOD (SFD): Free Stock Analysis
SMUCKER JM (SJM): Free Stock Analysis Report
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We do not have an Outperform recommendation on any of the
consumer staples companies. However, companies like Starbucks,
Coca-Cola, Heinz, Hershey, Walmart and Molson Coors are showing
impressive growth despite industry headwinds.
) has beaten estimates and delivered solid growth in all the
quarters of 2012. We are encouraged by the company's global
reach, strong brand power, expanding presence outside the U.S.
and its solid cash position. Moreover, the company's acquisition
of Coca-Cola Enterprises' bottling business and its productivity
initiatives are expected to result in significant cost savings.
Share buybacks continue to be significant and the company has
also increased its dividend rate for 50 consecutive years. The
stock carries a Zacks #3 Rank.
The Hershey Company
) raised its 2012 earnings guidance after a solid first-half
performance. Earnings in the second quarter increased 17.9% year
over year, driven by revenue growth and improved gross margins.
Moreover, the company's strong brand positioning, strategic
marketing investments in core brands, disciplined innovation, and
consumer capabilities make it attractive.
The company's pricing and productivity benefits and improved
efficiencies from the company's supply-chain initiatives
overshadowed the headwinds from rising input costs. The company
pays a regular quarterly dividend that yields 2.7%, which makes
this chocolate maker attractive to income seeking investors.
Hershey's has also raised its long-term targets following its
continued earnings upside. The company aims to achieve $10
billion in net sales by 2017. The stock carries a Zacks #2 Rank
(short-term Buy rating).
Wal-Mart Stores, Inc.'s
) second quarter 2013 earnings were impressive, driven by
top-line and positive same store sales. Though currency headwinds
and continued economic pressures remained a hurdle, the company
upped its full year forecast versus its prior earnings forecast.
We are encouraged by the scale, product and geographic diversity
of Walmart. Moreover, Walmart is the sixth-largest Internet
retailer. The company is focusing on expanding its presence in
the online business, which is already strong in the US, UK,
Canada and Brazil. The stock carries a Zacks #2 Rank (short-term
Heinz's first quarter 2013 results exceeded the prior-year
earnings due to a lower-than-expected tax rate, organic sales
growth and productivity improvements. Though reported revenues
declined due to currency headwinds, organic revenues grew 4.8%.
Overall, Heinz's robust brand portfolio, continued strong growth
in emerging markets, strong marketing investments and ongoing
cost saving efforts will boost long-term growth. The stock
carries a Zacks #3 Rank (short-term Hold rating).
Despite challenging market conditions, global brewer
Molson Coors Brewing Company
) posted impressive results in the last three quarters. The
company's acquisition of StarBev is highly encouraging as the
addition of StarBev's flagship brand Staropramen to the company's
portfolio will help it to expand in untapped markets. The stock
carries a Zacks #3 Rank (short-term Hold rating).
Some of the companies have been, however, suffering from
continued input cost pressure and economic slowdown.
) second quarter 2012 earnings were significantly impacted by
weak revenues in Europe and high commodity costs. The acquisition
of Pringles benefited the top-line, but was largely offset by
currency headwinds. Gross margin and operating margin also
suffered due to commodity cost inflation, sluggish European
results and investments in supply-chain initiatives. The stock
carries a Zacks #3 Rank (short term Hold rating).
Smithfield Foods Inc.'s
) earnings lagged on the back of rising raw material costs and
weak margins in the fresh pork business. Sales were hurt by
softness in the hog production and international business.
Operating margins have remained sluggish on the back of increased
prices in the hog market.
Despite management's cost saving initiatives, the rising prices
of raw materials are offsetting the benefits from these
initiatives in the near term. We expect the rising costs of raw
materials to pull down the company's margins significantly in the
future. Moreover, widespread anti-obesity campaigns in the U.S.
have resulted in a general shift of consumer's preference away
from meat products. The stock carries a Zacks #3 Rank (short-term
) posted lower-than-expected sales and margin performance in
fiscal third quarter 2012. Gross margin also contracted due to
lower-than-expected production of K-Cup portion packs which led
to under-utilization of current manufacturing base.
The company also lowered its earnings and sales guidance both for
the fiscal 2012 and 2013. Though coffee prices are showing signs
of stabilization, over dependence on Keurig brewers, increasing
competition from Starbucks' Verismo also concerns us. The stock
carries a Zacks #3 Rank (short-term Hold rating).