For Immediate Release
Chicago, IL - Jan 05, 2018 - Today, Zacks Equity Research discusses the Industry: Consumer Staples, Part 3, including SUPERVALUSVU , Church & DwightCHD , ColgateCL , Kimberly-ClarkKMB and Procter & GamblePG .
Industry: Consumer Staples, Part 3
The U.S. market is currently in good shape and favorable economic indicators are likely to aid the performance of consumer staples companies. However, the improved economic scenario may divert investors' attention from these defensive stocks to other lucrative counters.
Further, the Fed's recent rate hike may make the dollar stronger against a basket of currencies, which is likely to hurt overseas profits and create an unfavorable environment for emerging economies. Though some emerging markets have started to witness improved trends lately, risks associated with operating internationally continue to act as deterrents for consumer staples stocks.
Also, responding to consumers' rapidly changing preferences creates significant competition, price wars and an intense promotional environment. This remains a threat to margins, which have been squeezed for a while now. So, investors must assess the possible issues in the sector, before placing their bets.
Troubles Looming Over Consumer Staples Stocks
Many companies in the consumer staples sector have been plagued by strained margins, stemming from various factors. These include tough grocery market conditions, rising input costs, costs associated with meeting consumers' changing demands and stiff competition that leads to aggressive promotions and price wars. From grocery chains like SUPERVALU, food companies like Campbell Soup to consumer products companies like Church & Dwight, Colgate and Kimberly-Clark, all remain troubled by squeezed margins.
The grocery industry has been grappling with challenges like stiff competition and aggressive promotions, which became more pronounced after Amazon's takeover of Whole Foods Market. Traditional grocery companies are facing competition from rivals, which are strengthening their franchises and offering alternative outlets for food and other staples.
Also, customers are more inclined toward private label products, which are low-cost alternatives to national brands. This, in turn is hurting food companies. Evidently, SUPERVALU has been facing stiff competition from grocery rivals in terms of innovative food offerings and related services. Going ahead, management continues to expect its business to be impacted by competitive pressure and price sensitivity existing in the market.
Input Cost Volatility
Input costs play a major role in determining the performance of a company. An increase in input cost directly hits the company's margins and profits. Moreover, any price increase to offset the same may drive consumers away. We note that many Consumer Staples companies are bearing the brunt of high input costs, which remains a concern for the future.
Evidently, Smucker has been struggling with the performance of its coffee segment, as price of green coffee, the raw material used in producing coffee, has been rising steadily for some time now, affecting this segment's profitability and gross margin. Consumer goods behemoth, Colgate also anticipates persistent pressure from increased commodity and packaging costs to impact gross margin.
Also, input cost inflation remains a cause of concern for Campbell Soup, Dean Foods, Church & Dwight and Kimberly-Clark. In fact, Kimberly expects commodity costs to shoot up mainly due to higher prices for several raw materials, including pulp and polymer resin. Input costs for some companies like Procter & Gamble have also increased lately due to the detrimental impact of hurricanes. However, this is likely to be just a short-term hurdle.
Volatile Emerging Markets
The majority of the global population is clustered in emerging economies. Thus, food/beverage companies are increasingly investing in developing and emerging markets like India, China and Brazil which boast significant growth potential due to relatively low per-capita consumption. Another reason is the burgeoning middle-class population with rising income levels, which in turn is increasing the demand for convenience food and beverages.
Though emerging markets offer strong growth prospects, they are generally volatile due to fluctuating currencies and other structural and political issues. Moreover, any unprecedented event that may impact economic conditions in countries like China, Brazil, Russia, remains a threat.
Higher Operating Expenses to Limit Profits
Consumer staple companies tend to spend heavily on marketing and advertising. As demand for staples is usually consistent, companies strive to increase sales and market share through innovations, promotions and efficient marketing and advertising. Though advertising strengthens brand appeal and helps to counter competition, it severely hits the profit margins of these companies. Also, efforts to keep up with consumers' changing needs entail significant costs. In this regard, costs related to e-commerce development and marketing are likely to impact profitability.
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