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Will Strategic Efforts Fuel Consumer Staples Growth in 2018?

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The Consumer Staples sector seems well-placed for 2018 with rising consumer confidence, healthy consumer spending, increased business investments and an improved labor market helping stocks in this space. Stocks in the sector lagged the broader market last year, but the sector’s stock market performance wasn’t too bad: +11.6% in 2017, roughly half of the +20.2% gain for the S&P 500 index.

Companies in the Consumer Staples sector stand to benefit from the recent tax reforms, which should help these stocks. That said, many of these companies are multinational and earn substantial proportions of their revenues beyond the U.S. shores, which means they already pay significantly lower taxes already related to previous statutory rates. Sectors that substantially operate domestically stand to benefit from the tax law changes.

Companies in this sector remain focused on undertaking efforts to resonate with consumers’ changing demands in order to fuel growth.

So let’s take a look at the strategies that position the consumer staples stocks for growth in 2018 as well.

Factors Ruling the Consumer Staples Space

Focus on Innovations

Innovation remains the guiding principle of consumer staples companies as it enables them to enhance brand appeal and capture market share across all regions and categories. Thus, companies put a lot of thrust on innovation to upgrade their brands and create differentiated value propositions. Notably, constant innovations supported by efficient marketing and commercialisation are likely to keep benefiting consumer staples companies.

Novelty has been a driving force for consumer product giants like The Procter & Gamble Co. (PG - Free Report) and Colgate-Palmolive (CL - Free Report) and cosmetic big-wigs like Estee Lauder (EL - Free Report) . These companies constantly come up with new products that suit changing consumer trends, to tap demand and boost revenues. Also, major food companies like Smucker and Campbell Soup (CPB - Free Report) , and even alcohol stocks like Constellation Brands have been adding new products to gain competitive advantage and augment market share.

Transition to Health and Wellness Products

As consumer preference is the life blood of Consumer Staples, companies have to adapt to evolving trends to stay strong in the industry. Currently, consumer staples companies are shifting focus to natural and organic products, given rising demand for health and wellness offerings.

This is the case with almost all industries in the sector. In the food industry, consumers are opting for healthier and nutritious rather than packaged food products, in view of increasing health consciousness and rising obesity concerns. Thus, companies like Campbell Soup and United Natural Foods (UNFI - Free Report) , among others, have taken to rolling out healthy and fresh products to expand in the booming organic food space.

Moving to the beverages, healthy and energy-boosting drinks are gaining prominence for a better lifestyle. Given the accelerated shift toward low- and no-alcohol products, AB InBev (BUD - Free Report) had struck a deal with Starbucks (in 2016) to provide Teavana, a ready-to-drink tea. Dr Pepper Snapple’s alliance with Bai Brands (low-calorie, coffee-fruit drinks maker) and Pepsico’s buyout of KeVita Inc. (producer of fermented probiotic and kombucha beverages) are other evidences of beverage players expanding into the fast-growing healthy and wellness categories. Notably, AB InBev expects the low- and no-alcohol beer category to account for about 20% of its global beer volumes by 2025.

Apart from this, tobacco companies like Altria Group (MO - Free Report) and Reynolds American are also adapting to the evolving needs of consumers and have resorted to less harmful alternatives like electronic cigarettes (e-cigarettes). To cater to changing consumer preference, Philip Morris launched the much talked about IQOS, a smokeless cigarette in November 2014, aiming to lead the tobacco industry’s push into reduced-risk products that may eventually replace traditional smokes. IQOS is anticipated to boost market share and offset declining volumes in traditional cigarette business over the long term.

Additionally, rising consumer awareness regarding the harmful impact of toxic chemicals has been driving the market share for organic personal care products, too. Consequently, players like Unilever are making solid progress in the natural and organic products category. This is evident from its recently announced deal to buy Schmidt’s Naturals that specializes in personal care products such as deodorants, toothpaste and bar soaps. Clearly, these robust efforts are expected to boost the companies’ top line in the future.

Adopting E-Commerce

With technology having advanced by leaps and bounds, online shopping has become the order of the day. Thanks to various mobile apps and dot.com business lines, shopping for anything is literally on consumers’ finger-tips. Consumers’ rapid shift to e-marketplace has compelled companies to adopt the e-commerce mantra. Companies like United Naturals, Campbell Soup and Estee Lauder among others, are striving to enhance e-commerce space, through investments in technology and infrastructure.

