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Ask the Rational Investor
Question: “Are consumer staple stocks such as Coca-Cola, General Mills, and Procter and Gamble still safe stocks?”
By: Ryan T. Fulmer
Sunday, June 3, 2018
Over the last twelve months, the consumer staple sector of the S&P 500 has declined by 12%. With the broad stock market having appreciated by a few percentage points so far this year, this group of stocks has significantly underperformed.
Consumer staple companies usually have less cyclicality in their sales and net income, because their products represent ‘staples’ of our everyday lives. These products include paper towels, cereal, soaps, shampoos, laundry detergent, and diapers to name a few. Regardless of how strong or weak the economy is, consumers consistently purchase these goods.
Reliable earnings and sales have historically translated into steady stock prices that outperform in down periods and provide a dividend yield about 50% higher than the broad stock market. A few of the companies that are considered consumer staples include Coca-Cola (KO), General Mills (GIS), Procter and Gamble (PG), Kraft Heinz (KHC), Unilever (UL), Clorox (CLX), and Walmart (WMT).
So why have traditionally safe companies underperformed so significantly in times of stock market volatility?
Changing consumer preferences and very challenging end-markets leave consumer staple stocks tested.
After the Great Financial Crisis (GFC), U.S. organic growth for many consumer staples companies shifted downward from 3-6% to -1 to 3% growth each year. Management teams of these companies highlighted their growth opportunities in the emerging markets and reassured investors of long-term growth targets.
Over the last few years, investors have seen these U.S. organic growth trends worsen, which we think is a result of changing consumer preferences after the GFC. Digging deeper into the data, many of these companies are either lowering their prices to compete with private label companies (the store brand) or are seeing mixed trends of weak volume and very little pricing power.
The second factor that has impacted many industries is the threat of Amazon. Consumers are starting to shift how and when they buy. Many younger adults will have heavy or bulky items like pop, paper towels, and toilet paper, shipped to their homes for free by Amazon. Amazon encourages these shoppers to buy Amazon’s brands, and many do, showing no loyalty to their parents’ brands.
Yikes! That’s a major change.
Because Amazon has changed the ‘way’ that consumers purchase paper towels and Coke, these companies are aggressively trying to earn a listing on Amazon’s website. Compared to grocery store examples, Amazon isn’t friendly because of their push for lower prices to balance shipping costs.
Historically, Wal-Mart has represented about 20-30% of sales for many of these consumer staple companies. For decades Wal-Mart has been one of the cheapest places to purchase goods. However, even they are worried about being disrupted by Amazon, which has in-turn applied even more price pressure to these underlying companies. Wal-Mart also pushes their private labels products, known as Great Value, for food products, which further harms these companies.
Over the next few years, we expect many of these consumer staples companies to change their product portfolio towards more niche-oriented brands and away from major iconic brands, where the brands have a strong message and value to customers. To summarize, we expect there to be a few winners, and even more losers, which is why owning great companies will be increasingly important moving forward.
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.
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