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Innovation, Buyouts & More to Fuel Consumer Staples Growth

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Demand for everyday-use products created by operators in the Consumer Staples space doesn’t tend to fluctuate a lot, but it is nevertheless exposed to macroeconomic forces at the margins. As such, the outlook for this space perks up as the outlook for the U.S. and global economy improves.

The outlook for the U.S. economy has been favorable for the last several years, with the recent tax legislation expected to add to the longevity of the current U.S. expansion cycle. In addition to the indirect benefits to Consumer Staples companies from the tax cuts, these companies also stand to benefit directly from the legislation, as reflected in the improving earnings outlook for many companies. That said, Consumer Staples operators tend to be global in their operations and as such don’t benefit to the same extent from U.S. tax law changes as the more domestic companies.

With growth hard to come by for companies in this mature space, Consumer Staples players have to remain focused on squeezing more out of their operations and coming out with revenue-boosting initiatives, which mainly include efforts to keep pace with the changing consumer patterns.

On that note, let’s delve deeper in some of the major growth-driving strategies of the space.

Strengthening Product Portfolio via Strategic Alliances, Buyouts

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

Mergers of Tyson Foods (TSN - Free Report) 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. KHC and H.J. Heinz Company (in July 2015) and consumer goods companies Newell Brands (NWL - Free Report) and Jarden (in 2016) were the most talked about deals. Belgium-based brewer Anheuser Busch InBev’s BUD buyout of SABMiller in October 2016 also created a buzz in the beverage industry. Apart from this, Molson Coors (TAP - Free Report) 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.

Cost Cutting and Restructuring Initiatives

Most consumer staples companies are implementing cost-reduction initiatives to boost profits. In the latter half of 2017, Tyson Foods announced a Financial Fitness Program, with the objectives of enhancing operating efficiency, reducing overheads and fuelling bottom-line performance. Colgate CL has also been benefiting 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.

Additionally, Sysco’s (SYY - Free Report) core strategies for 2020 include plans to optimize business and achieving operational efficacy. We also commend Kimberly Clark’s KMB 2018 Global Restructuring & Focus on Reducing Costs Everywhere (FORCE) programs, which are expected to generate cost savings of more than $2 billion over the next four years. Companies like McCormick (MKC - Free Report) , Coca-Cola KO, Molson Coors, Mondelez International MDLZ, Smucker (SJM - Free Report) , Kellogg K and many others have also been benefiting from significant cost savings and restructuring initiatives to boost earnings.

Focus on Innovation

Innovation remains the guiding principle of consumer staples companies as it enables them to enhance brand appeal through product differentiation 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 are essential for consumer staples companies to stay ahead of competition.

As evidence, novelty has been a driving force for consumer product giants like The Procter & Gamble Co. (PG - Free Report) and Colgate-Palmolive, and cosmetic majors like Estee Lauder EL. 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, alcohol stocks like Brown-Forman BF.B and Constellation Brands (STZ - Free Report) , and even tobacco players like Altria (MO - Free Report) and Phillip Morris (PM - Free Report) have been adding new products to gain competitive edge and augment market share.

Exiting Underperforming Units to Enhance Operations

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

For example, as part of its strategic business review following its merger with Jarden, Newell Brands announced plans 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. Similarly, Unilever (UL - Free Report) announced plans to sell its shrinking Spreads business to KKR (in December 2017) to shift concentration on fast-growing products.

Adopting E-Commerce Mantra: The Need of the Hour

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 (UNFI - Free Report) , SUPERVALU SVU, 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 almost 28.9% in the second quarter. As for SUPERVALU, the company’s contract with Instacart, along with endeavors to upgrade website and mobile applications underscore its knack to enhance consumer shopping experiences.

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. A key trend over the last few years has been the desire for natural and organic products, prompting many players in the space to come out with health and wellness offerings. This is the case with almost all industries in the sector.

Apart from this, tobacco companies like Altria 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. 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 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.

Clearly, the consumer staples space offers plenty of reasons to be optimistic about it over the long term. So 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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