For Immediate Release
Chicago, IL – September 28, 2016 – Today, Zacks Equity Research discusses the Consumer Staples, part 3, including Kroger Co. (NYSE:(KR - Free Report) - Free Report), Whole Foods Market, Inc. (NASDAQ:-Free Report), SuperValu, Inc. (NYSE:(SVU - Free Report) - Free Report), Sprouts Farmers Market (NASDAQ:(SFM - Free Report) - Free Report) and United Natural Foods, Inc. (NASDAQ:(UNFI - Free Report) - Free Report) .
Industry: Consumer Staples, part 3
Despite a modest economic recovery and improvement in U.S. consumer confidence, persistent uncertainty about the global backdrop could limit the staple stocks’ upside potential.
A host of factors have been plaguing the global economy, with uncertainty related to the Fed rate hike being one of them. Although the possibility of a rate hike in September is now behind us, it has fueled expectations of an interest rate hike by the U.S. Federal Reserve in December.
Apart from this, the tightening U.S. Presidential election is also adding to market uncertainty. Markets don’t like uncertainty and the prospects of a close election could potentially weigh on stocks, all stocks, over the coming weeks.
In addition, headwinds like unfavorable currency, food deflation, potential price wars, a competitive environment, slowdown in international markets, political turmoil in Russia, sluggishness in Japan and an unfavorable economic environment in Europe are hindering growth. In Europe, the economic/political conditions are expected to be challenging post-Brexit (Britain’s exit from the European Union).
Amid global worries, we note that consumer spending pattern is changing and they are not willing to splurge despite benefiting from still lower fuel prices and higher wages. While some are busy boosting their savings, others are burdened with higher health care costs.
Hence, investors should carefully select stocks for their portfolio as certain headwinds are likely to prevail in the coming months.
Food Deflation and Price Wars
The grocery/supermarket business is grappling with food deflation, stiff competition, aggressive promotional environment, and waning store traffic. These headwinds have led to a sharp decline in share price of major food grocers like The Kroger Co. (NYSE:(KR - Free Report) - Free Report), Whole Foods Market, Inc. (NASDAQ:-Free Report), SuperValu, Inc. (NYSE:(SVU - Free Report) - Free Report), Sprouts Farmers Market (NASDAQ:(SFM - Free Report) - Free Report) and United Natural Foods, Inc. (NASDAQ:(UNFI - Free Report) - Free Report) .
An oversupply in some types of food – particularly meat, poultry and dairy – has dragged prices lower and forced grocery stores into more aggressive promotions. Cheaper groceries have also hurt the restaurant business, with more people opting to save money and eat at home.
The natural supply cycle in beef; a massive rebound in poultry and egg production following last year's Avian flu that overshot demand and the stronger dollar along with general weaker demand for dairy in Asia led to the oversupply and resultant drop in commodity prices.
Analysts believe the price wars between companies will erode profits, leading to declining margins in the near term.
Slowdown in Emerging Markets
The majority of the global population lives in emerging economies. Due to a slowdown in income and consumption growth, affordability is low. Though there remains huge opportunity for sales growth in these markets, currently the state of affairs remains volatile.
Apart from China, which is struggling since the past few quarters, developing countries like Brazil and Mexico are facing economic slowdown. The Middle East, Russia and Ukraine are witnessing continued political and civil unrest resulting in challenging operating conditions. Some developed markets are also facing weakness due to sluggish consumer demand.
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