Consumer staples stocks rebounded in the first quarter, largely reflecting the group’s perceived defensive attributes in an otherwise uncertain global macroeconomic and market backdrop.
Parts of the U.S. economy have actually held up fairly nicely despite the aggregate growth picture remaining sub-par, with GDP growth in the first quarter barely remaining in positive territory. A steadily improving labor market, notwithstanding recent weakness, and gains in wages have helping consumer spending trends. A number of retailers and fast food chains including Wal-Mart Stores, Inc. (WMT - Analyst Report) , McDonald's Corp. MCD, Target Corp. (TGT - Analyst Report) and The TJX Companies, Inc. (TJX - Analyst Report) have hiked wages.
As a result, market experts believe the economy is strong enough to face headwinds such as worries stemming from China and other emerging markets and Fed rate uncertainty.
Consumer staples companies typically have tight margins, and a reduction in energy prices over the last two years is helping companies to lower costs. Going forward, consumer staples companies will continue to benefit from decreasing commodity costs and lower energy costs, which will help improve profit margins. The recent weakening of U.S. dollar is also expected to boost profits.
Apart from this, let’s discuss some of the key factors that have been driving consumer staples stocks since the past few quarters, despite global worries and also have the potential to boost earnings in the near term.
In a crowded and competitive space, consumer product companies need to regularly innovate and upgrade their brands to create differentiated value propositions and to remain successful. In fact, companies with innovative products in their pipeline will be in a position to benefit.
Innovation has been a driving force for consumer product giants like The Procter & Gamble Co. (PG - Analyst Report) and cereal maker General Mills Inc. GIS. P&G believes that consistent product innovation, supported by strong marketing and commercialization, will help deliver stronger results over the long term.
Global brewer Molson Coors Brewing Co. (TAP - Analyst Report) ) has also been launching new products to boost revenues and market share, which help it to offset the impact of declining volumes. Molson Coors also invests in marketing and advertising to create brand awareness.
Transition to Health and Wellness and ‘Good-for-You’ Products
Consumer staples companies are also shifting focus to make healthier and nutritious products in view of increasing health consciousness, rising obesity concerns and growing regulatory pressure.
Food companies B&G Foods, Inc. BGS and General Mills also have been rolling out a variety of nutritious products. Natural and organic food/beverages maker The WhiteWave Foods Company (WWAV - Snapshot Report) , J&J Snack Foods Corp. JJSF and United Natural Foods, Inc. (UNFI - Analyst Report) have been benefiting from strong demand for natural/organic food products and expect the trend to continue.
The global leader in spices and seasonings, McCormick & Co., Inc. MKC, is also reshuffling its portfolio to increase the amount of organic herbs and spices amid the rising demand for organic food products. It now plans to ramp up its organic and non-GMO offerings by 2016.
Food and beverage companies are not the only ones trying to shift to healthier options. Tobacco companies like Altria Group Inc. MO and Reynolds American Inc. (RAI - Analyst Report) are also adapting to the evolving needs of consumers and have resorted to less harmful alternatives like electronic cigarettes (e-cigarettes). In keeping with this trend, Philip Morris International, Inc. (PM - Analyst Report) is also working on its portfolio of e-cigarette products called Next Generation Products. These products generate nicotine-containing aerosols by heating a liquid. These will reduce the risks related to tobacco products and attract adult consumers.
America’s largest soft drinks makers – The Coca-Cola Company KO, PepsiCo, Inc. PEP and Dr Pepper Snapple Group, Inc. DPS – have pledged to reduce calories in their beverages by 20% by 2025 due to a significant customer shift toward healthier and nutritious products. Accordingly, the companies agreed to promote bottled water, no-or-lower-calorie beverages and smaller portion sizes to its consumers.
Acquisitions and Strategic Partnerships
Consumer staples companies are regularly carrying out acquisitions both domestically and internationally to expand their existing customer base and product lines into new markets. Some of them are also forming partnerships, mostly with larger and better known companies, to take a lead in this challenging environment.
Treehouse Foods Inc. (THS - Analyst Report) , which was spun off by Dean Foods Company DF, has been expanding its product offerings through a number of acquisitions. In Feb 2016, Treehouse Foods acquired the Private Brands Business from ConAgra Foods, Inc. CAG to boost its portfolio.
In mid-Jan 2016, Pinnacle Foods Inc. (PF - Analyst Report) completed the acquisition of Boulder Brands, Inc. for $975 million, including debt. The transaction expands Pinnacle's presence in the natural and organic retail channel and provides Pinnacle with a new growth platform in refrigerated foods.
Tyson Foods’ merger deal with packaged meat producer, The Hillshire Brands Company in Aug 2014 was the most talked about and the biggest deal in the meat industry. The merger of Reynolds American – Lorillard in the tobacco industry was also of a similar scale.
Another big merger that happened in Jul 2015 was that of food giants Kraft Foods Group, Inc. and H.J. Heinz Company per a deal announced in March. The newly formed The Kraft Heinz Company KHC is now the third-largest food and beverage company in North America and the fifth-largest food and beverage company in the world.
Further, Belgium-based beer giant Anheuser Busch InBev BUD is considering taking over its London-based rival, SABMiller plc SBMRY. The proposed merger, expected to close in the second half of 2016, would combine the two largest beer companies in the U.S. and could have wide implications on the worldwide beer market.
The companies are also focusing on improving their product portfolio through divestitures, which enables them to concentrate on their core portfolio.
Procter & Gamble is near the completion of its divestiture plan and has eliminated almost 60% of the brands (roughly 105 brands) that were witnessing decline in sales and profits, in order to focus on more profitable brands.
Similarly, in Oct 2014, Kimberly-Clark Corp. KMB spun-off its health care business, which is now called Halyard Health, Inc. HYH. Snacking giant Mondelez International also spun-off its coffee business to Netherlands-based coffee company, D.E Master Blenders 1753 in Jul 2015 in order to concentrate on its core snacks business.
In Nov 2015, General Mills divested its Green Giant and Le Sueur brands of frozen and shelf-stable vegetables to food manufacturer, B&G Foods. The Green Giant buyout will help B&G Foods enter the frozen food business, which according to the company, has tremendous growth potential.
Cost Cutting and Restructuring Initiatives
Most consumer staples companies are implementing cost-reduction initiatives to boost profits. Companies like McCormick, Mondelez International, Inc. MDLZ, Kimberly-Clark, Kellogg Co. K, Sysco Corp. (SYY - Analyst Report) and many others have been benefiting from significant cost savings and restructuring initiatives to boost earnings.
This is a mature space, with growth hard to come by and margins typically razor thin. But demand for most consumer staples products typically doesn’t fluctuate that much with the economic cycle. It is this operating stability that gives these stocks a boost in times of uncertainty.
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