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
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 activity.
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 consumer
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 investments.
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 initiatives.
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 2014.
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 run.
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 selection.
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.
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
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 Buy rating).
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
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 Hold rating).
) 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).
COCA-COLA ENTRP (CCE): Free Stock Analysis
GREEN MTN COFFE (GMCR): Free Stock Analysis
HEINZ (HJ) CO (HNZ): Free Stock Analysis Report
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 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
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