The consumer staples sector has been generally weak in the
recent past due to a difficult consumer spending environment
resulting from slow job growth, rising interest rates and tightened
credit availability. In addition, difficult operating conditions in
Europe and a slowdown in some Asian countries, like China, also
weigh on the sector's outlook.
As a result, consumer staple stocks have underperformed the S&P
500 as a whole in the year-to-date period. We see that in the
stocks of most staples stocks, particularly the leaders like
The Coca-Cola Company
The Procter & Gamble Company
). Most of the large consumer staples companies are able to
increase their earnings solely with the help of cost controls,
innovations, acquisitions and share buybacks, but only a few have
been able to deliver impressive top-line growth - thus signaling a
lack of real growth.
In a crowded and competitive space, consumer product companies are
forced to innovate and upgrade their brands to create
differentiated value propositions for their customers to remain
Kellogg's efforts on that count include introductions of several
breakfast options like Special K Nourish hot cereal and bars,
Pop-Tarts Gone Nutty toaster pastries, Raisin Bran Healthy Heart
Omega 3 cereal, Special K Multigrain cereal, Kashi Golean Vanilla
Graham Clusters cereal and Kashi Heart-to-Heart cereal.
Consumer product giant Procter & Gamble has a strong tradition
of introducing blockbuster products and new categories. The company
has launched new products in most of its categories. In fact,
P&G invested around $2 billion in innovation in 2012, which
shows the importance of innovation in the company.
Molson Coors Brewing Co
) introduced several beer brands in 2012 to ensure variety and it
continues to focus on the above premium category in beer in 2013.
Other than beer, the company expects to launch the world's first
low-alcohol cider beer mix in the Czech Republic. It will also
introduce a new non-alcohol category with the launch of Brewers
Lemonade in 2013.
Shifting Focus on Health and Wellness and 'Good-for-You'
The companies are shifting focus to make healthier and nutritious
products according to consumer preferences, increasing health
consciousness and rising obesity concerns.
Beverage companies like Coca-Cola and
) are slowly expanding their portfolio of non-carbonated drinks due
to the increasing awareness about calorie intake and nutrition
Though these companies are still largely dependent on carbonated
beverages, changing consumer preference toward health and wellness
products has led them to introduce a variety of non-carbonated
Coca-Cola is expanding its portfolio of non-carbonated drinks,
which include Powerade sports drinks and Minute Maid fruit juices,
whereas Coca-Cola's bottler
Coca-Cola Enterprises Inc.
) is also slowly shifting its product mix from colas to energy
drinks and other non-carbonated beverages. PepsiCo is also
increasing its focus on low calorie beverages, non-carbonated
beverages and healthier snacks.
), 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 and new wholesome Salad Bowls.
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
) captures 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 has strengthened its position in the wide electronic
cigarette market. Nu Mark, the subsidiary of
Altria Group Inc
) also launched its first e-cigarette brand MarkTen in Aug 2013,
Reynolds American Inc's
) Vuse e-cigarette brand also offers potential for long-term
Cost Reduction and Restructuring Initiatives
In order to boost profits, 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 growth.
Coca-Cola started a four-year productivity and reinvestment program
early last year, 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
The program is expected to generate incremental annualized
savings of $550 to $600 million through 2015. As the company's
tepid volume growth in the just released third quarter earnings
season shows, these measures are key to the company's bottom-line.
PepsiCo also announced a restructuring program last year, which is
expected to generate productivity savings of up to $3 billion
Through its cost savings program FORCE (Focused on Reducing Costs
Everywhere), consumer products giant
) is expected to save $300-$350 million by the end of 2013.
Kimberly-Clark's pulp and tissue restructuring program is expected
to increase operating profit by at least $75 million in 2013 and at
least $100 million in 2014.
The company has also dissolved the diaper segment in Western and
Central Europe, except the Italian market, in order to streamline
its manufacturing facilities in Europe. This has reduced its
European workforce by approximately 1,300 to 1,500 positions.
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.
Cigarette company Altria made significant progress with its $1
billion cost reduction program in 2012 by reducing headcount,
consolidating certain facilities, improving business processes, and
pursuing other savings. The cost reduction program is expected to
deliver $400 million in annualized cost savings by the end of 2013.
Reynolds American is also expected to save about $70 million
annually by 2015 through workforce restructuring.
) also has been divesting businesses to concentrate on its core
foods portfolio. Recently, 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. 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.