Driven by these efforts, United Natural Foods’ e-commerce sales jumped more than 30% in the first quarter, with food service e-commerce sales recording its highest quarter of year-over-year growth in a while. Also, Campbell’s shift to advertising via mobile and digital devices highlights its focus on the development of digital and e-commerce capacities. Estee Lauder, which witnessed online sales growth of 33% in the last reported quarter, expects the online channel to be a major growth engine for the upcoming few years.

Growth via Buyouts and Strategic Alliances

Consumer staples companies are regularly undertaking both domestic and international acquisitions to expand their existing customer base and product lines into new markets. Some of these are also forming partnerships, mostly with larger and better-known companies, to strengthen their network, diversify portfolio, expand reach and enhance market position. Notably, leveraging each other’s efficiencies creates significant synergies for companies that go for M&A activities.

Mergers of Tyson Foods with packaged meat producer, The Hillshire Brands (in August 2014); tobacco giants Reynolds American and Lorillard (in June 2015); food giants - Kraft Foods Group, Inc. and H.J. Heinz Company (in July 2015) and consumer goods companies Newell Brands and Jarden (in 2016) were the most talked about deals of the past. Belgium-based brewer Anheuser Busch InBev’s buyout of SABMiller in October 2016 also created a buzz in the beverage industry. Apart from this, Molson Coors acquired SABMiller plc’s 58% stake in MillerCoors, which made the former the third-largest brewer in the world, after Anheuser-Busch InBev and Heineken.

Other companies have also grown through acquisitions in the space. Treehouse Foods’ acquisition of Private Brands business in February 2016 from ConAgra generated significant revenues for the company. Also, United Natural has been carrying out various acquisitions over the years to grow its distribution network, customer base and boost long-term growth. In 2016, United Natural acquired Gourmet Guru (August), Haddon House Food Products (May) and Nor-Cal Produce, Inc. (April).

Moreover, Smucker’s agreement with Keurig Green Mountain, Inc. and Dunkin’ Brands Group to manufacture and sell the K-Cup category of products has been yielding positive results since fiscal 2016. Cosmetics giant Estee Lauder has also made several strategic acquisitions to enhance its portfolio. The acquisitions of BECCA and Too Faced (during the first quarter fiscal 2017) have strengthened Estee Lauder’s fastest-growing prestige portfolio.

Divesting Underperforming Units to Improve Operations

Apart from growing their businesses through buyouts, companies are also focusing on improving their product portfolio through divestitures. Offloading underperforming operations enables the companies to concentrate on the core and profitable areas.

Evidently, as part of a strategic business review following its merger with Jarden, Newell Brands had revealed intentions to sell nearly 10% of its current portfolio, including a major chunk of its Tools segment. This highlights the company’s focus on simplifying its operating structure, alongside highlighting its commitment toward making prudent investments in areas with higher growth potential. Also, Unilever recently announced plans to sell its shrinking Spreads business to KKR, in a bid to move ahead with its portfolio-restructuring strategy for long-term growth.

Iconix Brand Group is also focusing on managing its portfolio and spending resources on businesses that generate significant volume through both direct-to-retail relationships and global networks. In line with this view, the company sold the rights for the Sharper Image brand and related intellectual property assets to ThreeSixty Group in 2016, while it sold the rights for Badgley Mischka IP to Titan Industries.

More evidence in this regard is SUPERVALU Inc.’s divestment of its Save-A-Lot business to Onex. The sale of the business segment will allow SUPERVALU to concentrate more on its core segments that are profitable. Likewise, Procter & Gamble had announced portfolio strengthening and simplification plans in August 2014 to streamline its business and focus more on Billion Dollar Brands like Tide, Pampers and Oral-B.

Cost-Cutting and Restructuring Initiatives

Most consumer staples companies are implementing cost-reduction initiatives to boost profits. Colgate has been reaping benefits from its Global Growth and Efficiency Program, which focuses on reducing structural costs in order to improve gross and operating profit, standardizing processes to improve the decision-making procedure and enhance its market share worldwide.

Also, Sysco Corporation recently outlined its core strategies for 2020, as part of which it plans to optimise business and achieving operational efficacy. Additionally, per its ongoing cost management program, Smucker plans to achieve $450 million of total annual synergies and cost reductions by fiscal 2020. Companies like McCormick, Coca-Cola, Molson Coors, Mondelez International, Kimberly-Clark, Kellogg and many others have also been benefiting from significant cost savings and restructuring initiatives to boost earnings.

Clearly, the consumer staples space offers plenty of reasons to be optimistic about it over the long term. But how about investing in the space right now?

Check out our latest Consumer Staples Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

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