'Shrinkflation' to Save Consumer Staples ETFs

‘Shrinkflation’ is the term to describe the maintenance of companies’ margins by shrinking consumer products in weight, size or quantity while their prices remain the same or are increased. As companies are striving with high raw materials costs and supply-chain issues, many are cutting their product sizes and weights in response.

Consumers have been pointing to examples of shrinkflation for months, amid record high inflation. The trend is becoming more pronounced now as companies face higher prices for gas and ingredients, as well as supply-chain constraints, according to Emily Moquin, food and beverage analyst at Morning Consult, as quoted on CNBC.

The top categories where consumers have been feeling the pinch of shrinkflation include snacks, pantry items, frozen foods, meat, and bread and pastries, according to Morning Consult’s poll, as quoted on CNBC.

The article went on to explain that as many as 49% of consumers say they purchased a different brand, while 48% say they went for a generic brand over a name brand, and 33% intend to buy in bulk rather than smaller packages.

No matter what consumers try to do to avoid shrinkflation, the fact is that the trend will likely continue with consumer staples companies as they look to save margins in a difficult scenario. Hence, one can rely on staples stocks’ earnings and ETFs amid recessionary fears.

Consumer staples companies recorded 2.2% earnings growth in Q2 of 2022 on 8.1% revenue growth. Earnings are likely to decline 4.5% in Q3 over a likely 3.6% increase in revenues. The estimated earnings growth of the consumer staples sector for 2023 is 4.9% over 2.9% revenue growth.

Margins for 2023 are likely to be 0.25%. This compares with the S&P 500’s earnings growth estimate of 7.2% over 4% revenue growth and 0.38% margin growth, per Earnings Trends issued on Aug 24, 2022.

Against this backdrop, below, we highlight a few consumer staples ETFs that could be bought on the basis of shrinkflation.

First Trust Consumer Staples AlphaDEX ETF FXG

The underlying StrataQuant Consumer Staples Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology. The fund charges 64 bps in fees.

First Trust NASDAQ Food & Beverage ETF FTXG

The underlying Nasdaq US Smart Food & Beverage Index is a modified factor-weighted index, designed to provide exposure to U.S. companies within the food and beverage industry. The fund charges 60 bps in fees.

Invesco Dynamic Food & Beverage ETF PBJ

The underlying Dynamic Food & Beverage Intellidex Index comprises stocks of 30 U.S. food and beverage companies.These are companies that are principally engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies. The fund charges 63 bps in fees.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.