Consumer Staples Sector

The consumer staples sector is is composed of companies whose primary lines of business are;

  • Packaged Food
  • Beverages
  • Tobacco
  • Household & Personal Care

Consumer Staples Sector Growth (based on S&P 500 Consumer Staples index)

HPC Industry Growth (based on S&P 500 HPC index)

HPC industry growth

These types of companies have historically been characterized as noncyclical in nature and as such, are not response to changes in the business cycle.

Unlike other areas of the economy, even during economically slow times, the demand for the products made by consumer staples companies does not slow.

Some staples, like discount foods, liquor and tobacco, see increased demand during slow economic times when consumer confidence and morale is low. In line with the noncyclical nature of the demand for their products, the demand for these stocks tends to move in similar patterns.

Staples tend to have a low price elasticity of demand. This means that the demand for these products does not change much as their prices go up or down. There are no substitutes for the products themselves; however, there are many options to shop for lower prices among suppliers. This gives the suppliers of staples little room to raise prices or increase demand for their products. Suppliers do, however, have the ability to differentiate their products by the taste, appearance or results of using their products. This leaves the producers of staples in the cross hairs of the main costs that go into making their products: commodities.

If the demand for consumer staples does not grow by much, how do the producers or sellers of staples grow their businesses and ultimately their stock prices? They have a few options:

  1. Reduce costs
  2. Reduce prices
  3. Differentiate their products
  4. Cost Reduction

Reduce costs
Companies in the business of consumer staples can grow their profits and ultimately their stock prices by reducing costs. They can reduce their commodities costs by buying larger quantities, using hedging techniques, merging with or buying other companies, and creating economies of scale via horizontal integration or vertical integration.

Price Reduction
Although products are not massively affected by price, the same product in slower economic will be more attractive to the consumer if less expensive.

Product Differentiation
Each consumer product company tries to differentiate its product as superior in order to increase demand and give the company the ability to control the item’s price.

Opportunities for Investors
Why would anyone want to invest in consumer staples? One of the best reasons is slow and steady growth and the diversification benefits of owning those companies, whilst cyclicals are swinging wildly with the markets.  The correlation between the sector and the overall market is low.

The staples sector has historically exhibited a beta of .68 and a correlation of .64 with the overall market. It is pounded into the heads of investors to diversify their stock portfolios with holdings whose asset classes have low correlations, so they add bonds, international stocks, oil, real estate and gold. While this has worked historically, there have been times when all of those asset classes had higher correlations as they all fell and the staples sector maintained its value.

Defensive sectors like consumer staples, telecommunication services and health care have demonstrated tepid correlation to rising interest rates and are good stocks to own when rates are rising and other sectors are impacted. 


Industry themes going forward

  • Challenging environment with shifting consumer preferences. Customers are now wanting products that are healthy, eco-conscious, a premium to existing staples, a product that is more functional and able to be locally sourced.
  • Highly effective startups that are disrupting the market. Niche brands will command a mark-up for organic/higher-quality ingredients and consumers are already shifting focus towards brands that are customised, tailored to their needs and have a story to tell. All about experience-based spending.
  • Multinationals that are driven by exports will be impacted by a strong dollar against weaker emerging market importers.
  • Heath and wellness to continue to drive most of the industry growth – Beauty, Premium Pet products amongst other products in HPC
  • Consumer shifts towards e-commerce and functional snacking (immediate consumption items at the grocery store). E-commerce now being more used for nappies and shaving products. This is due to a shift towards price transparency and big able to compare the cost of a product at a retailer at the click of a button.
  • Rising oil prices already taking an effect and rising commodity prices to be impacted as a result of trade tariffs in already a low organic growth environment, which will squeeze margins. Domestic goods in US may become more expensive.
  • Low barriers to entry, lots of promotions and increased pace of innovation by smaller brands will challenge organic EBIT growth
  • Digital – customers don’t want to just be able to shop online but also have an immersive brand experience. Combining the digital experience in stores and having the customer being able to digitally interact with the product is growing more important. Drawback, however, of having these stores vs going online is that it requires Capex and technological investment, so important to get a good mix.
  • Increase in volatility – With the recent increase in volatility as a result of increased geopolitical and domestic political anxiety , the traditionally stable consumer staples sector may become more attractive to investors.
  • Emerging markets so important for organic sales growth and therefore, their economies’ helath and growth is important for growth in this industry.


Household and Personal Care Industry

Sector Multiples

It was found that P/Es for the entire HPC sector have risen since the decreased 10y euro yield in mid 2017.