Relative to the mature North American and European markets,
emerging markets such as Brazil, India, China, Mexico, Russia and
Southeast Asia are to a large untapped opportunities where consumer
spending is still growing. Additionally, 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
the negative impact of currency fluctuations for many consumer
staples companies. A stronger dollar reduces the value of
outside-U.S. sales and in turn limits growth. But with improving
standards of living in developing countries, the companies are now
focusing on increasing pricing to derive profits, which was
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. 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.
General Mills, Inc
) is also focusing on expansion in China, Brazil, India and Russia,
where consumer spending is on the rise.
Tobacco company Philip Morris International Inc (
) has a significant presence in a large number of markets. Asia
remains a growth engine for the company. It also enjoys robust
growth in Indonesia, Pakistan, China, Philippines, Mexico and
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 'Consumer Products - Miscellaneous Staples' is the best placed
among them with its Zacks Industry Rank #33, comfortably placing it
into the top 1/3rd of the 260+ industry groups. It is joined by the
'Cosmetics & Toiletries' with a Zacks Industry Rank #53. The
Tobacco, Food - Meat Products and Beverages - Alcohol also lies in
the top 1/3rd with Zacks Industry Ranks of #63, #67 and #70,
The Textile - Apparel lies in the middle 1/3rd with Zacks Industry
Rank #157. The Food - Miscellaneous/Diversified barely makes into
the middle 1/3rd with a Zacks Industry Rank #168.
However, all the other sub-sectors -- Beverages - Soft, Publishing
- Newspapers and Soaps & Cleaning Preparations -- are featured
in the bottom one-third of all Zacks industries with respective
Zacks Industry Ranks of #241, #214, and #232.
Looking at the exact location of these industries, one could say
that the general outlook for the consumer staples space as a whole
The Consumer staples sector depicts mixed earnings trends. The
third 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 20.6% companies reported under the consumer staples
industry, the earnings "beat ratio" was 42.9%, while the revenue
"beat ratio" was only 14.3%. Total earnings for this sector
increased only 0.3% until now, compared with a decline of 0.6%
registered in the second quarter. Total revenue declined 1.5% in
the quarter, worse than the decline of 0.6% in the previous
quarter. We note that the companies are facing weak results due to
difficult consumer spending environment.
The consensus earnings expectations for the rest of the year remain
muted with earnings projected to grow 2.1% in the fourth quarter of
2013, thereby pegging the full-year 2013 growth outlook at 5.5%.
Revenues will decline 7.1% in the fourth quarter, with full-year
revenue to decline 7.5%.
Moreover, the consumer staples sector is expected to account for
only 6.8% share of the S&P 500 index earnings in 2013, while it
accounts for 7.8% of the total market capitalization.
However, we believe the consumer staple environment will improve in
2014 with the expected recovery in economy and job environment.
Earnings for 2014 are expected to grow 9.3%, while revenue is
expected to improve 4.1%.
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. The
J. M. Smucker Co.
) and Green Mountain have been delivering strong performances
consistently and have gained from lower green coffee costs. Both
companies have raised their guidance for the fiscal year. The
positive earnings momentum of these stocks resulted in a Zacks Rank
Companies like PepsiCo,
Kraft Foods Group Inc
Tyson Foods Inc.
) also have solid growth potential, despite carrying a Zacks Rank
#3 (Hold). While Kraft and PepsiCo boasts solid organic growth and
productivity gains, Tyson and Hershey have solid innovation
programs and international presence which helps them to maintain
top line growth despite macroeconomic headwinds faced by the
There were some companies which were hit hard by the challenging
macro-economic environment, owing to lower consumer spending. U.S.
consumers are burdened with higher gasoline prices, payroll tax
increases and delayed tax refund checks. These external forces
might restrict consumer discretionary spending. The persistently
sluggish European economic conditions also remain an overhang.
While Zacks Rank #3 companies like Molson Coors, Procter &
Gamble and Kellogg are facing the brunt of sluggish sales, currency
headwinds, weakness in Europe and poor volumes; beverage company
Dr Pepper Snapple Group
) has been suffering due to weakness in overall carbonated soft
drinks (CSD) volumes in North America and increasing regulatory
pressure besides weak volume growth, higher cost pressure and
macro-economic headwinds. Dr Pepper holds a Zacks Rank #4 (Sell).
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
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
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
SMUCKER JM (SJM): Free Stock Analysis Report
MOLSON COORS-B (TAP): Free Stock Analysis
TYSON FOODS A (TSN): Free Stock Analysis Report
UNILEVER PLC (UL): Free Stock Analysis Report
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