Average PE per year HPC Sector Consumer Staples EU Market Consumer Staples Premium to EU market HPC Premium to EU market
2000 28.8x   21.9x   31.5%
2001 25.9x   18x   43.9%
2002 23.1x   17.7x   30.5%
2003 18.5x   15.4x   20.1%
2004 17.2x   15.3x   12.4%
2005 17.7x   13.3x   33.1%
2006 19.3x   12.8x   50.8%
2007 20.4x   12.9x   58.1%
2008 16.2x   9.8x   65.3%
2009 15.3x   11.3x   35.4%
2010 17.2x   11.1x   55.0%
2011 16.3x   10x   63.0%
2012 17.7x   10.5x   68.6%
2013 20.4x 18.1x 12.5x 44.8% 63.2%
2014 20.6x 18.3x 13.9x 31.7% 48.2%
2015 23.4x 23.1x 15.2x 52.0% 53.9%
2016 22.7x 23.6x 14.5x 62.8% 56.6%
2017 21.8x 20.4x 15x 36.0% 45.3%
YTD 20.6x 19.7x 14.4x 36.8% 43.1%

Organic Sales growth for the 8 largest HPC companies

Below graphs show that organic growth has been declining since 2012 and only picked up again in 2017, holding steady at around 4.45% for 2017, 4.4% going into Q118.

Average CAPEX as a % of sales for HPC companies



2017 saw a year where there was a strong correlation between EU HPC organic sales growth performance and changes in forward P/E multiples. Investors are effectively putting their emphasis back into organic sales growth.

Unilver and Beiersdorf led performance with reporting organic EBIT growth of 14% and 11%, respectively.

Average organic growth of large HPC manufacturers moved to 4.2% in 2017 (from 3.8% in 2016) as a result of;

  • Deflationary pressures and high promotional activity. Note when interest rates are down, not only is there increased competition in the market, but in the US the dollar is less expensive, demand for commodities increases and drives prices up. Higher commodity prices are bad for the input costs associated with the products HPC firms make. Higher interest rates, more volume/activity at the lower-end (not with new niche brands) and lower commodity prices are better environments for HPC firms.
  • Difficult economic situations with Brazil, Turkey and terror attacks that have raised unemployment rates and lowered consumer confidence
  • One-off elements such as earthquakes and hurricanes in Mexico and the US, respectively

To the upside:

  • Chinese consumers helping to fuel the prestige Beauty segment both in Asia and travel retail. This was as a result of more consumption by millenials, following a relaxation of import tariffs. This was seen by Estee Lauder and L’Oreal
  • Recovery of Infant Formula category brought about new China FDA regulations
  • Growth momentum in Adhesives
  • Acceleration of the skin care category

Q1 2018 – HPC

The first quarter of the year saw a slight deceleration in organic growth for the largest 8 listed HPC companies; from 4.8% in Q417 to 4.4% in Q118. This was deemed to be due to deflationary pressures in EM countries, most notably in Brazil that is facing geopolitical and economic pressures. Q1 also saw a high level of promotional activities in Western Europe that brought sales prices down.

Among the strongest performers were L’Oreal with 6.8% organic growth driven by continued appetite by the Chinese consumer for luxury beauty and acceleration of the skincare category. Companies that didn’t fare so well e.g. Henkel, were impacted by temporary delivery difficulties and logistics issues in North America.

Q1 confirmed the recovery of the North America region that posted 3% growth over a basket of the largest HPC companies vs 0.8% average for the full 2017. Western Europe experienced tough market conditions as a result of deflationary pressures, price promotions and fierce competition.

Emerging market organic growth seems to be dominated by China, especially for luxury beauty, whilst emerging markets in general accounted for 79% of tracked companies organic sales growth.

Organic sales growth in emerging markets was 6.4% in Q118 vs 1.4% in mature markets.
This is a trend that is continuing from 2014-2017, whereby 84% of organic sales growth is coming from emerging markets vs 16% from mature markets.

The fastest growing HPC product category at the minute is Prestige Beauty, mainly being driven by the growth of the middle class in China showing a strong appetite for luxury products. These consumers have a disposable income that is growing year-after-year. Adhesives were the second fastest growing category, thanks to some companies implementing price increases.

Q2 2018

Since last quarter, USD has strengthened against EM currencies and cost inflation has continued with the price of oil still rising. The strength in USD will impact most companies that export to South-American countries such as Brazil.
Commodities-wise, pulp and polypropylene has increased in price whilst polyethylene has dropped.
Margins have dropped across HPC as a result of reduced pricing power within the industry.


Looking forward

Analysts are predicting average organic growth of 3.4% for the major stocks in the European HPC industry. L’Oreal and Beiersdorf are expected to perform exceptionally well (average of around 5.5% OSG between them) due to the continued strong growth in Prestige Beauty products, aided by strong continued demand in Asia. Tough market conditions are expected to prevail in Brazil, weighing in on companies with large Latin America exposures.

The sector is experiencing a downturn at the minute as a result of various factors including;

  1. rising interest rates – when interest rates rise and companies have to refinance their relatively stretched balance sheets at higher interest rates, there will be an impact on earnings and cash flow. It is possible that dividends will be under pressure. 
  2. competitive pricing
  3. trade tariff talks and warnings


Company Data
BOA Global Research 

Leave a Reply

Your email address will not be published. Required fields are marked *